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VAT Update

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With all the talk in the press and other media on the subject of “Brexit”, we thought it would be a good time to take a look at VAT.

VAT is a EU tax that was introduced into the UK in 1973 when the UK joined what was then the Common Market. So the question then is when we leave the EU will VAT go at the same time. 

The probable answer to this question is No. 

When VAT was introduced it replaced a form of purchase tax. Thus leaving the EU would require VAT to be replaced by something else and more than likely we would replace the EU VAT with our own VAT. Furthermore this would largely operate in the same way as it does now. Besides which VAT is very profitable to the UK government raising around 16% of all UK taxes (based on a 2016/17 survey). Therefore as we believe it is here to stay a brief summary of how it operates with particularly reference to the European context would be important.

With VAT there are two types of supply. One is a supply of goods and one is a supply of services. Rather interestingly if the supply includes both goods and services, as a general rule this is regarded as a supply of services. For example an electrician carrying out a rewire where he supplies all the materials is regarded as making a single supply of services. 

So having determined what type of supply you are making the question is what is the rate of VAT to attach to the supply? This can be where it gets more complicated and we need to consider both types of supply separately.

Supply of goods

The default position is that unless the goods supplied fall under either the zero rated, reduced rate or exempt categories they will be standard rated. This is certainly true with goods supplied in the UK but what about supplies made outside the UK. 

If goods are supplied outside the EU then they are covered by a specific zero rating category (exports). If they are supplied in the EU we need to consider the nature of the customer. 

If the customer is a business that is registered for VAT in it’s own country and supplies you with that VAT number (and there is a facility to check that it is a genuine VAT number) then you can also zero rate that supply. 

If however the customer is not a business (we will see this is referred to as a consumer) or is a business that is not registered for VAT in it’s own country then you will need to charge VAT at the relevant rate (probably standard rate, but your first port of call should always be does my supply fall under any of the zero, reduced or exempt categories in the first instance). 

Supply of services

The rules on the supply of services were changed in 2010 to a more codified system. 

With supplies of services you need to consider the nature of your customer as the rules are different for each type of customer. In this respect there are two types being either a consumer or a business. 

If you, as a business make a supply to a consumer (a B2C supply) then the default position is that the supply is made where you belong and as that is in the UK then the supply is made in the UK and thus your supply is taxed by reference to the nature of your supply (i.e. does it fall under the zero rated, reduced rate or exempt categories or is it by default standard rated). It does not matter where your customer is.

If on the other hand your customer is a business (a B2B supply) then the supply is made where your customer belongs. If they are in the UK then you charge VAT according to the nature of your supply. If however, they are outside the UK then your supply is outside the scope of UK VAT and you do not charge VAT at all. It is important to note that this is not the same as zero rating. With zero rating you are charging VAT it is just that the rate is at 0%. With supplies outside the scope of VAT there is no VAT at all.

As with all things VAT there are exceptions to these general rules which may or may not affect the VAT nature of the supply.

The categories of exceptions are: 

  • Land related services
  • Hire of means of transport
  • Services linked to performance (artistic, training, sporting, educational, conferences, meetings)
  • Passenger and freight transport
  • Intermediary services
  • Use of enjoyment of digital services.

Delving into how these are taxed for VAT is a subject in it’s own right and beyond the scope of this blog.

Input vat

So having determined the rate of VAT you should charge on the supply you make, what about the recovery of input VAT.

Claims for the recovery of input VAT are based on direct attribution. If you make a taxable supply and the input VAT you have incurred is attributed direct to that taxable supply then you can recover the input VAT.

You will need to recognise that charging VAT can be either at, 0% (zero rated), 5% (Reduced rated) or 20% (standard rated) for the direct recovery of input VAT incurred. 

If you make exempt supplies then the directly attributable input VAT is not (initially) recoverable.

Input VAT on overheads which cannot be attributed to either type of supply are apportioned, usually by reference to the value of sales. Any input VAT that cannot be recovered as it is regarded as exempt may then need to be considered for the de-minimus rules whereby it can potentially be recovered.

This seems to cover the input VAT for the main types of supply. But what about supplies made which are outside the scope of UK VAT (i.e. a B2B supply outside the UK). In these circumstances the recovery of input VAT is based on asking the question “what rate of VAT would I apply if my supply was treated as being made in the UK”? If the answer is at 0%, 5% or 20% then the input VAT can be reclaimed.

Whilst considering input VAT and outside the scope supplies, the rules for charging VAT for the supply of either goods or services are standard across the EU. Therefore they would apply to circumstances where you are a customer as well and thus if the service you are receiving does not fall within any of the excepted categories above, then your supplier should not charge you VAT.

If however, you are charged VAT, one thing to bear in mind with input VAT is that as a general rule you can only recover UK input VAT. If you are charged VAT from another country then you cannot reclaim that input VAT on your UK tax return. The recovery of this input VAT is dependent and the nature of the input VAT and there is only recoverable in the country of origin by contacting the fiscal authorities of the country concerned.  

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