June 2024

Jun 17

HMRC VAT Assessment Reviews

By Paul Lymer Customs Duty news|Featured|Uncategorized|VAT news, Uncategorized|VAT news, VAT news

The worst has happened and you find yourself on the receiving end of a VAT assessment from HMRC in the UK. This might arise for a variety of reasons but essentially a VAT assessment will usually be triggered by the following:

A VAT audit where HMRC determine there is a VAT error;
As a result of a ‘precred’ query on a VAT repayment return – an error is discovered and it is found to relate to earlier VAT return periods in addition to the one subject to the ‘precred’ check;
Following submission of an Error Correction Notice (ECN) to HMRC where an amount of VAT is due to HMRC

This article will outline best practice to help you walk through some of the key considerations in reviewing HMRC VAT assessments. Where there are areas of uncertainty, The VAT Consultancy can provide advice and help.

How far back can VAT assessments go?

In the UK the ‘statute of limitations’ for VAT errors is 4 years. This means that errors both in the taxpayers favour and HMRC’s favour can go back up to 4 years but no further. This means 4 years from the end of the VAT return period in which the error arose for under-declared output VAT and over-claimed input VAT, so 4 years back from the current VAT return period. On a practical level HMRC’s systems are not able to accept data for periods prior to this.

Where an issue is disputed and discussions with HMRC are ongoing, it is common practice for HMRC to issue a ‘protective assessment’ to stop time periods falling foul of the 4 year cap outlined above. This means they raise and issue assessments for the early periods whilst the discussions are ongoing so that, in the event they win the argument or they disagree with the taxpayer and proceed to raise an assessment, the early period VAT is not lost. Normally they do not expect payment of the assessments during ongoing discussions, hence the moniker ‘protective assessment’ – to protect them from losing out on assessing earlier period VAT if discussions are protracted.

NB their desire to ensure VAT is not lost under these provisions does not override their requirement to ensure assessments are only raised using ‘best judgement’. This means they should not raise assessments unless they are in possession of full facts and accurate data.

VAT Assessments following VAT Audits

A VAT assessment arising following a VAT audit may or may not be contentious. What we mean by this is that errors can arise as a result of mis-postings, transposition of values etc, leading to under-declarations of VAT and there is usually no dispute as to whether an error has been made in this case. It does not matter that the customer would have recovered any VAT had it have been charged, HMRC will still likely want to raise an assessment, sticking to a mantra that the right amount of tax must be paid by the right person at the right time. See below regarding interest on assessments.

If a VAT audit results in a dispute whereby you do not agree with HMRC about the treatment of a particular type of transaction, you should be given the opportunity to continue making a case as to why additional VAT is not due before they raise an assessment (subject to the point above regarding the 4 year cap).

Once they make their final decision however this should be notified to you in writing and this becomes the formal ‘appealable decision’ which should be accompanied by an assessment schedule showing how much VAT is due per period plus details of any interest due.

VAT Assessments following submission of repayment VAT returns

HMRC frequently carry out mini desk audits on VAT returns showing larger than usual repayments, or on the first VAT return submitted by a newly VAT registered business if it shows a repayment due to the taxpayer.

During this process they will typically request confirmation of the business activities and copies of the 10 largest (by value) sales and purchase invoices. They also request copies of the VAT return workbook and sales/purchase listings for the period. If they discover errors during this process, if the error is confined to the VAT return they are reviewing, they will amend the VAT return values, reducing the repayment, and no assessment documentation will be issued. NB you are still able to appeal this decision if you disagree, as set out above.

However in some cases the error discovered may have also arisen in earlier VAT return periods. In this case HMRC will ask for the relevant data and raise an assessment for the earlier periods.

VAT Assessment following submission of an Error Correction Notice (ECN)

This scenario should not be contentious as such given the assessment is issued by HMRC following receipt of an ECN from the taxpayer. Therefore, provided the values agree, there should not be a dispute.

When must a VAT Assessment be paid?

VAT Assessments must be paid within 30 days of the date of issue which should be shown on the front page of the assessment, typically top right corner in a box with a date stamp. If making payment this will cause an issue for the business this should be discussed with HMRC as soon as possible so that a ‘time to pay’ arrangement can be reached if necessary. Otherwise they will issue demand letters and ultimately may visit business premises to collect the VAT debt. You should consult a VAT specialist if you need help with this.

If the business continues to submit repayment returns after the issuing of an assessment HMRC should not offset the assessment VAT against your repayment return if you are trying to arrange ‘time to pay’ with them or if you are still in the review period in relation to the decision.

Default Interest

Interest will be shown on the assessment documentation on sums due to HMRC, but if repayments are due from HMRC in the same period, the interest should only be due on the net value due to HMRC.

Historically HMRC did not impose interest penalties in situations where a taxpayer did not charge VAT to a customer in error but if they had charged VAT, the customer would have fully reclaimed this, meaning there would be no loss of VAT to HMRC. This changed from January 2023 and interest is now charged.

Key things to review/check on VAT assessments

It is worthwhile checking the following key points if a VAT assessment is raised to ensure it is accurate:

Was the assessment issued in due time (there are specific and fairly complex rules whereby HMRC have 12 or 24 months to raise assessments following receipt of full facts)? If you feel you provided all of the required information to HMRC and it took them more than 1 year to issue the assessment you should discuss the issue with a VAT specialist.
Has any default interest been calculated correctly?
Are the VAT values on the assessment correct and in the correct periods?

What should you do if you do not agree with the VAT Assessment?

If you do not agree with the technical basis for the VAT assessment the ‘decision letter’ should set out your rights of appeal. The time limits applying should be adhered to if possible, so if you would like the HMRC decision to be reviewed by an independent officer, this should be requested within 30 days of the date of the decision. If they uphold the original decision to assess, you then need to decide whether to lodge a formal appeal to a VAT tribunal within 30 days and also consider whether Alternative Dispute Resolution (ADR) – mediation – may be possible (it is typically less formal or costly than a tribunal).

The VAT Consultancy has extensive experience in helping clients determine whether a VAT assessment has been fairly issued or whether there are grounds to appeal the decision.

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the pre and post VAT audit. We provide global VAT and customs duty advice and VAT compliance services. To discuss how we can help contact us today or call us on +44 203 2806902.

Jun 05

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reverse charge vat international business

Reverse Charge VAT and the Impact on International Business Transactions

By Paul Lymer Customs Duty news|Featured|Uncategorized|VAT news, Customs Duty news|VAT news

In this article we will give a comprehensive overview of how reverse charge VAT affects the sales and purchase transactions your business might be involved in, why VAT reverse charge is important, how to best manage it in your accounting system, and how to provide guidance to your teams dealing with reverse charges (eg the Accounts Payable Team).

What is VAT Reverse Charge?

The reverse charge applies to services only rather than goods (although it can apply in certain situations where there are services with ancillary/incidental goods). In this article we are discussing reverse charge VAT that relates to cross border transactions rather than some of the reverse charge systems applying to domestic transactions eg in relation to construction services.

Many countries worldwide have a reverse charge system and the UK and EU use it extensively to tax B2B cross border transactions. It is essentially a way of taxing transactions where the business customer belongs – this effectively recognises the spirit behind VAT ie that it is a consumption tax.

Why do the Tax Authorities like Reverse Charge VAT?

The reverse charge is a way of self assessing VAT at your local VAT rate on purchases – you pay this VAT on your VAT return and on the same VAT return you get a credit for it (subject to the business’ normal VAT recovery profile – see more below). The alternative if we did not have reverse charge systems would be to have your overseas suppliers VAT register in the UK and charge you the same local VAT you self assess.

The reasons the tax authorities prefer reverse charge mechanisms rather than having the overseas supplier VAT register are as follows:

there is no value for the tax authorities in the additional admin created by having multiple suppliers from overseas VAT register as they need to audit them, process VAT returns etc. They get the same amount of VAT from you applying the reverse charge;
it saves the tax authorities overseas from having to process high value overseas VAT refund claims if services are subject to local VAT rather than reverse charge VAT;
by having a reverse charge system the tax authorities are able to pursue a local established business in the event of non payment of VAT which would not be as simple if if they were to make the overseas suppliers VAT register and account for the VAT instead

The EU extended the scope of the reverse charge mechanism significantly in 2010 partly for some of the reasons outlined above.

NB the reverse charge does not necessarily apply to land related services so care should be taken if your business is involved in providing services that have a connection to a specific piece of land or property.

How is Reverse Charge VAT declared?

Where the business has purchased service subject to the reverse charge, output tax and input tax should be accounted for on the VAT return, the impact being that the business has declared VAT on a sale and purchase so there is nil net VAT impact (subject to the business’ VAT recovery profile). On the UK VAT return the VAT amount is declared in box 1 (sales VAT) and box 4 (purchase VAT) and the net amount in box 6 (net sales) and box 7 (net purchases). Similar principles exist worldwide although the format of the VAT returns varies.

What Types of Service does the Reverse Charge apply to?

To answer this question it is easier to turn it on its head and state which services reverse charge VAT typically does not apply to in the first instance. In the UK/EU this includes the following:

land and property related services such as construction, architects, demolition
restaurants and hotels
cultural services such as theatre, cinema entrance
event entrance fees
exempt services such as financial services, insurance
outside the scope services (such as paymaster arrangements)

Why is Reverse Charge VAT important?

Accounting for reverse charge VAT when required is important as otherwise a purchase would be untaxed which would not be correct. Where the VAT rules mean that the overseas supplier is not required to charge their local VAT, the customer is required to account for their local VAT under the reverse charge as set out above. It would be easy to consider that accounting for reverse charge VAT is not important if the VAT in question is fully recoverable by the business as there is nil net impact/nil tax overall due to the tax authorities. However it is important as you could make the same argument about VAT generally, where suppliers charge VAT to business customers and they fully reclaim it, so nil net tax is due to the tax authorities overall. Some countries levy penalties if the reverse charge is not the accounted for when it should be, even if it would be fully recoverable. Accounting for reverse charge accurately is critical if the businesses is partly exempt – in this case the VAT reverse charge may not be fully recoverable and so there is an amount of VAT due to the tax authorities. If overlooked, this may lead to significant historic liabilities.

High Risk Transactions

We regularly encounter issues with clients where the following high risk transactions have been overlooked and reverse charge VAT has not been correctly accounted for. As above, this is particularly problematic for businesses unable to fully recover the reverse charge VAT due to their VAT recovery profile:

intercompany transactions, especially those booked on the intercompany account rather than being invoiced. Watch out for ‘cost allocations’ which have the same impact. Agreeing the allocation of a cost charged by an overseas group entity (eg by signing off the accounts) means that a tax point has crystalised for VAT reporting (assuming a VAT invoice has not been raised by this point or payment made). Any reverse charge VAT would therefore need to be accounted for. There is also a mandatory 31 December tax point created for reverse charge services where a tax point has not otherwise been created by the above;
transactions with advertising and marketing service providers such as Google and Linkedin – the contracting party is often located in Ireland and we find that these transactions are often missed, possibly due to the fact that VAT invoices are not necessarily that visible

Reverse Charges in the Accounting System

Ideally the business should use an appropriate tax code in the accounting system so that the transactions are tagged appropriately and the system automatically ensures that VAT flows to the output VAT and input VAT boxes on the VAT return. If your system doesn’t have this functionality and you cannot implement it, it would be advisable to produce VAT return reports for purchases that show the supplier location so that it is easy to identify transactions on which reverse charge VAT may be due.

Training the AP Team

The AP will typically be in the front line in deciding whether reverse charge VAT applies to a purchase. It is therefore only fair that they have the knowledge to make this determination. Decision trees are a useful tool for the AP team as these can help them determine whether a particular transaction that they are reviewing should be subject to the reverse charge. This should be incorporated into regular (annual) VAT training for the AP team and new joiners should also be encouraged to review the guidance.

Reverse Charge VAT and Sales

If the business provides services B2B and has overseas customers it is likely that it won’t be charging VAT. If the business is based in the UK it is helpful to show narrative on the invoice stating that the reverse charge applies (within the EU this is mandatory narrative along with the customer by registration number). From a UK (and EU) VAT perspective the test for not charging VAT cross-border on services is that the customer is in business the best evidence of this status is acknowledged to be the customer VAT registration number. Ideally this should be shown on the VAT invoice and should be held as part of the customer master data. Alternative evidence of business status can be obtained for eg business customers that are exempt and are therefore not VAT registered. However care should be taken with not-for-profit customers – although they may be VAT registered and therefore have a mechanism to account for reverse charge VAT, the true test is that they are purchasing the services for business rather than non business purposes for you to apply the reverse charge to your invoice.

Overseas VAT Registration Liabilities

The following transactions can create overseas by registration liabilities whereas the reverse charge system normally allows your business customer to account for VAT on your behalf so that you don’t need to register. Care should therefore be taken if you provide such services:

goods that are imported or acquired by you overseas
certain land or property related services depending on the customer VAT profile
supply and installation of goods
entrance fees to conferences and events

The VAT Consultancy can assist with all of the above so please get in touch if you have any queries.

EU VAT Registration UK Suppliers

If you are a UK business that is registered for VAT in the EU as a result of providing some of the services above, you might find that you are not required to charge overseas VAT to domestic business customers in that country even though you are VAT registered there. In some countries the domestic reverse charge applies instead so the tax authorities prefer the local established customer to account for the VAT rather than having you as the overseas supplier charge and account for the VAT. This is different to the construction domestic reverse charge and also the mainstream reverse charge for cross border transactions detailed above. VAT advice should be taken if you are unsure as to whether this applies to your business.

Reverse Charge on International Business Transactions

The reverse charge is a very useful tool to stop irrecoverable foreign VAT costs arising on cross-border transactions and it also removes the need for multiple overseas VAT registrations. Care should be taken to ensure that reverse charge is accounted for and that your team is trained in how to manage this and recognise relevant transactions.

The VAT Consultancy is highly experienced and provides relevant and practical advice to help international businesses deal with reverse charge VAT. We provide global VAT and customs duty advice and VAT compliance services. To discuss how we can help contact us today or call us on +44 203 2806902.