VAT: Mind the gap – HMRC latest figures

By Marcus Ward 23 June 2023

GOV.UK has published details of the most recent measurement of the tax gap for 2021-2022.

What is the tax gap?

The tax gap is measured by comparing the net tax total theoretical liability with tax actually paid. This is comparing the amount of tax HMRC expected to receive in the UK and the amount HMRC actually received.

The figures

The tax gap is estimated to be 4.8% of total theoretical tax liabilities, or £35.8 billion in absolute terms, in the 2021 to 2022 tax year.

Total theoretical tax liabilities for the year were £739.3 billion.

There has been a long-term reduction in the tax gap as a proportion of theoretical liabilities: the tax gap reduced from 7.5% in the tax year 2005 to 2006 to 4.8% in 2021 to 2022 – remaining low and stable between the years 2017 to 2018 and 2021 to 2022.

Criminal activity and evasion accounted for £4.1billion loss in tax collected.

30% of all underpayments of tax were due to a failure to take reasonable care, while 13% of instances were down to evasion.

A massive 56% of the tax gap is made up by small businesses (up from 40% of the total in 2017-18). Whether this is down to HMRC improving collection from large businesses or an increasing failure to crack down on small business is a moot point. It remains to be seen how HMRC react to this new information, but experience insists that small businesses may expect increased attention for the authorities.

The VAT gap

VAT represents 21% of the overall tax gap.

The VAT tax gap is 5.4%.

The absolute VAT gap is £7.6 billion.

The VAT gap has reduced from 14.0% of theoretical VAT liability in 2005 to 2006 to 5.4% in 2021 to 2022.

More than two thirds of the theoretical VAT liability was estimated to be from household consumption. The remainder came from the expenditure by businesses that supply goods and services where the VAT is non-recoverable (they are exempt from VAT), and from the government and housing sectors.

Information on the method used to estimate the VAT gap is here for those interested (I don’t imagine that there will be that many…).

So, £7.6 millions of VAT is missing. That seems an awful lot.

VAT refunds guidance

By Marcus Ward 13 June 2023

VAT Claims

HMRC has completely rewritten its manual VRM7000 on VAT repayments and set-off.

When a business makes a claim for VAT (for whatever reason) HMRC have the power to set-off a payment against other amounts due.

HMRC also has a discretion to take account of any taxpayer liabilities in other regimes HMRC administers such as corporation tax or excise duty.

In summary, the new guidance covers:

Inherent set-off via The VAT General Regulations 1995, Section 80(2A) and Regulation 29. This is where, say, a supply was incorrectly treated as standard rated when it was exempt. It would not be possible to claim the overcharged output tax (subject to unjust enrichment) without recognising the potential overclaim of input tax as a result of partial exemption.
Set-off under The VAT Gen Regs 1995, Section 81(3) HMRC. This covers HMRC liability to only pay a claim after setting off any VAT, penalties, interest or surcharge owed to it. Section 81(3) is mandatory and applies to the current liabilities of a taxpayer, regardless of the period incurred.
Set-off under section 81(3A). This is a special provision which requires HMRC to set any liabilities that would otherwise be out-of-time to assess, against any amounts for which HMRC is liable under a claim. It does this by disregarding the assessment time limit, to undo all the consequences of a mistake.
VAT group set-offs. When a company leaves a VAT group, it is still jointly and severally liable under section 43(1) VAT Act 1994 for any outstanding debts of the group incurred while the company was a member. Any VAT claim by the ex-member will be subject to set-off against these group debts.
Set-offs against other taxes and duties. HMRC has the discretion under Section 130 of the Finance Act 2008 to set-off debts due from any other tax regimes HMRC is responsible for. This is subject to the insolvency rules in section 131 Finance Act 2008. A taxpayer should always check that no further liabilities have arisen since the claim was made.
Transfers of rights to claim to another person (Section 133 of the Finance Act 2008) – A claim will be subject to set-off of any outstanding liabilities to HMRC from both transferor and transferee. NB: HMRC policy is to make reasonable efforts to recover outstanding debts from the original creditor before applying set-off to the current creditors claim.

VAT – What records must be kept by a business?

By Marcus Ward 5 April 2023

VAT Basics: Requirements for VAT records by taxable persons

I thought that it may be useful to round-up all the record-keeping requirements in one place and focus on what HMRC want to see. It is always good practice to carry out an ongoing review a business’ records to ensure that they comply with the rules.

General requirements

Every taxable person must keep such records as HMRC may require. Specifically, every taxable person must, for the purposes of accounting for VAT, keep the following records:

business and accounting records
VAT account
copies of all VAT invoices issued
VAT invoices received
certificates issued under provisions relating to fiscal or other warehouse regimes
copy documentation issued, and documentation received, relating to the transfer, dispatch or transport of goods overseas and/or imported
credit notes, debit notes and other documents which evidence an increase or decrease in consideration that are received, and copies of such documents issued
copy of any self-billing agreement to which the business is a party
where the business is the customer party to a self-billing agreement, the name, address and VAT registration number of each supplier with whom the business has entered into a self-billing agreement

Additionally

HMRC may supplement the above provisions by a Notice published by them for that purpose. They supplement the statutory requirements and have legal force.

Business records include, in addition to specific items listed above, orders and delivery notes, relevant business correspondence, purchases and sales books, cash books and other account books, records of daily takings such as till rolls, annual accounts, including trading and profit and loss accounts and bank statements and paying-in slips.

Unless the business mainly involves the supply of goods and services direct to the public and less detailed VAT invoices are issued, all VAT invoices must also be retained. Cash and carry wholesalers must keep all till rolls and product code lists.

Records must be kept of all taxable goods and services received or supplied in the course of business (standard and zero-rated), together with any exempt supplies, gifts or loans of goods, taxable self-supplies and any goods acquired or produced in the course of business which are put to private or other non-business use.

All records must be kept up to date and be in sufficient detail to allow calculation of VAT. They do not have to be kept in any set way but must be in a form which will enable HMRC officers to check easily the figures on the VAT return. Records must be readily available to HMRC officers on request. If a taxable person has more than one place of business, a list of all branches must be kept at the principal place of business.

Comprehensive records

In addition, we always advise businesses to retain full information of certain calculations such as; partial exemption, the Capital Goods Scheme, margin schemes, TOMS, business/non-business, mileage and subsistence claims, promotional schemes, vouchers, discounts, location of overseas customers, and OSS, amongst other records. The aim is to ensure that any inspector is satisfied with the records and that any information required is readily available. This avoids delays, misunderstandings and unnecessary enquiries which may lead to assessments and penalties.

If you have any doubts that your business records are sufficient, please contact us.

VAT: Alternative Dispute Resolution (ADR) new guidance

By Marcus Ward 14 February 2023

HMRC has published an updated Internal Manual which provides guidance on the ADR mechanism. I have written about this in detail here.

What is ADR?

ADR is the involvement of a third party (a facilitator) to help resolve disputes between HMRC and taxpayers. It is mainly used by SMEs and individuals for VAT purposes, although it is not limited to these entities. Its aim is to reduce costs for both parties (the taxpayer and HMRC) when disputes occur and to reduce the number of cases that reach statutory review and/or Tribunal. The facilitator is impartial and independent and aims to assist both parties in resolving the tax dispute.

Changes

The changes are mainly in connection with disagreements about whether a case is suitable for ADR. These include cases where requests have been made for ADR, for example:

requests from taxpayers for ADR where the HMRC decision is that the case is not suitable for ADR
requests from taxpayers for ADR where some of the HMRC case team believe the case is unsuitable, but other members of the team believe the case may be suitable
referrals from HMRC for complex or sensitive cases where they would like to offer ADR to the taxpayer

An ADR Panel, which consists of senior personnel from HMRC, will consider requests for ADR in circumstances where there is uncertainty about the suitability of a case for ADR. The ADR Panel will aim to provide assurance that applications by taxpayers in the most complex or potentially contentious cases for ADR are properly assessed and that decisions are consistent and principled.

VAT: Doctors and healthcare professionals

By Marcus Ward 16 January 2023

Healthcare services – an overview

I have noticed that I am receiving more and more queries in this area and HMRC does appear to be taking an increased interest in healthcare entities. This is hardly surprising as it can be complex and there are some big numbers involved.

(This article refers to doctors, but applies equally to most healthcare professional entities including; opticians, nurses, osteopaths, chiropractors, midwives, dentists etc.)

The majority of the services provided by doctors’ practices are VAT free. Good news one would think; no need to charge VAT and no need to deal with VAT records, returns and inspections.

However, there is one often repeated question from practices; “How can we reclaim the VAT we are charged?” This is particularly relevant if a practice intends to spend significant amounts on projects such as property construction or purchase.

The first point to make is that if a practice only makes exempt supplies (of medical services) it is not permitted to register for VAT and consequently cannot recover any input tax. Therefore we must look at the types of supplies that a practice may make that are taxable (at the standard or zero rate). If any of these supplies are made it is possible to VAT register regardless of their value. Of course, if taxable supplies are made, the value of which exceeds the current turnover limit of £85,000 in a rolling 12-month period, registration is mandatory.

Examples of supplies of services and goods which may be taxable are:

drugs, medicines or appliances that are dispensed by doctors to patients for self-administration
dispensing drugs against an NHS prescription (zero-rated)
drugs dispensed against private prescriptions (standard-rated)
medico legal services that are predominantly legal rather than medical – for example negotiating on behalf of a client or appearing in court in the capacity of an advocate
clinical trials or market research services for drug companies that do not involve the care or assessment of a patient
paternity testing
certain rental of rooms/spaces
car parking
signing passport applications
providing professional witness evidence
any services which are not in respect of; the protection, maintenance or restoration of health of a patient.

So what does VAT registration mean?

Once you join the “VAT Club” you will be required to file a VAT return on a monthly of quarterly basis. You may have to issue certain documentation to patients/organisations to whom you make VATable supplies. You may need to charge VAT at 20% on some services. You will be able to reclaim VAT charged to you on purchases and other expenditure subject to the partial exemption rules – see below. You will have to keep records in a certain way (see MTD) and your accounting system needs to be able to process specific information.

Because doctors usually provide services which attract varying VAT treatment, a practice will be required to attribute VAT incurred on expenditure (input tax) to each of these categories. Generally speaking, only VAT incurred in respect of zero-rated and standard-rated services may be recovered. In addition, there will always be input tax which is not attributable to any specific service and is “overhead” eg; property costs, professional fees, telephones etc. VAT registered entities which make both taxable and exempt supplies are deemed “partly exempt” and must carry out calculations on every VAT return.

Partial Exemption

Once the calculations described above have been carried out, the resultant amount of input tax which relates to exempt supplies is compared to the de-minimis limits (broadly; £625 per month VAT and not more than 50% of all input tax). If the figure is below these limits, all VAT incurred is recoverable regardless of what activities the practice is involved in. More details here.

VAT registration in summary

Benefits

recovery of input tax; the cost of which is not claimable in any other way
potentially, recovery of VAT on items such as property, refurbishment and other expenditure that would have been unavailable prior to VAT registration
only a small amount of VAT is likely to be chargeable by a practice
may provide opportunities for pre-registration VAT claims

Drawbacks

increased administration, documentation and staff time
exposure to penalties and interest
may require VAT to be added to some services provided which were hitherto VAT free
likely that only an element of input tax is recoverable as a result of partial exemption
uncertainty on the VAT position of certain services due to current tax cases
potentially dealing with the Capital Goods Scheme (CGS)
possible increased costs to the practice in respect of professional fees.

Please contact us if any of the above affects you or your clients.

Deregistration – When a business leaves the VAT club

By Marcus Ward 6 December 2022

This article considers when and how to deregister from VAT and the consequences of doing so.

General points

Deregistration may be mandatory or voluntary depending on circumstances. Although it may be attractive for certain businesses too deregister if possible, this is not always the case. The main reason to remain registered is to recover input tax on purchases made by a business. This is particularly relevant if that business’ sales are:

to other VAT registered businesses which can recover any VAT charged
supplies are UK VAT free (eg; zero rated)
made to recipients outside the UK

Businesses which make sales to the public (B2C) are usually better off leaving the VAT club even if this means not being able to recover input tax incurred.

A business applies for deregistration online through its VAT account, or it can also complete a form VAT7 to deregister by post.

NB: These rules apply to businesses belonging in the UK. There are different rules for overseas business which are outside the scope of this article.

The Rules

Compulsory deregistration

A business must deregister if it ceases to make taxable supplies. This is usually when a business has been sold, but there may be other circumstances, eg; if a business starts to make only exempt supplies, or a charity stops making business supplies and continues with only non-business activities or when an independent body corporate joins a VAT group. In such circumstances there is a requirement to notify HMRC within 30 days of ceasing to make taxable supplies.

We have seen, on a number of occasions, HMRC attempting to compulsorily deregister a business because either; it has not made any taxable supplies (although it has the intention of doing so) or it is only making a small amount of taxable supplies. In the first example, as long as the business can demonstrate that it intends to make taxable supplies in the future it is entitled to remain VAT registered. This is often the position with; speculative property developers, business models where there is a long lead in period, or business such as exploration/exploitation of earth resources.

Voluntary deregistration

A business may apply for deregistration if it expects its taxable turnover in the next twelve to be below the deregistration threshold. This is currently £83,000. It must be able to satisfy HMRC that this is the case. Such an application may be made at any time and the actual date of leaving the club is agreed with HMRC. It should be noted that when calculating taxable income, certain supplies are excluded. These are usually exempt supplies but depending on the facts, other income may also be ignored.

Consequences of deregistration

Final return

A deregistered business is required to submit a final VAT return for the period up to and including the deregistration date. This is called a Period 99/99 return.

Output tax

From the date of deregistration a business must stop charging VAT and is required to keep its VAT records for a minimum of six years. It is an offence to show VAT on invoices when a business is not VAT registered.

Input tax

Once deregistered a business can no longer recover input tax. The sole exception being when purchases relate to the time the business was VAT registered. This tends to be VAT on invoices not received until after deregistration, but were part of the business’ expenses prior to deregistration. Such a claim is made on a form VAT427

Self-supply (Deemed supply)

An often overlooked VAT charge is the self-supply of assets on hand at the date of deregistration. A business must account for VAT on any stock and other assets it has on this date if:

It could reclaim VAT when it bought them (regardless of whether such a claim was made)
the total VAT due on these assets is over £1,000

These assets will include items such as; certain land and property (usually commercial property which is subject to an option to tax or is less than three year old), un-sold stock, plant, furniture, commercial vehicles, computers, equipment, materials, etc, but does not include intangible assets such as patents, copyrights and goodwill. The business accounts for VAT on the market value of these assets but cannot treat this as input tax, thus creating a VAT cost.

We usually advise that, if commercially possible, assets are sold prior to deregistration. This avoids the self-supply hit and if the purchaser is able to recover the VAT charged the position is VAT neutral to all parties, including HMRC. It is worth remembering that the self-supply only applies to assets on which VAT was charged on purchase and that there is a de minimis limit. We counsel that care is taken to ensure planning is in place prior to deregistration as it is not possible to plan retrospectively and once deregistered the position is crystallised.

Re-registration

HMRC will automatically re-register a business if it realises it should not have cancelled (eg; the anticipated turnover exceeds the deregistration threshold). It will be required to account for any VAT it should have paid in the meantime.

Option To Tax

An option to tax remains valid after a registration has been cancelled. A business must monitor its income from an opted property to see whether it exceeds the registration threshold and needs to register again.

Capital Goods Scheme (CGS)

If a business owns any capital items when it cancels its registration, it may, because of the rules about deemed supplies (see self-supply above) have to make a final adjustment in respect of any items which are still within the adjustment period. This adjustment is made on the final return.

Cash Accounting

A business will have two months to submit its final return after it deregisters. On this return the business must account for all outstanding VAT on supplies made and received prior to deregistration. This applies even if it has not been paid. However, it can also reclaim any VAT provided that you have the VAT invoices. If some of the outstanding VAT relates to bad debts a business may claim relief.

Partial exemption

If a business is partly exempt its final adjustment period will run from the day following its last full tax year to the date of deregistration. If a business has not incurred any exempt input tax in its previous tax year, the final adjustment period will run from the first day of the accounting period in the final tax year in which it first incurred exempt input tax to the date of deregistration.

Flat Rate Scheme

If a business deregisters it leaves this scheme the day before its deregistration date. It must, therefore, account for output tax on its final VAT return for sales made on the last day of registration (which must be accounted for outside of the scheme).

Self-Billing

If your customers issue VAT invoices on your behalf under self-billing arrangements (or prepare authenticated receipts for you to issue) a deregistering business must tell them immediately that it is no longer registered. They must not charge VAT on any further supplies you make. There are financial penalties if a business issues a VAT invoice or a VAT-inclusive authenticated receipt for supplies it makes after its registration has been cancelled.

Bad Debt Relief (BDR)

A business can claim relief on bad debts it identifies after it has deregistered, provided it:

has previously accounted for VAT on the supplies
can meet the usual BDR conditions

No claim may be made more than four years from the date when the relief became claimable.

Summary

As may be seen, there is a lot to consider before applying for voluntary deregistration, not all of it good news. Of course, apart from not having to charge output tax, a degree of administration is avoided when leaving the club, so the pros and cons should be weighed up. Planning at an early stage can assist in avoiding in nasty VAT surprises and we would always counsel consulting an adviser before an irrevocable action is taken. As usual in VAT, if a business gets it wrong there may be an unexpected tax bill as well as penalties and interest.

Claiming UK VAT from overseas

By Marcus Ward 28 November 2022

With news that HMRC is testing a new electronic submission portal – the Secure Data Exchange Service (SDES) system for overseas businesses to recover VAT incurred in the UK, I thought it timely to look at the process. Especially as the deadline is 31 December 2022 for VAT incurred between 1 July 2021 and 30 June 2022.

The SDES is currently being tested. However, it is available to businesses to make claims, but during the testing period a claimant will need to email HMRC to request access.

Access to SDES request

Claimants wishing to use SDES, are required to email newcastle.oru@hmrc.gov.uk and should include:

‘SDES’ in the subject field
confirmation that the business would like to use the SDES
whether there is a Business Tax Account already set up

HMRC says it will contact the requestor within 15 calendar days to start the registration process and provide registration guidance.

Any queries on the registration process, may be addressed to the Overseas Repayment Unit on 0300 322 9279

If it goes wonky

HMRC states that during testing there may be times when SDES be stopped without notice. If it is stopped, claimants will be told by HMRC updating its online guidance. Further: If the service is stopped, it will not affect the claims that have already been submitted through it.

The alternative to claiming during testing is the good old-fashioned paper claims.

Claims in the UK

A non-UK based business may make a claim for recovery of VAT incurred in the UK. Typically, these are costs such as; employee travel and subsistence, service charges, exhibition costs, tooling, imports of goods, training, purchases of goods in the UK, and clinical trials etc.

Who can claim?

The scheme is available for any businesses that are:

not VAT registered in the UK
have no place of business or other residence in the UK
do not make any supplies in the UK

What cannot be claimed?

The usual rules that apply to UK business claiming input tax also apply to claims from overseas. Consequently, the likes of; business entertainment, car purchase, non-business use and supplies used for exempt activities are usually barred.

Amount

There is no maximum claim amount, but for most periods of less than twelve months a minimum of £130 of VAT must be claimed. For annual claims or for periods less than three months ending on 30 June, the VAT must be at least £16.

Process

The business must obtain a Certificate Of Status (CoS) from its local tax or government department to accompany a claim.

The CoS must be the original and contain the:

name, address and official stamp of the authorising body
claimants name and address
nature of the claimant’s business
claimant’s business registration number

The CoS is only valid for twelve months. Once it has expired you will need to submit a new CoS.

HMRC has previously announced (RCB 12 – 2018) that it is taken a firmer stance on what constitutes an acceptable CoS.

Claim form

The application form is a VAT65A and is available here Original invoices which show the VAT charged must be submitted with the claim form and CoS. Applications without a certificate, or certificates and claim forms received after the deadline are not accepted by HMRC. It is possible for a business to appoint an agent to register to enable them to make refund applications on behalf of that business.

Deadline

Claim periods run annually up to 30 June and must be submitted by 31 December of the same year. With the usual Christmas rush and distractions, it may be easy to overlook this deadline and some claims may be significant. Unfortunately, this is not a rapid process and even if claims are accurate and the supporting documents are in all in order the claim often takes some time to be repaid. Although the deadline is the end of the year HMRC say that it will allow an additional three months for submission of a CoS (only).

Payment

Refunds are made within six months of a “satisfactory application”.

Further information is available here HMRC guidance.

VAT: Input tax attribution to business and non-business activities

By Marcus Ward 15 September 2022

HMRC has issued new guidance on the amount of input tax claimable when an element is attributable to non-business (NB) activities.

If an entity is involved in both business and NB activities, eg; a charity which provides free advice and also has a shop which sells donated goods, it is unable to recover all of the VAT it incurs. VAT attributable to NB activities is not input tax and cannot be reclaimed. Therefore it is necessary to calculate the quantum of VAT attributable to business and NB activities. That VAT which cannot be attributed is called overhead VAT and must be apportioned between business and NB activities. There are many varied ways of doing this as the VAT legislation does not specify any particular method. Therefore it is important to consider all of the available alternatives. Examples of these are; income, expenditure, time, floorspace, transaction count etc (similar to those methods available for partial exemption calculations).

The new guidance is mainly as a result of the Sveda ECJ case.

The definition of business and NB here.

Legislation: The VAT Act 1994 Section 24(5).

Further reading

The following articles consider case law and other relevant business/NB issues:

Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft

Healthwatch Hampshire CIC

Pertempts Limited

Northumbria Healthcare

Claiming VAT incurred overseas

By Marcus Ward 20 July 2022

A UK VAT registered business is able to recover VAT it incurs in the EU. However, this is not done on the UK VAT return, but rather by a mechanism known as an “13th Directive” claim (Thirteenth Council Directive 86/560/EEC of 17 November 1986).

Via this procedure a UK business reclaims overseas VAT from the tax authority in the country it was incurred. This is different to the Retail Export Scheme.

Who can claim?

Any UK business which has a certificate of status and meets the following conditions:

The conditions

the UK business has not undertaken any business which would require it to register for VAT in the country in which the claim relates
a business must not have any fixed establishment, seat of economic activity, place of business or other residence (place of belonging) in the country of refund
a VAT invoice is obtained
the VAT was incurred for goods or services which give rise to the right of deduction (see below)

VAT not claimable

The following rules must be applied to a claim, and some claims are specifically refused:

Partial exemption

A business must apply the appropriate recovery rate for purchases using its partial exemption method.

Non-business expenses

Expenditure incurred in another country which relates to non-business activities is not claimable under the refund scheme.

Non-refundable supplies

VAT on the following supplies cannot be claimed

incorrectly invoiced
goods purchased which are subsequently exported

Further, the “usual” rules that apply to a UK VAT claim must be followed.

I have summarised what VAT is not claimable in each EU Member State here.

Minimum claim

Each country has a set minimum claim, but it is mainly around the €50 pa figure.

Time limit

Deadlines to request a refund are not standard and vary country to country. However, they are mainly 30 June or 30 September, and the claims are on a calendar year basis year (it is possible to make quarterly claims which have different deadlines).

How to make a claim

Claimants must send an application to the national tax authority in the country where the VAT was incurred.

Unfortunately, since Brexit, the claims procedure is more complex. There is no longer a single portal and the procedure to request refunds is not standard across the EU. A business needs to research the country specific information on VAT using links provided on the EU Taxation site and a claim for each country must be sent using the procedure set out by that country.

Full rules and procedure to follow can be found in Directive 86/560/EEC

Please note: Some countries require that a claim to be filed by a tax representative authorised by the local tax administration.

Time limits for the country of refund to process an application

The country of refund must notify the applicant of its decision to approve or refuse the application within four months of the date they first received the application.

Payment method

The refund will be paid in the country of refund or, at the applicant’s request, in any Member State. In the latter case, any bank charges for the transfer will be deducted by the country of refund from the amount to be paid to the applicant.

Penalties

All countries take a very serious view of incorrect or false applications. Refunds claimed incorrectly on the basis of incorrect or false information can be recovered and penalties and interest may be imposed, and further refund applications suspended.

Claims refused

If the country of refund refuses an application fully or partly it must notify a claimant of the reasons for refusal.

If this happens an appeal against the decision may be made using the appeals procedure of that country.

Interest on delayed applications

Interest may be payable by the country of refund if payment is made after the deadline.

Claims on UK VAT returns

VAT incurred overseas must not be claimed on a UK VAT return. If it is, it is liable to an assessment, penalties and interest levied in the UK by HMRC.

VAT: The Reverse Charge

By Marcus Ward 24 June 2022

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.