Chat VAT - Answering your VAT FAQs
Let’s chat VAT. Despite VAT being around for 50 years, many business owners report to still being confused about their VAT obligations, which is understandable given the numerous and often complex applications of VAT across goods and services.
In this series of short reads, we provide the essential knowledge and ‘how to’ guidance for some of your regular VAT queries .
VAT Reverse charge
The way we handle purchases of goods arriving from overseas in terms of VAT is relatively straightforward. They can be seen, weighed, counted, and valued easily. However, when it comes to buying services, things get more complex. There are several factors to consider for proper treatment. In this concise VAT guide, we aim to demystify the concept of reverse charges for services. Please keep in mind that this guide does not replace specific VAT advice. If you need clarification on the VAT treatment for your situation, it is recommended to consult a member of Price Bailey’s VAT team.
In essence, someone has to pay the VAT on services supplied from overseas. The liability’s location depends on the nature of the supply:
- If the supply requires the supplier to register and account for VAT in the place of supply (not where they’re based), the liability falls on the supplier. An example is ‘BTE’ supplies to non-business customers – Broadcasting, Telecommunications, and Electronic Services. This includes downloading music or films. Regardless of location, such suppliers must register and account for local VAT.
- However, for supplies from overseas to a business customer, the customer usually accounts for the VAT using the ‘reverse charge’ method. Non-VAT-registered businesses include the supply value in their ‘taxable income’ when assessing VAT registration needs.
The reverse charge shifts VAT recording responsibility from sellers to buyers when buying from suppliers in other EU countries. This reduces the need for sellers to register for VAT in the supply country. Suppliers can recover local VAT costs through EU VAT reclaim if eligible.
Under the reverse charge, the recipient of goods or services declares both their purchase (input VAT) and the supplier’s sale (output VAT) in their VAT return. This offsets the entries for cash payment in the same return.
It is crucial to note that reverse charge treatment applies to ALL services bought outside the UK, not just the EU. This includes non-EU purchases where VAT should have been accounted for before Brexit.
To apply the reverse charge:
- Convert the supply value to sterling and calculate the relevant VAT rate (0%, 5%, or 20%).
- Declare the VAT amount as output tax in the VAT return.
- If all VAT on costs can be recovered, declare the same value as VAT reclaimed.
- Include the net purchase value in total sales and purchases in the VAT return.
Most accounting software provides specific codes for the reverse charge; check with your provider for details.
If you would like more information on the reverse charge or advice for your specific scenario in relation to the reverse charge, please contact one of our team using the form below.
Import VAT
When goods arrive in the UK from outside, they are deemed to be ‘imported’, including from EU Member States. At the point of importation – unless the goods are placed under any suspension or specific measures – there is a declaration made which reports the importation details. This article provides a brief overview of the process for declaring and paying import VAT on goods.
What are import declarations?
Import declarations will include details of the goods and any weight, size, colour, and other characteristics, plus the related values. The calculated value of the goods plus the freight, insurance, and handling charges create what is known as the ‘customs value’, which is the value used to calculate the VAT and any customs duty on that importation.
C79 certificates
The import VAT may be paid at the time of importation and reported against the VAT and EORI registrations for the importing business. This method will create a document from HMRC – a C79 certificate – that is posted to the VAT address of the importing business and allows the business to recover the VAT as input tax.
PVA certificates
Alternatively, the business can activate ‘Postponed VAT Accounting’ (PVA – available from 1 January 2021), which allows the VAT value to be reported rather than paid at the time of importation. The values are then made available on a monthly online PVA certificate. The total value of this VAT is then entered on the next VAT return – ‘paid’ as output tax (box 1) and ‘recovered’ as input tax (box 4) in the same return, and the net value is reported (box 7). Using PVA can assist with cash flow management.
Most accounting software systems have specific coding for imported items, which will post the values to the relevant VAT return boxes. However, this is not universal and should be checked and confirmed wherever possible.
Our team of VAT experts specialise in international VAT matters. If you require advice on import VAT and paying what you owe to HMRC, please contact one of our team using the form below.
VAT and payments on account (POA)
HMRC have within their powers the ability to direct a VAT-registered business to submit regular payments in advance of the VAT return being submitted. These are called ‘Payment On Account’ (‘POA’). This article provides a brief rundown of POA, who will be directed to make POA, and the importance of paying on time.
This measure is applied by HMRC where the business has a net VAT liability of greater than £2.3m in any 12-month period or less. The business is notified by letter of this measure being applied and is given a summary of the amounts to be paid and the dates upon which those payments have to be made. It is possible to appeal against the decision, but this may be difficult to argue as the measure is based upon the values supplied to HMRC.
The net VAT liability value is divided by 24 to calculate the amount to be paid to HMRC in instalments. Businesses can set up a Standing Order for this (Direct Debit is not allowed).
The net value threshold of £2.3m includes the VAT value of imports and goods moving into and out of the excise warehouse This additional value does not form part of the quantum for calculating instalment payments.
This means that following Brexit, many businesses that are now incurring import VAT on the value of the goods they bring into the UK from outside will fall within the POA regime.
Interestingly, HMRC’s notification letter and internal guidance still refer to “non-EC imports” (non-European Commission) when quoting the import VAT value. It is a moot point whether a business with only EC imports would be able to challenge the direction to use POA, as this must be a legacy error from pre-Brexit times.
The instalment amount will be amended if there is a change to the net VAT liability of 20% or more.
For VAT groups, the net liability of the entire group is taken into account when deciding whether POA applies or not.
Making payments
The instalment payments must be cleared to HMRC’s account by the due date to avoid any potential surcharge. It is not just the VAT return and payment that would be in default, but the individual instalment payments as well.
Due dates for payment of instalments are the last working day of the second and third month of each VAT quarter, and the balancing payment and return are also due on the last working day of the month – NB there is no 7-day extension for electronic payments.
Businesses that are caught by the POA regime might benefit from checking with their bank that any payments due from the account won’t be held up as a result of monetary limits applied by the bank, as substantial defaults have been issued and upheld where payments have been late by a matter of minutes where electronic payments were delayed. In HMRC’s eyes, ‘late is late’.
If you have any questions on the POA, please contact one of our VAT experts using the form below.
VAT and disbursements
There are many words that are frequently used when describing transactions that may not have the same meaning in a VAT sense as they do in common use, and one of these is ‘disbursement’.
This brief article is designed to provide the nuts and bolts on what a disbursement is for VAT purposes and how to identify one in practice. Please note that this is not intended to replace specific VAT advice, and you should contact a member of Price Bailey’s VAT team if you are unsure.
Fundamental principles
Under specific circumstances, payments made on behalf of customers for goods and services they use can qualify as disbursements for VAT purposes. In such instances, however, VAT can neither be charged on customer invoices nor reclaimed on related purchase invoices.
Disbursements and recharges are often confused due to some apparent similarities, however they are separate concepts, and disentangling disbursements from recharges is vital to avoid potentially significant VAT-related consequences. The reason being that disbursements are not subject to VAT, while recharges are. Confusing the two could result in incorrectly charging (or not charging) VAT on a supply. This is especially important for businesses nearing the VAT registration threshold (£85,000), as misclassifying expenses could unexpectedly push you over the threshold, necessitating VAT registration. Hence, a clear understanding of costs and their proper treatment is of utmost importance for businesses.
To illustrate the difference between disbursement and recharges, let’s consider an example.
Costs may be incurred that form a natural component part of a business’s overall or underlying supply. These might be described as incidental, integral, or ancillary to the supply of that good or service. An example might be where public transport costs are incurred in order for a supplier to attend a meeting or site visit, and these are then recharged to the customer. They are consumed by the supplier in the course of making their onward supply to their client or customer and would form part of that overall supply and follow the same VAT liability of that supply (regardless of the fact that there may not have been any positive-rated VAT added to the purchase, e.g., train fare).
Where a cost is incurred that does not form part of that overall supply, it may be treated as a disbursement for VAT purposes, and no VAT is added when recharged. Such a cost would not be consumed by the supplier and would not form any incidental, integral, or ancillary part of that resupply.
When Does VAT Apply to Disbursements?
A supplier might act as an agent for a client when arranging a purchase, and it is that client who effectively buys and receives the goods/services, not the agent. If the supplier charges the client for these purchases, they might qualify as disbursements under the following circumstances:
- The supplier acted as the agent, paying the supplier on the customer’s behalf.
- The customer benefited from the purchased goods/services.
- The customer was responsible for payment, not the supplier.
- The supplier had customer consent for payment.
- The customer knew the goods/services were from a different supplier.
- The invoice clearly segregates the cost.
- The exact cost is transferred to the customer.
- The goods/services paid for are supplementary to the supplier’s offerings.
Establishing all these conditions, however, can be intricate. In cases where this isn’t feasible, the charge is not a disbursement but instead becomes part of the supplier’s overall supply, following the same VAT liability rules.
While the term ‘disbursement’ might appear misleading, careful consideration ensures that recharged costs align either with the overall supply’s VAT liability or meet the disbursement criteria. If you encounter situations that warrant VAT clarification, the Price Bailey VAT team can assist in reviewing these scenarios.
Remember, the intricacies of VAT and disbursements can be complex, and seeking expert guidance can provide you with the clarity needed for confident decision-making.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.