Is UK VAT reported on Schedule E of Form 5471?

No. Schedule E, Part I lists income, war profits and excess profits taxes, and the instructions say not to enter in Part III any tax that fails the criteria in Regulations section 1.901-2. VAT is a tax on supplies, not on net income, so it appears in neither part. For a UK limited company the Schedule E entry is ordinarily UK corporation tax only.

Should gross receipts on Schedule C include the VAT charged to customers?

Not under standard VAT accounting. Output VAT is collected on behalf of HMRC and is carried in a VAT account on the balance sheet, so line 1a of Schedule C shows sales exclusive of VAT. The exception is the flat rate scheme, where turnover is gross receipts less the flat rate payment and so includes the VAT the company keeps.

Can a US shareholder claim a foreign tax credit for UK VAT?

No. The IRS requires a creditable foreign tax to be an income tax or a tax in lieu of an income tax. VAT is charged on the value of supplies regardless of profit, so it is not creditable under section 901. Irrecoverable VAT instead reduces the company's income as part of the cost of the purchase it relates to.

How is irrecoverable VAT treated in a partly exempt UK company?

Input VAT attributable to exempt supplies cannot normally be reclaimed from HMRC. It becomes part of the cost of the expense or asset concerned in the UK accounts, and HMRC accepts the VAT apportionment for computing trading profits. On Form 5471 it is included in the Schedule C costs, or in the asset cost on Schedule F, and reduces net income.

Where does the VAT owed to HMRC go on the Schedule F balance sheet?

Schedule F has no VAT line. A net liability to HMRC at the year end is reported in other current liabilities on line 16, and a net repayment due from HMRC in other current assets on line 5. Both lines require an attached statement, which should name the VAT balance. Trade debtors and creditors are shown gross, including VAT.

Are HMRC VAT penalties deductible for UK corporation tax or US purposes?

Generally not. HMRC's Business Income Manual states that VAT penalties, surcharges and interest under the VAT Act are not deductible in computing trading profits. On the US side, section 162(f) generally disallows a deduction for amounts paid to a government in relation to the violation of a law, so a VAT penalty should be identified separately in the Form 5471 workpapers.

Form 5471 and UK VAT: Schedules C, E and F Explained

Form 5471 does not treat UK VAT as an income tax, and for most VAT-registered UK limited companies the VAT charged to customers never touches the income statement at all. Output VAT collected for HMRC is left out of gross receipts on Schedule C, recoverable input VAT is left out of expenses, and the balance owed to or by HMRC sits on the Schedule F balance sheet. Only the VAT the company cannot recover becomes a cost, and VAT has no place on Schedule E, which is reserved for income taxes such as UK corporation tax.

The detail matters because VAT is the largest sum that passes through a UK company's bank account without being the company's money, and it is the figure we most often find in the wrong place when a Form 5471 has been built from bank statements. This guide follows the VAT thread through Schedules C, E, F and H, using the current form and instructions (Rev. December 2025) at https://www.irs.gov/instructions/i5471 and HMRC's own guidance.

How does UK VAT flow through Form 5471?

UK VAT is a transaction tax that a registered business charges on its taxable supplies and pays over to HMRC after deducting the VAT it has itself been charged. HMRC's VAT guide at https://www.gov.uk/guidance/vat-guide-notice-700 defines output tax as the VAT due on taxable supplies and input tax as the VAT charged on business purchases and expenses. HMRC's Business Income Manual puts the accounting consequence plainly: a business making taxable supplies is in effect a collecting agent for VAT, the output tax, input tax and the balancing payments to and from HMRC are carried to a VAT account, sales and purchases are recorded exclusive of VAT, and the balance on the VAT account appears on the balance sheet (https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim31525).

Form 5471 follows that logic. Schedule C must be reported in the company's functional currency in accordance with US GAAP and translated under US GAAP translation principles, and Schedule F must be reported in US dollars, prepared and translated in accordance with US GAAP. Neither schedule has a VAT line. The VAT therefore lands in one of four places, depending on what kind of VAT it is:

Output VAT collected for HMRC: not income. It is excluded from line 1a (gross receipts or sales) of Schedule C and held as a liability on Schedule F until paid.
Recoverable input VAT: not an expense. It is excluded from cost of goods sold and from the deduction lines of Schedule C and held as an amount due from HMRC, or netted against the output VAT liability, on Schedule F.
Irrecoverable input VAT: a real cost. It follows the purchase it relates to, into the expense line, the stock value or the cost of the fixed asset.
VAT kept by the company under a simplification scheme: real income. The flat rate scheme can leave the company holding more VAT than it pays over, and that surplus is turnover.

Is turnover on Schedule C reported net of output VAT?

Yes. Schedule C opens with line 1a, gross receipts or sales, followed by returns and allowances on line 1b and cost of goods sold on line 2. A UK company that invoices a customer 100,000 pounds plus VAT at the standard rate has gross receipts of 100,000 pounds, not the VAT-inclusive total. HMRC lists the standard rate as 20 percent, with a reduced rate of 5 percent and a zero rate, at https://www.gov.uk/vat-rates. The VAT element is owed to HMRC, which is why it is a balance sheet item rather than revenue.

The failure mode we see most often is a Schedule C compiled from the bank account. Customer receipts arrive gross of VAT, supplier payments leave gross of VAT, and the quarterly payments to HMRC are entered as a tax expense. Gross receipts are then overstated by the output VAT, expenses by the recoverable input VAT, and the settlement of a liability is presented as a deduction.

Which Schedule C line takes a VAT charge that is a cost?

Schedule C has two tax lines and they do different jobs. Line 16 is labelled taxes, excluding income tax expense or benefit, and the instructions say to enter transactional taxes there, excluding items reportable in income tax expense. Lines 21a and 21b take current and deferred income tax expense reported in accordance with US GAAP. VAT is a transactional tax, so if any VAT is charged to the income statement as a tax in its own right, line 16 is its home and line 21 is not.

In practice most irrecoverable VAT never reaches line 16, because accounting treats it as part of the price of the thing bought. It is carried with the underlying expense, so it appears inside rent, professional fees, cost of goods sold or the cost of an asset. Line 16 is where we would expect a VAT amount that the accounts show separately, such as a partial exemption annual adjustment written off as its own figure or a VAT assessment for an earlier period that cannot be passed on to customers.

When is input VAT a cost rather than a receivable?

Input VAT becomes a cost whenever the company has no right to reclaim it. There are three common routes.

Blocked input tax. HMRC's VAT guide states that a business cannot normally reclaim VAT on business entertainment expenses or on the purchase of a car. The VAT on those items is simply part of what they cost.
Exempt supplies. GOV.UK gives financial and property transactions as examples of things exempt from VAT. A company making only exempt supplies recovers no input VAT, so every purchase is recorded gross.
Partial exemption. A company making both taxable and exempt supplies recovers some input VAT and not the rest, and the split is recalculated each year.

How does partial exemption change the Form 5471 figures?

Partial exemption is the position of a VAT-registered business that makes, or intends to make, both taxable and exempt supplies and incurs VAT on costs relating to both. HMRC's Notice 706 at https://www.gov.uk/guidance/partial-exemption-vat-notice-706 calls the input tax relating to exempt supplies exempt input tax and says it cannot normally be recovered. Residual input tax, on costs used for both kinds of supply, is apportioned: under the standard method the recoverable percentage is taxable supplies divided by total supplies, both excluding VAT.

Two features of the regime produce surprises in the US figures. First, there is a de minimis test: Notice 706 allows a business to recover all of its input tax where exempt input tax is not more than 625 pounds per month on average and not more than half of total input tax. A company can pass one year and fail the next, so the irrecoverable VAT cost can move from nil to a substantial sum without any change in the business. Second, an annual adjustment trues up the provisional recovery made on each VAT return, and the accounts may need an accrual for it.

On the Form 5471 the irrecoverable amount is a cost on Schedule C and reduces net income on line 22. Where it relates to a fixed asset it is added to the asset's cost on Schedule F, line 9a, and reaches the income statement only through depreciation on line 14. HMRC's Business Income Manual confirms that the apportionment agreed for VAT purposes is acceptable in computing trading profits, so the UK corporation tax computation and the US figures should start from the same number. Most guides to Form 5471 say nothing about the companies for which VAT does not wash through, such as property investment companies with exempt lettings and financial intermediaries.

Where does the HMRC VAT balance sit on Schedule F?

Schedule F is the balance sheet, with column (a) for the beginning of the annual accounting period and column (b) for the end. It has no line named for VAT. Based on the line descriptions on the current form, the VAT balances fall as follows.

A net amount owed to HMRC at the year end is a liability. It is not a trade payable, so in the returns we prepare it goes to line 16, other current liabilities, which requires an attached statement.
A net repayment due from HMRC, which is normal for an exporter or a company making mainly zero-rated supplies, is an asset. It goes to line 5, other current assets, again with an attached statement.
Trade debtors on line 2a are the gross invoice amounts, including the VAT charged, because that is what the customer owes.
Trade creditors on line 15, accounts payable, are likewise the gross amounts owed to suppliers, including VAT.
Irrecoverable VAT on a capital purchase is part of the asset's cost on line 9a, buildings and other depreciable assets.

The gross debtors and creditors are the reason the VAT balance cannot be ignored. If line 2a includes VAT that the company must hand to HMRC, the matching liability has to be shown, and the attached statement should name it as VAT payable to HMRC.

Why does VAT not belong on Schedule E of Form 5471?

Schedule E reports income taxes, and VAT is not an income tax. The instructions describe Part I, Section 1 as the place to list income, war profits, and excess profits taxes paid or accrued to each foreign country for the foreign corporation's foreign tax year ending with or within its US tax year. Part III reports taxes for which a foreign tax credit is disallowed, and the instructions add a sentence that settles the VAT question: do not enter taxes that do not meet the criteria under Regulations section 1.901-2. VAT therefore goes in neither part.

The IRS summarises the creditability tests at https://www.irs.gov/individuals/international-taxpayers/foreign-taxes-that-qualify-for-the-foreign-tax-credit. One of the four is that the tax must be an income tax, or a tax in lieu of an income tax. VAT is charged on the value of supplies whether or not the business makes a profit, so it is not a tax on net income and is not creditable under section 901.

UK corporation tax is the tax that does belong on Schedule E. It is charged on the company's taxable profits (https://www.gov.uk/corporation-tax), and for a UK limited company it is ordinarily the only entry in Part I, Section 1. The instructions also note that Schedule E must be completed even for noncorporate US shareholders, because the information is relevant to a section 962 election, including one made later on an amended return. Putting VAT on Schedule E inflates the pool of taxes such an election relies on.

How does VAT affect earnings and profits on Schedule H and tested income?

Schedule H reports the company's current-year earnings and profits for US tax purposes, starting on line 1 from net book income and adjusting on lines 2a through 2i. Correctly booked VAT needs no Schedule H adjustment of its own: output VAT was never in income, recoverable input VAT was never in expenses, and irrecoverable VAT is already a cost in the line 1 figure. Line 2g deals with differences between the income tax expense in the books and the income taxes deducted or added to earnings and profits. VAT does not belong there.

VAT reaches Schedule H indirectly. Irrecoverable VAT capitalised into an asset is part of the historical cost on which the depreciation adjustments on lines 2b and 2c are based, so the US depreciation schedule must use the VAT-inclusive cost where the VAT was not recovered.

Tested income works the same way. Schedule I-1 starts from the CFC's gross income on line 1. VAT collected for HMRC is not gross income; a flat rate surplus is. Irrecoverable VAT is part of the deductible cost of the item it relates to. A company whose records overstate both receipts and costs by the VAT may reach the right net figure and still report the wrong gross income.

What changes if the company uses the flat rate scheme?

The flat rate scheme is a simplification under which a small business charges its customers VAT at the normal rate but pays HMRC a fixed percentage of its VAT-inclusive turnover and does not reclaim input VAT. HMRC's Notice 733 at https://www.gov.uk/guidance/flat-rate-scheme-for-small-businesses-vat-notice-733--2 sets the conditions: a business can join if its taxable turnover excluding VAT in the next year will be 150,000 pounds or less, it does not recover input tax, and the one exception is a single purchase of capital expenditure goods costing 2,000 pounds or more including VAT.

Under the scheme the VAT charged to customers is no longer wholly HMRC's, and input VAT is no longer recoverable. Notice 733 says the accounts are prepared using gross receipts less the flat rate VAT for turnover, with expenses including the irrecoverable input VAT. HMRC's own illustration at https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim31585 uses gross sales of 84,000 pounds, including output VAT of 14,000 pounds, and a 6 percent flat rate: the payment to HMRC is 5,040 pounds and turnover in the accounts is 78,960 pounds. The VAT-exclusive sales were 70,000 pounds. The remaining 8,960 pounds is VAT charged to customers and kept by the company, and it is income.

On Form 5471 that means line 1a of Schedule C is higher than the net invoice values, and every expense line carries VAT. A preparer who strips 20 percent out of a flat rate company's sales understates gross receipts. This surplus is rarely covered elsewhere: it is part of the profit charged to UK corporation tax, of earnings and profits, and of gross income for tested income.

What about the cash accounting scheme?

The cash accounting scheme changes when VAT is paid, not how much. Under the scheme, described at https://www.gov.uk/vat-cash-accounting-scheme on GOV.UK, the business pays VAT on its sales when customers pay and reclaims VAT on purchases when it pays its suppliers. It cannot be combined with the flat rate scheme.

The accounts and the Form 5471 are still prepared on an accruals basis, so the effect is on the balance sheet. Output VAT on unpaid sales invoices is a liability that is not yet due to HMRC, and input VAT on unpaid purchase invoices is an amount not yet reclaimable. Both must still be carried on Schedule F, because debtors and creditors are shown gross. The trap is a ledger that posts VAT only when cash moves, which leaves the Schedule F liability understated by the VAT sitting in debtors.

Are VAT penalties and interest deductible in the UK or the US?

Generally no, on either side. For UK purposes HMRC's Business Income Manual at https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim31610 states that VAT penalties, VAT surcharges and interest charged under the VAT Act are not deductible in computing trading profits, citing section 1303 of the Corporation Tax Act 2009 for companies. They are added back in the corporation tax computation.

On the US side, section 162(f) generally disallows a deduction for amounts paid to, or at the direction of, a government or governmental entity in relation to the violation of a law. The final regulations are published at https://www.irs.gov/pub/irs-drop/td-9946.pdf. A VAT penalty paid to HMRC should therefore be treated as presumptively non-deductible when computing the company's tested income, and it should be identified separately in the workpapers rather than left inside other deductions on line 17 of Schedule C. Interest needs its own analysis, and the treatment for book income, for earnings and profits and for tested income will not necessarily be the same.

A worked illustration: a partly exempt UK company on Form 5471

The following figures are an illustration only. They are invented for this article and the exchange rates are assumptions, not published rates.

A US citizen living in London owns all the shares of a UK limited company with a 31 December year end. In the year the company makes standard-rated sales of 400,000 pounds plus VAT of 80,000 pounds, and earns exempt income of 100,000 pounds. It uses standard VAT accounting and the partial exemption standard method. Its purchases carry input VAT of 40,000 pounds: 21,000 pounds on costs used only for taxable sales, 9,000 pounds on costs used only for the exempt activity, and 10,000 pounds on overheads used for both. Costs excluding VAT total 300,000 pounds.

Recoverable percentage of residual input tax: 400,000 divided by 500,000, or 80 percent. Recoverable residual VAT is 8,000 pounds and irrecoverable residual VAT is 2,000 pounds.
Exempt input tax: 9,000 plus 2,000, or 11,000 pounds. That is more than 625 pounds a month on average, so the de minimis test is failed and the 11,000 pounds cannot be recovered.
Recoverable input VAT: 29,000 pounds. Net VAT payable to HMRC for the year: 80,000 less 29,000, or 51,000 pounds.
Schedule C, line 1a and other income: total income of 500,000 pounds, not the 580,000 pounds that reached the bank.
Costs on Schedule C: 300,000 pounds plus irrecoverable VAT of 11,000 pounds, or 311,000 pounds. Net income before corporation tax: 189,000 pounds.
Schedule F: assume the final quarter's VAT return shows 12,750 pounds payable. That is reported in other current liabilities on line 16, with a statement naming it.
Schedule E: nil VAT. Only the UK corporation tax on the year's taxable profits is entered in Part I, Section 1.

Assume an average rate for the year of 1.30 US dollars to the pound and a year-end rate of 1.32. The US dollar column of Schedule C would show total income of about 650,000 dollars and costs of about 404,300 dollars. The VAT liability on Schedule F would be about 16,830 dollars at the assumed year-end rate. Built from the bank account, the form would have overstated gross receipts by 80,000 pounds, and entering the 51,000 pounds paid to HMRC on Schedule E would have overstated foreign income taxes by that amount.

How are sterling VAT amounts translated into US dollars?

VAT balances follow the translation rule of the schedule they sit on. Schedule C amounts are reported in functional currency and in US dollars translated under US GAAP translation rules, so irrecoverable VAT within an expense is translated with that expense. Schedule F is reported in US dollars under US GAAP translation rules, so the year-end VAT liability or receivable is translated with the other monetary balances. Schedule H, line 5d translates current-year earnings and profits at the average exchange rate for the company's tax year under section 989(b).

The instructions require every exchange rate on the form to be reported using a divide-by convention, rounded to at least four places, which means the rate is stated as units of functional currency per US dollar. The IRS publishes yearly average rates at https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates. The section 986(a) rule for translating foreign income taxes on Schedule E applies to corporation tax, not to VAT.

What records should a US owner keep?

For a VAT-registered company we ask for the following each year and keep them with the US return file.

The VAT returns for every period falling in the accounting year, and the VAT account or control account that reconciles them to the ledger.
The year-end VAT balance in the statutory accounts, agreed to the final VAT return.
The partial exemption calculation for each period, the annual adjustment, and the de minimis test, where the company makes any exempt supplies.
The flat rate scheme category and percentage, the date of joining or leaving, and the calculation of turnover net of the flat rate payment.
A list of fixed asset additions showing whether VAT was recovered on each, so that the US depreciation cost is right.
An analysis of every payment to HMRC by tax type (VAT, PAYE and corporation tax), so that only corporation tax reaches Schedule E.
Any VAT assessment, penalty or interest notice, with the period it relates to.

Getting the VAT thread right on your Form 5471

Each VAT amount belongs in one of four boxes: collected for HMRC, recoverable from HMRC, irrecoverable, or retained. We prepare Form 5471 for US owners of UK companies from the statutory accounts and the VAT records together, so that Schedule C, Schedule E, Schedule F and Schedule H agree with each other and with what has been filed at HMRC and Companies House. If your Form 5471 has been prepared from bank totals, or earlier years show VAT on Schedule E, those returns should be reviewed and, where necessary, corrected.