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VAT Advice – An Overview of the Basics

By October 30, 2023March 13th, 2024VAT news
VAT advice

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