Around 50% of businesses do not recover VAT incurred overseas and there is an estimated $5 billion not reclaimed each year.
Tag Archives: VAT-overseas
VAT: Tax representatives and tax agents – what is the difference and why it is important
VAT Basics
A Non-Established Taxable Person (NETP) may be required to appoint a tax representative or tax agent if they make taxable supplies in the UK. The term NETP is used to describe a person who is liable to be registered for VAT under the VAT ACT 1994 Schedule 1a. A NETP must register for VAT as soon as it makes its first taxable supply in the UK, or when it expects to make taxable supplies here within the next 30 days, that is; there is no turnover limit for a NETP.
A NETP is a business which has no place of belonging in the UK. So, what is the difference between a representative and agent, and does the NETP get a choice?
Tax representative
A representative maintains the NETP’s VAT records, submits VAT returns and accounts for UK VAT on behalf of the NETP and dels with communication with HMRC. A representative is jointly and severally liable for any VAT debts incurred by the NETP.
A NETP may only appoint one person at a time to act on its behalf, although a tax representative may act for more than one NETP.
Tax agent
An agent carries out a similar role to a representative, however, the important difference is that HMRC cannot hold an agent responsible for any of NETP’s VAT debts. HMRC reserve the right not to deal with any particular agent. In some circumstances, if HMRC deem think it necessary, it will insist that a tax representative is appointed.
As long as HMRC has not directed (see below) a NETP to appoint a tax representative, it can appoint an agent to deal UK VAT affairs. Any arrangement made will be subject to whatever contractual agreement the NETP and agent decide. In some circumstances, if HMRC think it is necessary, it may still insist that a tax representative is appointed.
Distinction
The tax representative and the tax agent both act on behalf of a NETP. However, while the tax agent operates in the name of the NETP, the tax representative operates in its own name. Consequently, a tax representative is personally committed to pay HMRC and must be accredited beforehand. Contracts between representatives/agents need to be clear on this point and fees charged for this work should reflect the difference in responsibilities. Should the NETP fail to pay VAT, penalties and interest due, HMRC will collect these directly from the tax representative, so, in effect, the tax representative represents a monetary insurance for HMRC.
Direction
HMRC can direct some NETPs to appoint a tax representative who must be:
- based in the UK
- fit and proper
this is via VAT Act 1994, section 48(1).
HMRC may choose to require some form of security from a NETP whether or not there has been any direction regarding the appointment of a representative.
Not appointing a tax representative or agent
If a NETP does not wish to appoint a tax representative or agent, and HMRC has not directed them to appoint a tax representative, it must meet all its obligations under UK VAT law itself. This includes, inter alia:
- registering for VAT
- keeping comprehensive record of all transactions in relation to business in the UK
- keeping records required to complete VAT returns
- producing records to HMRC for inspection
- paying the right amount of tax on time
Post Brexit
For UK businesses making overseas supplies:
Businesses established within the EU are exempted from appointing a tax representative in other Member-States (MS) as international tax assistance is compulsory within the EU (the local tax administration can request assistance from the country of establishment to recover the money directly from the business). Since Brexit, the UK became a third country, so this rule does not apply, and MS have the choice to make the appointment of a tax representative compulsory for UK businesses. Most MS have done so, the notable exception being Germany.
New guidance for registration of a NETP here.
What VAT CAN’T you claim?
Blocked VAT claims – an overview
- No supporting evidence
In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice”) although it may be import, self-billing or other documentation in specific circumstances. A claim is invalid without the correct paperwork. HMRC mayaccept alternative evidence, however, they are not duty bound to do so (and rarely do unless the amount is minimal). So ensure that you always obtain and retain the correct documentation.
- Incorrect supporting evidence
Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation. HMRC are within their rights to disallow a claim if any of the details are missing.
- Input tax relating to exempt supplies
Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it. If a business makes only exempt supplies it cannot even register for VAT. There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here.
- Input tax relating to non-business activities
If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief. Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here
- Time barred
If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.
- VAT incurred on business entertainment
This is always irrecoverable unless the client or customer being entertained belongs overseas. The input tax incurred on staff entertainment costs is however recoverable. A flowchart for recoverability in this area here.
- Car purchase
In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.
- Car leasing
If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged. The 50% block is to cover the private use of the car.
- Fuel costs
The element of fuel costs used for personal use is blocked. There are three ways to treat input tax on fuel:
-
- claim 100% of the VAT charged. This is possible if fuel is bought for business motoring only or for both business and private motoring and the appropriate road fuel scale charge is applied on the value of supplies of fuel for private use
- use detailed mileage records to separate business mileage from private mileage and only claim for the business element
- claim no input tax
- A business using certain schemes
For instance, a business using the Flat Rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on for Tour Operators’ Margin Scheme (TOMS) users
- VAT charged in error
Even if a business obtains an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate. A business’ recourse is with the supplier and not HMRC.
- Goods and services not used for a business
Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for that business’ use. This may be because the purchase is for personal use, or by another business or for purposes not related to the claimant business.
- VAT paid on goods and services obtained before VAT registration
This is not input tax and therefore is not claimable. However, there are exceptions for goods on hand at registration and which were purchased within four years of registration, and services received within six months of registration if certain conditions are met.
- VAT incurred by property developers
Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked.
- Second hand goods
Goods sold to a business under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.
- Transfer of a going concern (TOGC)
Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.
- Disbursements
A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here.
- VAT incurred overseas
A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EU States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant authorities in those States. Details here. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.
- Business assets of £50,000 and more
There are special rules for reclaiming input tax using the Capital Goods Scheme, which means a business must spread the initial VAT claimed over a number of years.
Inter-company charges: Do I add VAT?
Do I charge VAT on a management charge?
An easy yes or no question one would think, however, this being VAT, the answer is; it depends. Typically, management charges represent a charge by a holding company to its subsidiaries of; a share of overhead costs, the provision of actual management/advisory services or office facilities or similar (the list can obviously be quite extensive).
Consideration for a supply
The starting point is; is something (goods or services) supplied in return for the payment? If the answer is no, then no VAT will be due. However, this may impact on the ability to recover input tax in the hands of the entity making the charge. It is often the case that a management charge is used as a mechanism for transferring “value” from one company to another. If it is done in an arbitrary manner with no written agreement in place, and nothing identifiable is provided, and VAT is charged, HMRC may challenge the VAT treatment and any input recovery of the company making the payment.
Composite of separate supply?
This is a complex area of the tax and is perpetually the subject of a considerable amount of case law. This has been so since the early days of VAT and there appears no signs of disputes slowing down. I have written about such cases here here here here and here
“Usually” if a combination of goods or services are supplied it is considered as a single supply and is subject to the standard rate. However, case law insists that sometimes different supplies need to be divided and a different rate of VAT applied to each separate supply. This may be the case for instance, when an exempt supply of non-opted property (eg; a designated office with an exclusive right to occupy) is provided alongside standard rated advice.
Approach
What is important is not how a management charge is calculated, but what the supply actually is (if it is one). The calculation, whether based on a simple pro-rata amount between separate subsidiaries, or via a complex mechanism set out in a written agreement has no impact on the VAT treatment. As always in VAT, the basic question is: what is actually provided?
Can the VAT treatment of a supply change when recharged?
Simply put; yes. For example, if the holding company pays insurance (VAT free) and charges it on as part of a composite supply, then VAT will be added to an original non-VAT bearing cost. It may also occur when staff are employed (no VAT on salaries paid) but the staff are supplied to a subsidiary company and VAT is added (but see below).
Staff
The provision of staff is usually a standard rated supply. However, there are two points to consider. One is joint contracts of employment which I look at below, the other is the actual definition of the provision of staff. Care must be taken when analysing what is being provided. The question here is; are staff being provided, or; is the supply the services that those staff carry out? This is relevant, say, if the services the staff carry out are exempt. There are a number of tests here, but the main issue is; which entity directs and manages the staff?
Directors
There can be different rules for directors compared to staff.
If a holding company provides a subsidiary company with a director to serve as such, the normal rules relating to supplies of staff apply and VAT applies.
However, there are different rules for common directors. An individual may act as a director of a number of companies. There may be an arrangement where a holding company pays the director’s fees and then recover appropriate proportions from subsidiaries. In such circumstances, the individual’s services are supplied by the individual to the companies of which (s)he a director. The services are supplied directly to the relevant businesses by the individual and not from one company to another. Therefore, there is no supply between the companies and so no VAT is due on the share of money recovered from each subsidiary.
Accounting adjustments
Just because no “cash” changes hands, this does not mean there is no supply. Inter-company recharges may involve the netting off of supplies so that no cash settlement is made. However, consideration is passing in both directions, so, prima facie, supplies have been made. This applies when there are accounting adjustments in both parties’ accounts.
Inter-company loans
The making of any advance or the granting of any credit is exempt via The VAT Act 1994, Schedule 9, Group 5, item 2. This exemption covers most normal types of credit, eg; loans and overdrafts.
Planning
Planning may be required if;
- the subsidiary cannot reclaim all VAT charged to it as input tax
- there are cashflow/timing disadvantages
- there are management or administrative complexities
Specific planning
VAT grouping
If commercially acceptable, the holding company and subsidiary companies may form a VAT group. By doing so any charges made between VAT group members are disregarded and no VAT is chargeable on them.
There are pros and cons in forming a VAT group and a brief overview is provided here
A specific development in case law does mean care must be taken when considering input tax recovery in holdco, details here
Joint contracts of employment
If members of staff are employed via joint contracts or employment no VAT is applicable to any charges made between the two (or more) employers. In addition, where each of a number of associated companies employs its own staff, but one company (the paymaster) pays salaries behalf of the others who then pay their share of the costs to the paymaster the recovery of monies paid out by the paymaster is VAT free as it is treated as a disbursement.
Disbursements
Looking at disbursements is a whole article in itself, and in fact there is a helpful one here
But, briefly, if a charge qualifies as a disbursement, then the costs is passed on “in the same state” so if it is VAT free, the onward charge is also VAT free, as opposed to perhaps changing the VAT liability as set out above. It is important to understand the differences between a disbursement and a recharge as a VAT saving may be obtained.
Overseas
The above considers management charges within the UK. There are different rules for making or receiving management charges to/from overseas businesses. These charges are usually, but not always, VAT free (an example is the renal of opted office space which is land related, so is always standard rated) and it is worth checking the VAT treatment before these are made/received. VAT free services received from overseas may be liable to the reverse charge.
Same legal entity
There is no supply if management charges are made between branches of the same legal entity.
Charities
There may be more planning for charities and NFP entities via cost-sharing arrangements, but this is outside the scope of this article.
Summary
As may be seen, the answer to a simple question may be complex and the answer dependent upon the precise facts of the case. It is unusual to have two scenarios that precisely mirror each other, so each structure needs to be reviewed individually. Inter-company management charges must be recognised, especially if the recipient is partly exempt. Please contact us if you have any queries or would like more information on any of the above.
VAT: New rules for registration and reporting in the EU from 1 January 2025
EU Member States have agreed to extend similar VAT registration thresholds utilised by domestic businesses to EU non-resident taxpayers.
VAT scheme for Small Businesses
New simplification rules will open the VAT exemption to small businesses established in other member states and help reduce VAT compliance costs. The new regime should reduce red tape and administrative burdens for SMEs and create a level playing field for businesses regardless of where they are established in the EU. The new VAT scheme for SMEs will apply from 1 January 2025.
The new scheme
Current rules on the exemption of supplies under a certain threshold:
- Member States are allowed to exempt supplies by small enterprises with an annual turnover not exceeding a given threshold, different in each Member State.
- Small enterprises not established in a certain Member State have, however, no access to such an exemption.
New rules on the exemption of supplies under a certain threshold
- Member States will be allowed to continue exempting small businesses with an annual turnover not exceeding a given threshold, which cannot be higher than € 85,000 (maximum exemption threshold).
- The new rules will open the exemption to small enterprises established in other Member States than the one in which the VAT is due. The exemption will apply if the turnover in Member State where the SME is not established is below the national threshold and if the annual turnover in all of the EU is below €100,000. This is a safeguard threshold preventing companies with large turnover to benefit from the SME exemption in other Member States. For this purpose, SMEs will be able to use the single registration window in their own Member State.
The new rules will provide exempt SMEs with simplifications in terms of registration and reporting. These rules should reduce the overall VAT compliance costs for SMEs by up to 18% per year.
VAT: B2B and B2C – The distinction and importance
A key feature of the place of supply rules is the distinction between B2B (business to business) and B2C (business to consumer) supplies. The distinction is important because it determines, inter alia, whether GB VAT is applicable to a supply made by a GB supplier.
Status of the customer:
- B2C: A supply is B2C when the customer is a private individual, an organisation with only non-business activities or the supply is wholly for private use (eg for the private use of a business owner)
- B2B: A supply is B2B when the customer has any level of business activity (though if a supply is wholly for private use it remains B2C). It does not matter if the supply is for a non-business activity of the customer or if the customer is not VAT registered. All that matters is the customer has some level of business activity – this includes VAT exempt activity and taxable activity below the VAT registration threshold VAT place of supply.
To apply the B2B treatment a GB supplier must obtain evidence that the customer has business activities. If the supplier cannot obtain any evidence, they should apply B2C treatment.
- If the customer is VAT registered, the customer’s VAT number is evidence of status and it is good practice to quote this on the supplier’s invoice. A GB supplier should check the customer’s VAT registration number is in the correct format for the country concerned. This can be done via the EC Vies website. for EU customers. NB: Special evidence rules apply to electronically supplied services.
- If the customer is not VAT registered, a GB supplier should obtain and retain evidence that the customer has business activities. HMRC state “If your customer is unable to provide a VAT number, you can accept alternative evidence.This includes certificates from fiscal authorities, business letterheads or other commercial documents indicating the nature of the customer’s activities”.
A supplier needs to identify where his customer belongs in order to establish the place of supply.
VERY broadly, depending on the nature of the supply, the rule of thumb is that a B2B service is GB VAT free (it is subject to a reverse charge by the recipient as it is deemed to be “supplied where received”) but a B2C service is generally subject to GB VAT, regardless of the place of belonging of the recipient. There are exceptions to these rules however, such as the use and enjoyment provisions, land related services, hire of transport and admission to events.
VAT: Selling goods using an online marketplace – new guidance
HMRC has published new guidance for use when a business sells goods using an online marketplace (an e-commerce site that connects sellers with buyers where transactions are managed by the website owner) or direct to customers in the UK.
It can be used to check when a seller is required to pay UK VAT.
It is important, especially for sellers based outside the UK, to understand the tax consequences when such marketplaces are used. It is not always possible to rely on the platforms to deal with output tax on sales made to UK recipients.
The guidance covers:
- selling goods using an online marketplace
- selling goods direct to customers in the UK
- checks online marketplaces need to do
- VAT when goods are returned to the seller
More on online business here.
VAT: HMRC to end making payable orders to NETPs
HMRC will stop issuing payable orders to overseas non-established taxpayers (NETP – taxpayers who are registered for UK VAT but do not have a business address here). The system automatically issued a payable order if a NETP was due a repayment.
Background
HMRC has received notifications and complaints from taxpayers advising that they can no longer cash their payable orders in their country or their bank. The impact of Brexit and COVID19 has seen an increase in banks/countries no longer accepting payable orders. Consequently, HMRC were sending repayments to NETPs with the knowledge they may not be able to cash them.
New Gform
To address this issue HMRC has created a Gform that will enable NETPs to send their bank account information in order that the issue of a payable order can be avoided and a Clearing House Automated Payment System (CHAPS) payment made instead.
Access
HMRC systems do not currently have CHAPS functionality or the ability to store overseas bank information. However, once a NETP has completed the form, which is accessed via the Government Gateway HMRC will set a lock on the taxpayer’s record to prevent the payable order being automatically issued. NETPs will then receive their repayments directly into their bank account without the need to visit their bank to cash a payable order.
Information required
Information requested on the Gform will include:
- VAT registration number
- address
- email address
- bank account information
- payable order information if necessary
Oops! – Top Ten VAT howlers
I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”. While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:
- Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.
- Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT triggerpoint can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.
- Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.
- Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.
- Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.
- Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.
- Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.
- Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.
- Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.
- Forgetting the impact of the Capital Goods Scheme (CGS). The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed. The CGS also “passes on” when a TOGC occurs, so extra caution is necessary in these cases.
So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.
Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!