Tag Archives: VAT reverse-charge

VAT: The Reverse Charge

By   24 June 2022
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Normally, the supplier is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed, and it is the customer who must account for any VAT due. Don’t get caught out!

Purchasing services from abroad

These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ (RC) procedure must be applied. Where the RC applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax.

The effect of these provisions is that the reverse charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus, creating a level playing field between purchasing from the UK and overseas.

Accounting for VAT and recovery of input tax.

Where the RC procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.  On the same VAT return, the recipient must

  • account for output tax, calculated on the full value of the supply received, in Box 1
  • (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4
  • include the full value of the supply in both Boxes 6 and 7

Value of supply

The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration.  The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.

More on consideration here.

Time of supply

The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.

Registration

If a business is not UK VAT registered, it must recognise the value of RCs in determining its turnover. That is; if its turnover is below the registration limit (currently £85,000 pa) but the value of its RCs supplies exceed this limit, it must register.

Other RCs

The RC or similar procedures can also apply in the following situations:

Construction supplies

Import of goods (postponed accounting)

Deregistration

The Flat Rate Scheme (FRS)

Mobile telephones

Motor cars

Land and buildings

VAT: Exempt insurance intermediation. The Staysure case

By   8 June 2022
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Latest from the courts

In the Staysure.Co.UK Limited First Tier Tribunal (FTT) case the issue was whether services of service of generating insurance leads for the appellant fell within the insurance exemption or whether the reverse charge (please see guide below) should be applied.

Background

Staysure is an FCA regulated insurance broker based in the UK which provided travel insurance for people aged 50 or over, home insurance, cover for holiday homes and motor vehicles. It received services from an associated company belonging in Gibraltar.

The services amounted to:

  • the provision of insurance leads online and offline
  • placing targeted advertising in the press, television and online
  • owning and operating the domain and related website: staysure.co.uk
  • providing insurance quotations via a bespoke quote engine which employed complex algorithms to produce a personalised price for each customer and resulted in an offer which was competitive from the customer’s perspective while also maximising profit for Staysure, the underwriter, and the service provider
  •  reporting on where prospective customers were falling out of the quotation and lead selection process, and in so doing demonstrate opportunities for further product development

If the services were not covered by the relevant exemption, they would be subject to a reverse charge via The Value Added Taxes Act 1994 section 8 by Staysure. As the recipient was not fully taxable, this would create an actual cost when the charge was applied. HMRC considered the service taxable and:

  • registered Staysure on the strength of the deemed self-supply
  • assessed for the input tax which was created by the reverse charge.

The assessment was circa £8 million, penalties of over £1 million plus interest. This was on the basis that HMRC concluded that the supply was taxable marketing rather than exempt intermediary services.

Decision

The court decided that the marketing and technology was used to find clients and introduce them to the insurer. The supplier was not supplying advertising, but qualified leads produced by that advertising. The quote engine was not merely technical assistance, but a sophisticated technology which assessed the conditions on which customers might be offered insurance. Consequently, these services were exempt as the supplies of an insurance intermediary (The VAT Act 1994, Schedule 9, Group 2, item 4) and Staysure was not required to account for UK VAT under the reverse charge.

The appeal was allowed. The services were within the insurance exemption, essentially because they were linked to essential aspects of the work carried out by Staysure, namely the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts. 

Technical

This is another case on the application of the reverse charge. I looked at a previous case here

However, the judge helpfully summarised the following principles on insurance intermediation after considering previous case law.

  • whether a person is an insurance broker or an insurance agent depends on what they do. How they choose to describe themselves or their activities is not determinative
  • it is not necessary for a person to be carrying out all the functions of an insurance agent or broker for the exemption to be satisfied        
  • it is essential that the person has a relationship with both the insurer and the insured party, but this does not need to be a contractual relationship. The requirement that the person has a relationship with the insurer is satisfied where the person is the subcontractor of a broker, which in turn has a relationship with the insurer
  • where the person is a subcontractor of a broker, the exemption is satisfied:
    • where the relationship with the customer is indirect or where the subcontractor is one of a chain of persons bringing together an insurance company and a potential insured, but;
    • the subcontractor’s services must be linked to the essential aspects of the work of an insurance broker or agent, namely the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts

Commentary

Care should always be taken when outsourcing/offshoring services or in fact, when any business restructuring takes place. The VAT impact of doing so could provide costly. In this case, the distinction between intermediary and marketing services was considered. It went in the taxpayer’s favour, but slightly different arrangements could have created a large VAT hit.

Guide

Reverse charge on services received from overseas
Normally, the supplier of a service is the person who must account to the tax authorities for any VAT due on the supply.  However, in certain situations, the position is reversed and it is the customer who must account for any VAT due.  This is known as the ‘Reverse Charge’ procedure.  Generally, the Reverse Charge must be applied to services which are received by a business in the UK VAT free from overseas. 
Accounting for VAT and recovery of input tax.
Where the Reverse Charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.
Value of supply
The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration.  The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
Time of supply.
The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.
The outcome
The effect of the provisions is that the Reverse Charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus the charge aims to avoid cross border VAT rate shopping. It is not possible to attribute the input tax created directly to the deemed (taxable) supply. 

VAT: What is consideration and why is it important?

By   18 March 2022
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VAT Basics

Consideration – background

There is no definition of consideration in legislation. The meaning was originally taken from contract law, but after the European Court of Justice ruled that the term is to be given the Community meaning and is not to be variously interpreted by Member States the UK adopted that approach.

The expression “consideration” means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance etc). Consideration is a payment for the supply of goods or services. It is usually a payment in money, but can also be of a “non-monetary” nature, such as goods or services supplied in return.

The phrase “in return for the supply” is interpreted to mean that there must be a direct link between the supply and the consideration.

Therefore, in order that a supply for a consideration can be made, there must be at least two parties and a written or oral agreement between them under which something is done or supplied for the consideration. There is a direct link between the supply and the consideration because the supplier expects something in return for his supply and would not fulfil his obligation unless he thought that payment would be forthcoming.

Profit

It is important to recognise that the concept of consideration and profit are wholly different, and the fact that a business makes no profit on a supply does not mean that there is no consideration for it. Whether payment yields a profit or loss is immaterial and has no bearing on whether or not it is consideration for VAT purposes. 

Importance

If consideration is not recognised, or undervalued, a business can expect HMRC assessments and penalties. Overstating consideration will result in an overpayment of tax.

if there is no consideration, there is no supply.

Consideration hallmarks

  • Consideration is defined widely to bring within the tax everything which the taxable person receives as consideration for the goods or services supplied.
  • The consideration must be capable of being expressed in money.
  • There must be some form of bargain or transaction between the parties.
  • A payment should be related to what the payer receives although the fact that people pay the same amount for varying benefits does not stop it from being consideration.

Consequently, if the provision of goods or services is incapable of being expressed in money, it is not consideration and is outside the scope of VAT.

Indicators of no consideration

  • The absence of any consensual element on the part of the payer.
  • A lack of control by the payer over the services provided.

Valuation of consideration

This may seem obvious, but as the amount of case law demonstrates, this is not always the case. The starting point is:

Monetary consideration

Monetary consideration includes cash and payment by cheque, credit card, bank transfer, contactless payment, deduction from pay, etc. This is set out in The VAT Act 1994, section 19(2).

Non-monetary consideration

Non-monetary consideration includes goods or services supplied as payment, for example in a “barter” (including part exchange) agreement. Services provided include the giving up of a right, refraining from doing something, agreeing to suffer some loss etc in return for the supply. At first sight these may appear to be merely conditions of an agreement, but are in fact consideration for a supply. If the supply is for a consideration not consisting or not wholly consisting of money, its value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration. Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply is deemed to be for such part of the consideration as is properly attributable to it.

In determining the taxable amount, the only advantages received by a supplier that are relevant are those obtained in return for making the supply should be recognised.  Non-monetary consideration has the value of the alternative monetary payment that would normally have been given for the supply.

What is not consideration

Donations

If a monetary donation is freely given, it is not consideration for any supply and so is outside the scope of VAT. In this situation, the donation has to be unconditional, and the following points dictate whether this is the case.

  • Does the donor receive anything in return for the payment?
  • Are there any conditions attached to the payment?
  • What will the payments be used for?
  • If the donor does not benefit directly, does any third party receive a benefit?
  • Is there a contract and what are the terms and conditions?

Donations must be contrasted to sponsorship.

It is necessary to distinguish between donations and sponsorship payments. Whereas a donation means the donor does not expect anything in return, sponsorship involves the sponsor receiving identifiable benefits. These benefits may include advertising, publicity or use of facilities and any sponsorship payment is within the scope of VAT.

Open Market Value

The VAT Act 1994, section 19 (5) states that “…the open market value of a supply of goods or services shall be taken to be the amount that would fall to be taken as its value …if the supply were for such consideration in money as would be payable by a person standing in no such relationship with any person as would affect that consideration”.

Difficult areas

Commonly, areas which give rise to VAT consideration problems include, but are not limited to:

  • when consideration is provided in return for supplies of differing VAT liabilities
  • Special Valuation Provisions in The VAT Act 1994, Schedule 6
  • supplies to staff or goods for own use
  • discounts and special offers (eg; persons providing selling or introductory services to traders who receive goods for a reduced cash payment, or BOGOF)
  • barter transactions – when each supply has a different value
  • part-exchange
  • apportionment of monetary consideration
  • separate/composite supplies
  • supplies between connected parties
  • direct selling structures
  • gifts, prizes, and reward goods.
  • imports
  • prompt payment discounts
  • deemed supplies
  • non-business use of business assets or of services supplied to a business
  • reverse charges
  • reduced rate accommodation
  • supplies expressed in foreign currencies
  • transfer pricing
  • business gifts/samples
  • caravans sold with contents
  • self supplies
  • club membership benefits
  • correspondence courses
  • opticians and hearing aid dispensers (exempt services vs standard rated goods)
  • rebates/refunds
  • disbursements
  • tour operators (TOMS)
  • partial exemption

Further reading

For purposes of research or interest, the following cases on consideration are worth reading:

Staatssecretaries van Financien v Cooperatieve Aardapplenbewarr-plaats ((1981) ECR 445; (1981) – The Dutch Potato case for ease!

BAZ Bausystem Gmbh v Finanzamt Munchen Fur Korperschaften

Apple & Pear Development Council (APDC), (ECJ (1988) STC 221; (1988)2 CMLR 394)

Tolsma C-16/93 (1994 STC 509)

Naturally Yours Cosmetics Ltd

Empire Stores Ltd



VAT: Domestic Reverse Charge for construction services from 1 March 2021

By   17 February 2021
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A reminder

The twice delayed introduction of the Domestic Reverse Charge (DRC) for the construction industry will be introduced from the first of next month and affected businesses need to have the necessary procedures in place – as it won’t be deferred again.!

Details of the scheme here and here.

Please contact us if you have any queries.

VAT: Postponed Accounting

By   9 February 2021
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VAT Basics

A quick look at Postponed Accounting (PA) and what it means for a business after Brexit

Pre-Brexit (if one remembers such halcyon days) acquisitions from other Member States crossed the UK border without any formalities as there was free movement of goods within all of the EU.

Now that GB is a third country, it is unable to take advantage of the benefits of a single market, so acquisitions become imports and are required to be declared when imported. However, gov.uk has announced he return of PA in an attempt to simplify matters.

PA

PA is accounting for import VAT on a VAT return means a business declares and recovers import VAT on the same return, rather than having to pay it upfront and recover it later. This means neutral cash flow; which is to be welcomed.

The normal rules about what VAT can be reclaimed as input tax will apply.

PA also has the advantage that imported goods are not delayed at the entry port while VAT paperwork and payment is completed. Of course, as experience has demonstrated; there may be other reasons for delays to imports and exports.

Who can use PA?

From 1 January 2021, if a business is registered for VAT in the UK, it will be able to account for import VAT on its return for goods it imports into:

  • GB (England, Scotland and Wales) from anywhere outside the UK
  • Northern Ireland from outside the UK and EU

There will be no changes to the treatment of VAT for the movement of goods between Northern Ireland and the EU.

A business does not need approval to account for import VAT on its returns.

How does PA work practically?

VAT is payable on imports of over £135 arriving into the GB from any country in the world, which now includes the EU. Practically, PA is similar to the current Reverse Charge. Output and input VAT is accounted for on the same VAT return.

When completing a customs declaration a business may choose how to account for VAT on its return.

If the Customs Handling of Import and Export Freight (CHIEF) system is used:

On the declaration, the following needs to be entered:

  • the EORI number starting with ‘GB’ which includes the VAT registration number into box 8, or, if applicable, the VAT registration number in box 44h
  • ‘G’ as the method of payment in Box 47e

If the Customs Declaration Service is used:

The VAT registration is entered number at header level in data element 3/40.

Returns

  • Box 1 – Include the VAT due in this period on imports accounted for via PA.
  • Box 4 – Include the VAT reclaimed in this period on imports accounted via PA.
  • Box 7 – Include the total value of all imports of goods included on your online monthly statement, excluding any VAT.

Using someone to import goods on your behalf

If a business uses a third party to import goods on its behalf (eg; a freight forwarder, customs agent, or fast parcel operator) it will need to inform them how it wants to account for VAT on those imports, so that they can complete the customs declaration correctly.

Alternatives

The use of PA is optional. The alternative is to pay VAT on goods when they enter the UK. This means the use of the “usual” C79 certificates sent by HMRC on which input tax may be reclaimed (rather than any other documentation, eg; invoices).

Northern Ireland

Goods moved to NI from the EU are not impots (NI remains part of the EU, so the old rules on acquisitions still apply and no import VAT is due).

Customs Duty

Alongside additional border formalities, Customs Duties may be payable on certain goods. This Duty is not reclaimable like VAT. Most of the complexities of Customs Duty relate to the rules of origin.

Commentary

PA is a relief for businesses importing from the EU. It is a simple system and will be familiar to any business which applies Reverse Charges. With all the varying changes applying post-Brexit, this is one area which should not affect a business importing from the EU in terms of port delays or negative cash flow. To date, there is no evidence on how well the system is working, but anecdotally, I understand that this part of Brexit changes has not thrown up any issues, unlike other problems which have been widely reported. I stand to be corrected though.  

VAT: Domestic Reverse Charge for builders – introduction delayed

By   9 September 2019
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As you were…

The UK Government has announced that it is to delay the introduction of the VAT Domestic Reverse Charge (DRC) for construction businesses by a year after a coalition of trade bodies and organisations highlighted its potentially damaging consequences. Details of DRC here

The DRC was due to come into force from 1st October this year, but it has been announced via Revenue and Customs Brief 10 (2019): domestic reverse charge VAT for construction services – delay in implementation that it has been deferred for a year. The new implementation date will be 1 October 2020 unless there are further delays.

The move has been welcomed by all parties affected by the rules and HMRC said that it was committed to working closely with the sector to raise awareness and provide additional guidance to make sure all businesses will be ready for the new implementation date.

Invoices etc

HMRC have also recognised that some businesses have already put changes in place to anticipate the original introduction date and appreciate that it may not be possible to reverse these changes before 1 October 2019. Where “genuine errors” have occurred, HMRC has stated that it will take into account the late change in its implementation date.

 Comments

The Chief Executive of the Federation of Master Builders said “I’m pleased that the government has made this sensible and pragmatic decision to delay reverse charge VAT until a time when it will have less of a negative impact on the tens of thousands of construction companies across the UK. To plough on with the October 2019 implementation could have been disastrous given that the changes were due to be made just before the UK is expected to leave the EU, quite possibly on ‘no-deal’ terms.” The situation hasn’t been helped by the poor communication and guidance produced by HMRC. Despite the best efforts of construction trade associations to communicate the changes to their members, it’s concerning that so few employers have even heard of reverse charge VAT.”

It has been stated by certain trade bodies that more than two-thirds of construction firms had not heard of the VAT changes and of those who had, around the same number had not prepared for them. My own experience backs this up and talking to other tax people and building businesses it is clear that this is not an issue which has been publicised widely and despite accountancy firms doing their best to bring it to the attention of relevant clients and contacts, many remain unaware.

Commentary

Discussions over Brexit (obviously!) have been blamed for the situation, although there is no word about why HMRC waited until a month before the intended implication to decide to delay the DRC. A lot of work has been carried out on this matter, and changes to documentation, processing and systems have taken place which will need to be reversed before 1 October 2019. At least the delay will provide HMRC with a new chance to let affected parties know next time and gives them time to identify why so many building businesses were unaware of the reverse charge.

Whether the DRC IS introduced next year remains to be seen. To my mind, it does not deal with the major sources of tax leakage in the construction industry and, as usual, complaint business will play by the book and those that do not will find a way round the rules. To exclude labour only services appears to be a folly. Perhaps they will be amended before next year.







I have to charge myself VAT?!

By   9 July 2019
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How comes?!

Well, normally, the supplier is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed and it is the customer who must account for any VAT due. Don’t get caught out!

Here are just some of the situations when you have to charge yourself VAT:

Purchasing services from abroad

These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ procedure must be applied. Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax. The effect of the provisions is that the reverse charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus creating a level playing field between purchasing from the UK and overseas.

Accounting for VAT and recovery of input tax.
Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.  On the same VAT return, the recipient must
      1. account for output tax, calculated on the full value of the supply received, in Box 1;
      2. (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;
      3. include the full value of the supply in both Boxes 6 and 7.
Value of supply: The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration.  The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
Time of supply: The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.

Purchasing goods from another EU Member States

Something similar to reverse charge; called acquisition tax, applies to goods purchased from other EC Member States. These are known as acquisitions (they are imports if the goods come from outside the EU and different rules apply). The full value of the goods is subject to output tax and the associated input tax may be recovered by the business acquiring if the goods are used for taxable purposes. If you are not already registered for VAT in the UK and acquire goods worth £85,000 or more in the UK from other EC countries, you will have to register for VAT in the UK on the strength of the value of the acquisition tax. A business will also have to complete an Intrastat Supplementary Declaration (SDs) if its acquisitions of goods from the EC exceed an annual amount – currently £1.5 million.

Intrastat_flow_diagramMore details on Intrastat Supplementary Declarations here

Deregistration

Any goods on hand at deregistration with a total value of over £1,000 on which input tax has been claimed are subject to a self supply. This is a similar mechanism to a reverse charge in that the goods are deemed to be supplied to the business by the business and output tax is due. However, in these circumstances it is not possible to recover any input tax on the self supply.

Flat Rate Scheme

There is a self supply of capital items on which input tax has been claimed when a business leaves the flat rate scheme (and remains VAT registered).

Mobile telephones

In order to counter missing trader intra-community fraud (‘MTIC’), supplies of mobile telephones and computer chips which are made by one VAT registered business to another and valued at £5,000 and over are subject to the reverse charge. This means that the purchaser rather than the seller is responsible for accounting for VAT due.

And not forgetting the new domestic reverse charge for building and construction here.

Land and buildings…. and motor cars

There are certain circumstances where land and buildings must be treated as a self supply… but that is a whole new subject in itself… as is supplies in the motor trade.

Even if the result of a self-supply or reverse charge is VAT neutral HMRC is within its rights to assess and levy penalties and interest in cases where the charge has not been applied; which always seems unfair.  However, more often than not simple accounting entries will deal with the matter…. if the circumstances are recognised and it is remembered to actually make the entries!







VAT: Domestic reverse charge for building services – Latest

By   12 June 2019
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The new domestic reverse charge for building and construction services will be introduced on 1 October 2019. Details here

HMRC have now published comprehensive guidance which appears to cover all scenarios (but almost certainly there will be transactions which will produce disputes).

Brief Overview

The domestic reverse charge is a major change to the way VAT is collected in the building and construction industry.

It means the customer receiving the service will have to pay VAT to HMRC instead of paying the supplier.

It will only apply to individuals or businesses registered for VAT in the UK.

This will affect a business if it supplies specified services reported under the Construction Industry Scheme (CIS). A business will need to prepare for the change by:

  • checking whether the reverse charge affects either sales, purchases or both
  • informing regular clients or suppliers
  • ensuring a business’ accounting systems and software are updated to deal with the reverse charge
  • considering whether the change will have an impact on cashflow

The reverse charge does not apply if the service is zero rated or if the customer is not registered for VAT in the UK. It also does not apply to services which are supplied to end users or intermediaries connected with end users. More details here.

Please contact us if you have any queries.







VAT: Construction industry – the new Reverse Charge

By   11 June 2018
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Builders will soon be required to charge themselves VAT.

HMRC has published an important new draft Statutory Instrument (SI) for technical consultation with a draft explanatory memorandum and draft tax information and impact note. The new rules are likely to be introduced in the autumn.

This sets out more details of the intended Reverse Charge (RC) for construction services. The draft legislation will make supplies of standard or reduced rated construction services between construction or businesses subject to the domestic RC, which means that the recipient of the supply will be liable to account for VAT due, instead of the supplier.

What supplies does the intended legislation cover?

The RC will apply to, inter alia:

  • construction, alteration, repair, extension, demolition or dismantling of buildings or structures
  • work on; walls, roadworks, electronic communications apparatus, docks and harbours, railways, pipe-lines, reservoirs, water-mains, wells, sewers, or industrial plant
  • installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
  • internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
  • painting or decorating the internal or external surfaces of any building or structure
  • services which form an integral part of the services described above, including site clearance, earthmoving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

What is not covered?

These are some supplies which are not covered by the draft SI

  • drilling for, or extraction of, oil or natural gas
  • extraction of minerals and tunnelling or boring, or construction of underground works, for this purpose
  • manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
  • manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
  • the professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
  • signwriting and erecting, installing and repairing signboards and advertisements
  • the installation of seating, blinds and shutters or the installation of security.

Please note that neither of the lists above are exhaustive.

Further details

The rules do not apply to supplies to the end user (consumer) eg; retailers and landlords, but rather to other construction businesses which then use them to make a further supply. There are no de minimis limits, but the RC will not apply to associated businesses.

Deadline

Before these new rues come into effect, HMRC have asked for comments before 20 July 2018.

Why the new rules?

Briefly, the SI is intended to avoid Missing Trader Fraud (MTF). The rules avoids suppliers charging and being paid VAT, but failing to declare or pay this over to the government. HMRC has identified the building trade as an area where there has been considerable tax leakage in the past.

Technical

As a general rule, it is the supplier of goods or services who is required to account for VAT on those supplies. However, the VAT Act 1994, section 55A requires the recipient, not the supplier, to account for and pay tax on the supply of any goods and services which are of a description specified in an order made by the Treasury for that purpose.

Action

It is prudent to check whether you, or your clients’ businesses will be affected by the intended SI. If so, plans need to be put in place; whether as a supplier or recipient, to ensure that VAT is not charged incorrectly (supplier) and the RC is applied correctly (recipient). It is likely that output tax incorrectly shown on an invoice will be due to HMRC, but will not be recoverable by the recipient and the omission of levying the RC will lead to penalties.

Please contact us if you have any queries or require further information.







VAT – Latest from the courts: treatment of web-based introductions

By   14 September 2016
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First Tier Tribunal (FTT) – What intermediary services may be exempted?

Background

The provision of intermediary services (putting those who require a financial product in touch with those who provide them) is exempt from VAT if certain conditions apply.  Broadly, the requirement is mainly the need to provide something more than just the introduction, eg; negotiation of credit. If a business acts as a mere conduit or in an advertising capacity its supplies will be standard rated.

The case

In the FTT case of Dollar Financial UK Limited TC05334 (Dollar) the applicant received web-based services from overseas The Reverse Charge was applied to these supplies (details of the Reverse Charge here). Dollar provides “payday loans” which are themselves exempt from VAT.  As Dollar was unable to recover all of the VAT on the Reverse Charge it represented a VAT cost to the business.  However, if the supplies were exempt there would be no need to apply the Reverse Charge and so the loss would be avoided.

The FTT was required to consider what precisely the suppliers (so called lead generators) provided to Dollar in return for a commission based on the value of the loan.  The lead generators operated websites which are mainly comparison sites and which referred potential borrowers to loan providers such as Dollar. HMRC formed the view that these services did not amount to intermediary services and hence were subject to the Reverse Charge.

The FTT ruled that there were differences between the two examples of services received by Dollar.  In one example it was decided that despite;

  • there being no legal relationship between the lead generator and the potential borrower
  • that the leads were sold to the lender offering the best commission
  • that the assessment for loan suitability was quick, only involved only a few basic checks, and did not require any judgment or discretion, and
  • that only 1% of the introductions resulted in offers of loans to borrowers,

the appellant was acting as more than a mere conduit or in an advertising capacity, and was providing exempt introductory services. Consequently, there was no need to apply the Reverse Charge.

In the other example, the Tribunal considered that a single supply of online chat assistance was more akin to an outsourced, principally back-office function which did not amount to intermediary services and was therefore standard rated such that Dollar must apply the Reverse Charge.

Commentary

This case demonstrates the need to identify precisely what is being provided by a business’ suppliers and to review contracts intently.  A small change in the circumstances between one supply and another may result in different VAT treatment. This is a comprehensive judgement and it is worth reading in its entirety if a business is involved in these type of transactions.  We recommend that advice is sought by those businesses which could be affected by this case; either as supplier or recipient.