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October 2023

VAT advice

VAT Advice – An Overview of the Basics

By VAT news

Getting to grips with VAT can be complex, with lots of actions being required to get the business into a position of being compliant with the relevant VAT laws and regulations.  Most countries worldwide have VAT type systems other than the US and a handful of others.  Generally speaking the key requirements at a high level are very similar.  These broadly apply in most countries.

 

The following is a step by step guide to some of the key questions a business might have in relation to being registered for VAT for the first time, or if it is expanding to overseas territories for the first time:

When do I need to register for VAT?

Once a business starts trading and generating income in any particular location it needs to consider whether a VAT registration is required.    Most countries do not have a VAT registration threshold, or if they do, it is very low.  The UK is relatively unique in having a threshold of £85,000 in a 12 month period, meaning there is no requirement to register and account for VAT unless this threshold is exceeded.  Businesses with ‘taxable’ sales revenues are required to VAT register.  If a business only makes only ‘exempt’ sales (eg certain financial services, insurance, healthcare services) they may not be able to VAT register as VAT on costs cannot be reclaimed (unless they have overseas clients, in which case some VAT recovery on costs may be permitted and VAT registration is allowed on a voluntary basis).

The process of becoming registered for VAT can take some time, in some locations a number of months, so it is important to act as soon as possible to ensure that the VAT registration is in place when it needs to be so that the business is able to issue VAT invoices and to provide suppliers with a valid VAT ID if trading within the EU to prevent overseas VAT being charged.

It is frequently the case that costs with VAT on them will be incurred before sales are made.  It is possible in most countries to register for VAT in advance of sales being made so that the VAT incurred on costs can be recovered.  This is often referred to as being an ‘intending trader’ and the tax authorities will need to be satisfied that the business has tangible evidence that sales will be made in future (eg business plans or signed contracts with clients).  If they are, the business can register, file VAT returns and claim VAT refunds on business costs (subject to the normal VAT recovery rules) before sales are made.

Alternatively many countries have rules regarding ‘pre-registration input tax’ which allow businesses to claim VAT incurred on the purchase of goods and services prior to the VAT registration date.  For example in the UK, VAT on services purchased up to 6 months prior to VAT registration can be claimed, whilst VAT on goods purchased beforehand can be claimed if the goods are still on hand in the business when it becomes registered.

As a note of caution, if a business is not making taxable sales, eg if its revenue is VAT exempt, it may still need to register for VAT if it purchases services from overseas.  In this case, given most services are purchased without VAT from B2B suppliers, the VAT is to be self assessed by the purchaser under the reverse charge rules and depending on the business’ VAT recovery position, it may be possible to obtain a partial credit for this.

 

How do I register for VAT?

The information and documentation required to register for VAT ultimately differs from country to country but generally speaking there are common themes – the tax authorities will want to know:

  • the nature of the business activities;
  • approximate anticipated turnover;
  • start date of trading;
  • locations in which sales will be made;
  • details of the directors and owners of the business/trustees (this may include personal details of the individuals so that their identity can be checked by the tax authorities)
  • copies of Certificates of Incorporation and similar.

It is advisable in most cases to seek the assistance of a 3rd party advisor (VAT specialist or accountant) to register you for VAT so that the correct answers are provided on the VAT registration form.  In addition some countries require documentation to be notarised and apostilled which can be a relatively burdensome process.

 

What are the VAT Invoicing Requirements?

Within the UK and EU there is a standard set of information required on VAT invoices and other countries have similar requirements – largely due to the fact that there is a limited data set that could be applied on an invoice.  The EU/UK requirements are as follows:

Information required in all cases:

  • Date of issue (usually the same as the invoice date)
  • Invoice Number (Unique sequential number)
  • Customer’s VAT identification number (not mandatory in all countries for domestic transactions but advisable to include)
  • Supplier’s full name & address
  • Customer’s full name & address
  • Description of quantity & type of goods supplied or type & extent of services rendered
  • VAT rate applied
  • VAT amount payable
  • Breakdown of VAT amount payable by VAT rate or exemption
  • Unit price of goods or services – exclusive of tax, discounts or rebates (unless included in the unit price).

In addition to the above, specific narrative is required for certain transactions:

  • Exempt transactions – a reference to the appropriate (EU or national) legislation exempting it, or any other reference indicating it is exempt (at the choice of the supplier).
  • Where Customer liable for the tax (i.e. under the reverse-charge procedure) – the words ‘Reverse charge’.
  • Intra-EU supply of a new means of transport – the details specified in Article 2(2)(b) of the VAT Directive (e.g. for a car, its age and mileage).
  • A margin scheme applies – a reference to the particular scheme involved (e.g. ‘Margin scheme — travel agents’).
  • Self-billing (customer issues invoice instead of supplier) – the words ‘Self-billing’.
  • If person liable for tax is a tax representative – their VAT identification number, full name and address.
  • Supplier is operating a cash-accounting system – the words ‘Cash accounting’).

Most countries also permit ‘simplified VAT invoices’ to be issued for low value transactions in certain scenarios eg retail.

Invoices can be issued electronically and some countries have special rules whereby a supplier must send the invoices to a tax authority portal for approval before they are issued to the customer.  This process is becoming more common across the EU – it has been common practice in South America for years.

 

Do I need to issue a VAT invoice to my customer?

Valid VAT invoices must be issued by VAT registered businesses for taxable B2B transactions.  For B2C transactions they are generally not required although a VAT invoice must be provided if requested by a customer.  VAT invoices are not required for VAT exempt transactions eg in the finance, insurance  and healthcare sector.

Although VAT invoices may not be required it is fine to issue a VAT invoice if preferable in terms of systems processes, clearly provided VAT is not shown on invoices not subject to VAT (eg zero rated or exempt invoices).

It is important to ensure the correct detail is shown on the VAT invoices to limit queries from customers and reduce delays with payment being made.

 

How often do I need to submit VAT returns?

This depends on the country in which you are registered and also the turnover in some countries.  The filing frequency will either be monthly, bi-monthly or quarterly, with some countries also requiring annual returns to recap the transactions reported during the year and allow for any adjustments.  Businesses with low turnover may be allowed to file returns less frequently eg annually, whilst those with a high turnover/tax liability are likely to have to file and/or pay more frequently, usually monthly.

In terms of the deadline for filing and paying returns, the shortest deadline in the EU is Germany, where payment and filing must be by 10th of the following month (although a 1 month extension can be obtained upon payment of a deposit).  Otherwise it is more commonly the case that filing and payment is due towards the end of the following month (typically from 20th onwards).  It is therefore important that systems are closed down to ensure all relevant transactions can be reported accurately. It is particularly important to ensure all sales VAT is accounted for on time.  Purchase VAT recovery should be supported by valid VAT invoices and import entries as appropriate.

 

What Records do I need to keep for VAT purposes?

The basic VAT record keeping requirements are as follows:

  • Copy sales invoices issued to customers
  • Original purchase invoices from suppliers
  • Import entries of import VAT statements/certificates (eg PIVA or C79)
  • Purchase ledger
  • Sales ledger
  • VAT Account – summary of sales and purchases per VAT return period (net and VAT values)

There should be a clear audit trail from the source documents (the invoices) to the ledgers and then to the VAT account.

Business records such as bank statements and annual accounts may also be needed for VAT audits by the tax authorities along with other supporting documentation.

In the UK, VAT returns need to be filed using Making Tax Digital (MTD) approved software.  The VAT records must be maintained with ‘digital links’ which means the audit trail in the VAT accounting records needs to be digitally linked rather than having any ‘copy and paste’ or manually entered data.

Some other countries require invoices to be submitted to tax authority portals periodically in addition to the VAT returns themselves.

 

What happens if I submit my VAT return late?

It is important to file returns and make payments on time to avoid penalties and interest being applied.  Filing and paying late can also increase the risk of the tax authorities carrying out a VAT audit.   If you believe you will be unable to prepare accurate VAT return figures in time for the deadline it is possible in some locations to file estimated VAT returns (the prior approval of the tax authorities may be required for this).

With regard to payments, if the business is not able to pay the amount due in part or full, it is best to let the tax authorities know and try to agree a time to pay plan with them – the bottom line is that the tax authorities prefer to have communication from taxpayers unable to file or pay on time and they prefer to have payment plans in place rather than receiving no payment or communication.  This approach can help limit penalties.

 

Can I reclaim VAT on business expenses?

If the business is VAT registered in the country the expenses were incurred it, it may be possible to reclaim any VAT on the expenses on the VAT return (subject to any partial exemption restriction) if the following applies:

  • The expenses were incurred for taxable (ie standard, reduced or zero rated) business purposes;
  • There is a valid VAT invoice or simplified invoice to support the expense;
  • VAT is normally deductible on such expenses under local VAT rules. For example VAT on business/client entertainment is generally not recoverable and many countries impose a partial restriction on motoring related expenses in certain circumstances.

If business expenses have been incurred in overseas countries, it may be possible to file an overseas VAT refund claim to reclaim the VAT.  The EU, UK and Switzerland refund such VAT on eligible expenses.

 

What happens in a VAT audit?

If the tax authorities conduct a general VAT audit or a mini VAT audit in relation to a VAT return that shows a repayment, they will typically expect to see the VAT accounting records for the period specified, including copies of sales and purchase invoices, ledgers and bank account statements to ensure all payments made into the account have been accounted for on the VAT return.  They may also wish to reconcile the turnover in the annual accounts.

Audits can take place either remotely, with the relevant documentation being emailed to the tax authorities or via a Dropbox type system.  Alternatively where the business operates from business premises, the tax authorities may want to conduct the audit onsite so that they can determine whether the nature and scale of the business activities matches what is reported on VAT returns. This also gives them an opportunity to ask staff questions, although it is not unreasonable to ask them for details of staff they would like to speak to in advance or at the start of the audit, so as to prevent disruption to business operations.

 

How do I de-register from VAT?

If the business stops trading or has turnover that drops below the VAT registration threshold where applicable, an application can be made to deregister from VAT.  Before deregistering the business should make sure that all eligible VAT on costs has been reclaimed (although some countries have a process to allow businesses to claim certain VAT on costs post de-registration).  In addition, if the business has assets on hand at the time of deregistration, if VAT was reclaimed on these when the business was registered, it may be necessary to pay back VAT, typically based on the current value of the asset.  Certain assets are excluded from this and the rules vary from country to country so should be checked.

 

Do I need to charge VAT if I sell a business or part of a business?

If you sell a business or part of a business (that can be operated as a standalone business), it may not be necessary to charge VAT to the purchaser provided the sale qualifies as a VAT free ‘Transfer of a Going Concern (TOGC).

There are conditions attached to this and these provisions are designed to minimise the cashflow burden created by what could be a significant amount of VAT.  The conditions in the UK include the following (local rules should be checked for transfers in other countries):

  • There should be no break in trade
  • The same type of business should be carried on by the new owner
  • If the seller is VAT registered or required to be VAT registered, the new owner should also be VAT registered
  • There mustn’t be a series of back to back transfers
  • if a property is being transferred and the seller has opted to tax, the purchaser must also opt to tax the property (including notifying HMRC) before the business is transferred

As many of the conditions are imposed on the purchaser rather than the seller, it is important that the legal agreements protect the seller so that they are not at risk of penalties being imposed in the event the purchaser breaks one of the conditions post transfer, meaning the seller should have charged VAT.  There are special rules if a business is transferred into a partly exempt VAT group.

If the conditions are not met, VAT must be charged on the transfer as appropriate.  This would typically be on the full value of the transfer if the transfer is domestic.  If the transfer is cross border, VAT may not be chargeable on all elements, with reverse charge VAT being accounted for overseas by the purchaser where relevant in accordance with the normal VAT rules.

 

Conclusion

This article has hopefully given you a whistlestop tour through the end to end VAT process – from the minute the business starts thinking about trading in a particular location through to filing VAT returns periodically and having VAT audits.  It demonstrates how VAT needs to be considered early on and how seeking specialist VAT advice can be key to ensure the business is best placed to minimise the impact of VAT.

 

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces.  We provide global VAT and customs duty advice and VAT compliance services.  To discuss how we can help contact us today

VAT Exemption and Payment Services

By VAT news

The Supreme Court has released its decision in the Target case which concerns the VAT exemption for payment related services: Click to see the case.

This was the final stage in long running VAT litigation about a common area of difficulty in relation to an area of the financial services VAT exemption, namely what is meant by ‘transactions concerning payments, transfers, debts…’.   This is the area that concerns the often complex set of transactions taking place when a payment is made by one party to another.  In the Target case, the underlying transactions related to individuals making mortgage payments to a bank.  Target had been contracted by the bank to administer the mortgage loan accounts and instigate and process payments due from borrowers.  The key question in this case (and in various earlier CJEU cases focused on the same area of the legislation), concerned the scope of the legislation in this area – is there a narrow meaning, resulting in only the party in the chain actually effecting the payment/transfer being able to apply VAT exemption, or is there a wider exemption extending to those such as Target involved in giving instructions for payment.

The Supreme Court decision usefully sets out the salient facts and findings from earlier cases of relevance such as SDC, FDR, and DPAS, finding these also applied to Target:

  • the VAT exemption for ‘transactions concerning payments/transfers…’ is to be interpreted narrowly;
  • it is essential for exemption to apply that the transfer or payment is actually executed by the business seeking to apply exemption
  • it is not sufficient to simply give instructions to trigger a transfer or payment

The commercial background in the Target case is relatively simple compared to many others using the same area of the VAT legislation where there can be multiple parties in a chain.  This complexity can make it difficult to identify which parties the VAT exemption applies to.

The key message emerging remains that businesses involved in any way in transactions involving financial payments/transfers should carefully consider whether their services are at the heart of the ‘execution’ process or whether they instead precede this, by simply approving a transfer which is actually executed by someone else in the chain.  The reason this is particularly critical is that there will typically be a financial institution or similar as the principal in the transactions, and given they will be partly exempt and have limited VAT recovery, they tend to insist on VAT inclusive pricing in contracts.  This means a business such as Target within the supply chain would bear the cost of the VAT in the chain, not the financial institution.  Therefore treating the transactions as VAT exempt when pricing is agreed and later finding out they are subject to VAT can have a serious impact on profitability.

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces.  We provide global VAT and customs duty advice and VAT compliance services.  To discuss how we can help contact us today

Cosmetic Surgery and VAT

By Customs Duty news|VAT news

Over the past few years there has been a significant increase in the provision of cosmetic surgery and procedures with practitioners now offering a wide range of services.

cosmetic surgery and vatIn terms of the VAT treatment of the revenue, VAT exemption is available in certain fairly limited circumstances.   In simple terms, the spirit behind VAT exemptions is that they are focused on basic societal needs and the common good such as education, health, charity etc.  This means that many of the VAT exemptions are restricted in terms of the profile of the organisation or provider and also by the scope of the services the exemption applies to.  Care is therefore needed to ensure all relevant tests are met to qualify for exemption.

So far as healthcare is concerned, the VAT legislation allows the following medical services to be VAT exempt, with both tests needing to be met for VAT exemption to apply:

  • relevant services provided by registered medical professionals (registered in the register of medical practitioners – similar provisions exist for dentists and pharmacists);
  • the relevant services are described as the ‘provision of medical care’

In terms of the profile/status of the provider, this can also include non registered professionals who are supervised by registered medical practitioners (conditions are attached to the level of supervision).  Assuming this test is met, the key question in relation to cosmetic surgery is whether the services constitute ‘medical care’.

Cosmetic Surgery and VAT

Cosmetic surgery has been the focal point of recent VAT litigation in the Illuminate Skin Clinics Ltd case.  ‘Medical care’ is not defined in VAT legislation but is described in HMRC guidance as the protection, maintenance or restoration of the health of the person concerned (this definition came from an earlier ECJ case on healthcare exemption).    This might for example include tests to diagnose a specific medical condition and the provision of the treatment.  HMRC cite the Ultralase Medical Aesthetics Ltd as the leading case confirming VAT exemption does not apply to cosmetic procedures.

At the heart of the issue with VAT exemption for cosmetic surgery is the question of whether the services are provided to address a genuine medical condition impacting the patient’s health, or to effectively make them feel better about themselves.  There are scenarios where a psychological assessment has been carried out which recommends cosmetic procedures to improve the patient’s mental health.  Even in these cases this may not be sufficient to qualify for VAT exemption.  In the Illuminate Skin case, it seems there was a conclusion that making the patient feel better in themselves due to the positive psychological impact was not sufficient to meet the test for exemption.  The logic here is presumably that a new hairstyle or new clothes could arguably have a similar positive impact.   This therefore puts some distance between the true spirit of the healthcare VAT exemption and the services provided albeit there will be countless situations where there is far less distance.   There appears to be an expectation that there needs to be an element of professional medical diagnosis involved, albeit this could presumably be provided by a fellow medical practitioner assessing what is required.    In any event the principle purpose of the procedure must be to protect, maintain or restore health.  Even then, the resulting procedure needs to go beyond improving the mental health of the patient.    It can be difficult to provide specific guidance when each patient will have a different set of circumstances and therefore a different analysis of the ‘primary purpose’ test.  As a result it is likely more cases will be litigated – the decisions may shed more light on this complex area but equally may cause further lack of clarity in the event they appear contradictory to cases already settled or HMRC guidance.

 

Why is it Important to Have Certainty of the VAT Treatment?

Businesses operating in the B2C environment are not able to go back to their customers to claim additional amounts of VAT in the event their services are deemed VATable when they have assumed they are VAT exempt.  The impact on the business is likely to be significant, particularly if there is a retrospective element (VAT errors going back 4 years need to be disclosed).  This can have an impact on future exercises in fund raising or business disposal as it is likely to be high-lighted in related due diligence exercises.

If you are concerned about whether the services you provide qualify for VAT exemption please get in touch.

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces.  We provide global VAT and customs duty advice and VAT compliance services.  To discuss how we can help contact us today

 

 

short term accommodation vat

Is there VAT on short term rentals?

By Customs Duty news|VAT news

The travel sector continues to face VAT challenges in certain areas, with a couple of recent cases coming to Tribunal that potentially have broad relevance within the travel and accommodation sector.  If nothing else they serve as a reminder of the many pitfalls and complexities these industries face with many area of VAT law and guidance overlapping and needing to be considered.

Short Term Accommodation and VAT

The Sonder Europe tribunal case focused on the scope of the Tour Operator’s Margin Scheme (TOMS) – an EU wide VAT simplification that also continues to apply within the UK post Brexit albeit with tweaks.  Sonder rents out serviced apartments on a short term basis and these are deemed to be ‘holiday accommodation’ (this would be appropriate for example if the apartments are advertised on websites such as Booking.com, Airbnb etc to drive business).  This pulls the business out of the sphere of the normal domestic property rental VAT rules (where the property rental would potentially be VAT exempt depending on the degree of services) and into the travel VAT rules.

Are you a in the travel sector? See how The VAT Consultancy can help you navigate the complex array of VAT rules – click: VAT for Travel businesses

These rules can be complex, with many issues to consider in determining the appropriate subset of VAT rules to use.  TOMS is to be used if a business ‘buys in and onsells designated travel services from 3rd parties without material alteration’.  There is lots to pick apart in this definition, but of relevance to Sonder is the question of what ‘material alteration’ means.   Sonder typically rented unfurnished accommodation and added furniture and decorated where necessary to bring the accommodation to the requisite standard.   HMRC took the view that they were not on-selling exactly what they had ‘bought in’ per the definition, and therefore they must have ‘materially altered’ the accommodation.  Crucially the impact here would be that the normal VAT rules would apply instead, so VAT incurred on costs would be fully recoverable whilst VAT would be due on the full selling price @ 20% (the accommodation is in the UK).  However given the rental of the flats from the 3rd party landlord would be VAT exempt, there would be no input VAT to offset against the VAT due on the full selling price, significantly increasing the cost of VAT to the business against what it would be with TOMS.  HMRC lost the case and the Tribunal found that the changes made to what was ‘bought in’ were not material in terms of cost or in terms of changing the nature of what had been bought in to something different, and therefore TOMS could apply.  HMRC are appealing which is not surprising given the size of the market in such accommodation.

Businesses with the following profile should review their VAT position to ensure the correct VAT rules are being applied:

  • does the business account for VAT using TOMS but make alterations to the accommodation or passenger transport bought in from a 3rd party before on-selling it? This applies within and outside the UK;
  • is the business involved in providing short term let accommodation that is advertised on sites such as Booking.com, Airbnb;
  • if the business believes it is acting as a disclosed agent for VAT purposes, meaning the underlying sale of accommodation or passenger transport is between the owner and customer, do the contractual arrangements and documentation support this?

Realreed was a business letting out serviced short term accommodation that was assessed by HMRC.  Realreed had treated the revenue as VAT exempt whereas HMRC took the view it was held out for sale/advertised or similar to hotel accommodation and was therefore subject to 20% VAT.  The issue in this case related to ‘misdirection’ by HMRC as the business had had numerous VAT inspections by HMRC and none of the officers took issue with VAT exemption being applied.  The High Court  determined that Realreed could not rely on the concept of ‘Legitimate Expectation’ and HMRC were entitled to assess for underdeclared VAT.    It has always been difficult to persuade HMRC that they are in the wrong in relation to advice/guidance they have previously given during assurance visits which is later overturned by a subsequent HMRC officer.  This case perfectly reflects the risk for businesses operating in the B2C sector and treating their revenue as VAT exempt when a different analysis might apply.  In these cases it would be wise to ensure specialist VAT advice has been taken to provide reassurance.

 

TOMS versus Normal VAT Rules

The issue of the TOMS scheme versus the normal VAT rules reared its head recently in a decision involving Golf Holidays Worldwide Ltd.  In this case the company submitted an ECN (error correction notice) to HMRC on the basis it had overdeclared VAT under TOMS when it could have used the normal VAT rules for the wholesaling of golf holidays to overseas customers.   Following an ECJ decision in 2013, HMRC issued guidance stipulating that TOMS or the normal VAT rules could be used for wholesale supplies.  The choice of TOMS versus the normal VAT rules hangs on a legal technicality pre Brexit whereby UK taxpayers were able to rely on EU VAT law (ie ECJ decisions) if it suited them, but equally could rely on UK provisions if preferable.  In relation to wholesale travel supplies, HMRC guidance prior to the ECJ decision stipulated that the normal VAT rules should be used rather than TOMS.  The ECJ disagreed.  Golf Holidays Worldwide lost its case, with the Tribunal deciding it was not able to change to using the normal VAT rules once it had decided to use TOMS, even though HMRC guidance specified that either could be used.  The question arises as to what the UK guidance should now say in relation to wholesale activities given we are now in a post Brexit environment and this decision has made it clear businesses apparently cannot change their mind about which rules to follow once an initial decision has been made.    This decision emphasises the need to choose the appropriate regime carefully when a choice is available.

For businesses operating in B2C environment and treating their revenue as VAT exempt or zero rated, it can be potentially catastrophic to be in the position of revenues suddenly being deemed to be subject to VAT (including historically back 4 years where relevant).  Where there is any doubt or possibility of the revenues being viewed in a different way, it is worth taking advice from a VAT specialist to be certain of the position.

The CJEU considered the case of C. sp. z o. o against the Polish tax authorities.  This company bought in holiday accommodation from 3rd parties and onsold it to business customers.  The Polish tax authorities took the view that TOMS did not apply despite the scenario appearing to fit the definition above, ie ‘buys in and onsells designated travel services from 3rd parties without material alteration’.  Their argument was that the business did not provide a complex package of services so the TOMS simplification, which significantly reduces the number of countries in which travel businesses need to register for VAT, was not required.  The CJEU agreed with the taxpayer, finding that TOMS did apply.  Whilst this case is unlikely to have wider application in the sense of most tax authorities agreeing TOMS would apply, it does serve as an example of how lengthy litigation can ensue (a delay of 5 or more years to get to CJEU stage would not be uncommon) in situations where a challenge arises.

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces. We provide global VAT and customs duty advice for tour operators, travel agents (including OTAs), bedbanks, business travel agents, online marketplaces for short term lets and events organisers. To discuss how we can help contact us today.

VAT and Selling Goods Cross Border

VAT and Selling Goods Cross Border – a Guide

By Customs Duty news|VAT news

Selling goods cross-border, either to or from the UK, brings with it a number of complex VAT and customs duty considerations for a business. Having a sound understanding of these is vital to ensure that business profits are not adversely impacted and that the business remains compliant with the rules.  The latter is critical when due diligence is being carried out in the event of the business looking to sell or to seek additional funding – depending on the circumstances, and unidentified under-declaration of VAT overseas can derail this process.

Being VAT registered in the right place is important to the bottom line as it means the business is able to recover the VAT credits it is entitled to and so that it is able to declare VAT on sales where appropriate, regardless of whether the customers are businesses, not for profit organisations or consumers.

These principles apply regardless of whether you are importing goods into an overseas country, acquiring them in an EU country from a supplier in another EU country, or purchasing overseas from a local supplier.

The VAT rules for sales to businesses and consumers differ and these are set out below.

Selling services? Click the link to see our guide on selling services cross-border.

B2B Sales

B2B sales in goods are typically VAT neutral ie VAT does not form a cost for the supplier or customer, but this only holds true if the supplier and customer are VAT registered where they should be, enabling VAT credit on imports or purchases to be reclaimed.

 

Sales from the UK to Overseas Business Customers

These are exports of goods from the UK so the first decision to be made commercially is one of who will be the Importer of Record of the goods in the overseas location – the supplier or the customer.  This is determined by the contractual delivery terms, also known as the Incoterms.  These make it clear who is responsible for managing costs and risk in relation to the goods while they are in transit, eg transport and insurance costs, and of relevance to import VAT and customs duty, they also  determine who is responsible for bringing the goods through the border and paying import VAT and customs duty as appropriate.

If you are exporting goods into an overseas country to a business customer, it is most common (and advisable) to have them act as importer of record as they will likely have an existing infrastructure for VAT which will enable them to easily account for import VAT and customs duty and obtain a credit for the import VAT through their VAT registration.  This means that the Incoterms would be anything other than DDP (delivered duty paid) eg DAP, FOB.  If you are able to agree this with your customer, you will not have a liability to register for VAT in the overseas location.

If instead a UK supplier is responsible for acting as importer of record in an overseas location, it will likely need the following:

  • an EU EORI number if exporting to an EU Member State;
  • a VAT registration in the overseas location;
  • a fiscal representative if required under local rules;
  • a robust process to obtain and store import entries to allow import VAT to be recovered;
  • a process to issue valid VAT invoices to customers;
  • an adviser to prepare and submit VAT returns;
  • access to a deferment account to pay import VAT and customs duty

The VAT Consultancy can provide global VAT compliance services and obtain an EORI and VAT registration for you in addition to advising on the other areas outlined above.

 

Sales from Overseas to UK Business Customers

If you are an overseas supplier selling to a UK business customer, the same principles as set out above apply.  Where you have a UK business customer, it would make sense to use Incoterms that make them import the goods into the UK so that you are not required to VAT register in the UK.

If you are required to act as Importer of Record into the UK, you will require the following:

  • a GB EORI number;
  • a VAT registration (the UK’s VAT registration threshold of £85k pa does not apply to overseas businesses);
  • a PIVA registration so that import VAT can be paid and reclaimed on the VAT return
  • a process to issue valid VAT invoices to customers;
  • an adviser to prepare and submit VAT returns
  • access to a deferment account to pay customs duty

 

B2C Sales

The position with cross border sales to consumers is technically the same as with B2B sales ie the first question is one of who will act as Importer of Record of the goods – the supplier or the customer?  However in practice it is rarely the case that the customer acts as importer, paying the import VAT and customs duty, as this means they have to pay these taxes before receiving their goods from the delivery company.  This harms the customer experience and therefore the majority of etailers act as importer of record in the customer location so that the customer receives goods that have been customs cleared, incurring local VAT at a rate they recognise on the purchase (although website pricing is typically VAT inclusive meaning the rate is not immediately visible).

The impact of this on the supplier is that this frequently leads to the need for numerous VAT registrations overseas so that the relevant import VAT and customs duty can be paid and sales VAT at the local rate accounted for.    This can add a significant administrative burden to a business that is in a growth phase.

Customers returning goods they have purchased online is also a frequent occurrence and the business should ensure it has considered the customs duty implications of these movements of goods back and forth to ensure multiple customs duty costs on the same item are minimised.

 

Special Rules and Anti Avoidance

There are a number of special VAT rules now in place for cross border B2C transactions in goods which have been implemented for a range of reasons including: minimising the VAT compliance burden for businesses, reducing the VAT and duty cost for smaller businesses and reducing the incidence of VAT and duty under declarations:

  • a number of countries have put low value import reliefs in place which mean import VAT and customs duty may not be due if the transaction value is below a certain level (£135/Euros 150 in the UK and EU and similar in other countries where applicable);
  • within the EU there is a simplification which means that only a single ‘one stop shop’ VAT registration is required to account for VAT on all EU B2C sales (in addition to a normal VAT registration in the EU country of import or goods storage). These registrations are know as OSS or iOSS;
  • in the UK and EU special VAT rules apply if the business sells via an Online Marketplace (OMP). These are anti avoidance VAT rules in place to manage the risk of overseas sellers not accounting for VAT and customs duty appropriately.  The rules make the OMP liable to account for VAT on the sale (up to a value of £135/Euros 150).  For sales above this value the supplier remains liable to account for the VAT.  It is important these rules are clearly understood and that there is a process in place to ensure VAT is accounted for by the appropriate party in the supply chain

 

Other Red Flags and Considerations

If the business is involved in any of the following types of transaction, VAT and customs duty advice should be taken to determine if an overseas VAT registration liability arises as a result:

  • storing stock in another country including warehouses owned by third parties such as Amazon;
  • supply and install contracts where the business is required to install the goods in an overseas location;
  • moving goods into a country for other business purposes eg leasing, tooling for use by 3rd party manufacturers, exhibition stands and marketing material;
  • purchasing goods from a supplier in the same overseas country as your customer

 

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces.  We provide global VAT and customs duty advice and VAT compliance services.  To discuss how we can help contact us today

 

 

VAT what is value added tax

Value Added Tax: What is VAT?

By VAT news

Most countries worldwide (other than the US and an increasingly small handful of others) now have a Value Added Tax (VAT) or Goods and Services Tax (GST) type system in place. VAT is an integral part of the UK’s tax system, an intricate web of regulations and rates that impacts businesses, individuals, and the broader economy. As a consumption tax, VAT is designed to generate revenue for a government while simultaneously influencing economic behaviour and promoting fiscal fairness. This comprehensive guide aims to unravel the complexities of VAT/GST, shedding light on its fundamental principles, intricate rate structure, exemptions, registration processes, and the economic implications it carries.

In this guide, we explore the multifaceted aspects of VAT, from its inception to its current role in the global fiscal landscape. We’ll look at its primary objectives, including revenue generation and progressive taxation, while also examining its critical role in ensuring economic stability and fair resource allocation. We’ll cover the range of VAT rates, spanning from the standard rate to reduced rates and exemptions, examining their impact on consumer behaviour and market dynamics.

We’ll look at the obligations businesses face when registered for VAT and the benefits it can provide. And as we traverse this VAT landscape, we’ll underscore its broader economic ramifications, from its influence on cross-border trade to its ability to shape government budgets and stimulate specific economic sectors.

Understanding the impact of VAT  is not just a matter of financial prudence; it’s a fundamental aspect of participating in the country’s economic fabric. Whether you’re a business owner navigating VAT compliance, a consumer wondering about the tax implications of your purchases, or simply someone intrigued by the intricate workings of fiscal policy, this guide will equip you with the knowledge needed to comprehend, navigate, and appreciate the role of VAT.

The Purpose of VAT

Value Added Tax (VAT) serves a multifaceted purpose, extending beyond mere revenue generation. Its underlying principles and objectives are essential to understanding how it operates within the country’s economic and fiscal framework.

  1. Revenue Generation: The most apparent purpose of VAT is to generate revenue for the government. VAT collections form a significant portion of overall tax revenue, contributing to funding essential public services, social welfare programs, infrastructure development, and various government initiatives. This revenue helps maintain the nation’s financial stability and provides the government with the necessary resources to meet its obligations.
  2. Progressive Taxation: VAT embodies a progressive taxation system, where the tax burden increases as consumption rises. Unlike direct taxes, such as income tax, which disproportionately affect higher-income individuals, VAT is said to distribute the tax load more evenly across society. This approach aligns with principles of fairness and social equity, as those with greater financial means typically consume more and, consequently, contribute more to government revenue.
  3. Economic Stability: VAT is instrumental in stabilising the economy. During periods of economic growth, VAT collections tend to increase as consumer spending rises. Conversely, during economic downturns, VAT revenues may decline, reflecting reduced consumer activity. This natural responsiveness allows the government to adjust fiscal policy and maintain economic equilibrium.
  4. Consumer Behaviour Modification: VAT rates can influence consumer behaviour and purchasing decisions. Governments can strategically adjust VAT rates to incentivise or discourage specific types of spending. For instance, a reduced VAT rate on energy-efficient home improvements can encourage eco-friendly renovations, while higher VAT rates on luxury items can discourage excessive consumption and promote responsible spending.
  5. Encouraging Formalisation: VAT implementation often leads to the formalisation of the economy. Businesses operating in the informal sector may opt to register for VAT to claim input tax credits and benefit from being part of the formal economy. This formalisation enhances tax compliance, widens the tax base, and fosters a more transparent and accountable business environment.
  6. Efficiency and Fairness: VAT is known for its efficiency and transparency. It reduces tax evasion and fraud because businesses are incentivised to report their transactions accurately to claim VAT credits. Additionally, it ensures fairness in the tax system, as all consumers, regardless of their income levels, pay the same VAT rate on the same goods and services.
  7. Cross-Border Trade: VAT plays a critical role in international trade. It can prevent double taxation on cross-border transactions and provides mechanisms for businesses to claim refunds for VAT paid on imports. This facilitates the flow of goods and services across borders and promotes international trade relations.
  8. Resource Allocation: VAT can influence resource allocation within an economy. By differentiating VAT rates on various goods and services, governments can steer resources toward sectors they deem strategically important. For example, a lower VAT rate on green technology can encourage investment in environmentally friendly industries.
  9. Budgetary Flexibility: VAT offers governments flexibility in managing their budgets. Adjusting VAT rates allows for fiscal policy changes without altering the underlying tax structure. During economic crises or unexpected expenditures, governments can raise VAT rates temporarily to bolster revenue or, conversely, reduce rates to stimulate economic activity.

In essence, VAT serves as a dynamic and adaptable tool within a country’s fiscal arsenal. Beyond its role as a revenue generator, it should embody the principles of equity, economic stability, and efficiency, allowing governments to shape economic behaviour and allocate resources effectively. Understanding the multifaceted purpose of VAT is essential for policymakers, businesses, and individuals, as it underscores the tax system’s broader implications for society and the economy.

VAT Rates in the UK

In the UK, VAT is not a one-size-fits-all tax. Instead, it employs a tiered system of rates that correspond to different types of goods and services.   As of September 2023, here are the primary VAT rates in the UK:

  1. Standard Rate: The standard rate of VAT stands at 20%. This rate is applied to most goods and services. It is the baseline rate used for calculating VAT on everyday items, making it the most common rate encountered by consumers and businesses.
  2. Reduced Rate: A reduced rate of 5% is applied to specific goods and services aimed at making essential items more affordable. Examples include domestic energy, children’s car seats, and some home renovations. This rate reflects the government’s efforts to alleviate the financial burden on consumers for essential items.
  3. Zero Rate: Some goods and services are subject to a 0% VAT rate. This means that no VAT is added to the selling price, but businesses can still recover the VAT they incur on related expenses. Zero-rated items encompass essential categories such as most food items, children’s clothing, books, and some medical supplies.
  4. Exempt: Certain goods and services are entirely exempt from VAT. These include financial and insurance services, education, healthcare, and some forms of land and property transactions. Exempt supplies do not incur VAT, and businesses cannot reclaim VAT on related expenses.

It is crucial to stay updated on tax rates, as these can change over time due to government policy shifts.

VAT Registration

Businesses operating in the UK are subject to VAT registration based on their annual taxable turnover. The current VAT registration threshold in the UK (as at September 2023) is  set at £85,000. Businesses with an annual turnover exceeding this threshold must register for VAT.  NB the threshold does not apply to overseas businesses that need to VAT register.

However, voluntary registration is also an option, even if a business’s turnover falls below the threshold. Opting for voluntary registration can be advantageous, especially for companies trading with other businesses and industries that can recover VAT and where they have substantial input VAT on their expenses, as it allows them to recover these costs.

Once registered for VAT, businesses must adhere to various responsibilities:

  • Charging VAT: Registered businesses must charge VAT on their taxable supplies, which includes most goods and services subject to a positive rate of VAT.
  • VAT Records: Accurate records of all VAT transactions, including sales and purchases, must be maintained. This meticulous record-keeping is vital for the submission of VAT returns.
  • VAT Returns: VAT-registered businesses must periodically submit VAT returns to HMRC. These returns detail the VAT collected on sales and the VAT paid on purchases. The difference between the two figures represents either a payment to HMRC or a refund, depending on the net result.  Returns must be filed using Making Tax Digital (MTD) compliant software.

VAT’s Broader Economic Impact

Beyond its role as a revenue generator, VAT has broader implications for the economy:

  1. Revenue Generation: VAT is a significant contributor to government revenues, providing essential funding for public services, infrastructure development, and other government initiatives.
  2. Consumer Behaviour: VAT rates can influence consumer behaviour. Changes in VAT rates may impact purchasing decisions, particularly for items subject to higher rates.
  3. Business Operations: VAT compliance can be administratively burdensome for businesses, particularly smaller enterprises. Businesses must invest in record-keeping and compliance measures to meet their VAT obligations.
  4. International Trade: VAT plays a role in international trade, as it affects the cost structure of exported and imported goods and services. VAT refunds are often available for businesses engaged in international trade although the rules vary globally.
  5. Economic Stimulus: VAT rates, particularly the reduced rate, can be adjusted by the government to stimulate specific sectors of the economy or incentivise certain types of spending during economic downturns.

Summing up VAT

In this exploration of VAT, we have delved into the intricacies of a tax system that extends far beyond revenue generation. VAT serves as a fundamental pillar of a country’s fiscal framework, touching every corner of the economy, from businesses to consumers, and from public finances to international trade.

We began our journey by unravelling the primary purpose of VAT, recognising it as a versatile tool used by governments to collect revenue while promoting economic stability and equity. Its progressive nature ensures that the tax burden is shared among all consumers, and its adaptability allows it to influence consumer behaviour and economic activity.

The diverse VAT rate structure in most countries, encompassing standard, reduced, zero, and exempt rates, became clearer as we explored its impact on pricing, consumer choices, and business operations. Understanding these rates is essential for businesses to navigate the intricate web of tax compliance and the logic that lies beneath it.

In essence, VAT is not just a tax; it’s a dynamic force driving fiscal policy, economic behaviour, and resource allocation. Understanding VAT is essential for individuals, businesses, and policymakers alike. It empowers us to make informed financial decisions, promotes fiscal responsibility, and contributes to a fair and stable economic environment.

As you navigate the world of VAT and GST, remember that it is not a static entity; it evolves with economic and policy changes. Staying informed about VAT regulations and rate adjustments is crucial, as is seeking professional guidance when needed.

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces.  To discuss how we can help contact us today