VAT offers a tricky challenge to businesses. The tax is filled with technical details, snags and pitfalls, and when you’re growing a business you can’t spend your days learning every nuance.
This is why good systems and good advice will spare you a lot of grief (and fines!), allowing you to concentrate on your business. But there are also a few simple steps you can take to improve your relationship with VAT. Let’s take a look at three common areas of confusion.
Crossing the threshold
Businesses often misunderstand when they must register for VAT. The more common confusion arises when trying to work out when they have hit the VAT registration threshold of £85,000 of taxable turnover. A business may become liable to register for VAT by assessing this in two ways, the backward look and the forward look.
The backward look requires a business at the end of each month to look at their total taxable supplies over the previous 12 months. The business is then liable to register within 30 days of the end of the month the liability arose.
The forward look requires a business to determine whether they anticipate that the value of their taxable supplies in the following 30 days alone will exceed the VAT registration threshold. The business must register within 30 days of the day the liability arose.
Where a business realises that their taxable supplies for the next 30 days do not exceed the threshold, but totalled with the previous 11 months sales pushes the business over the £85,000 bracket, this would be cause for registration on the backward look basis and would only trigger in the month that the threshold is met.
On the other hand, where a business only makes sales that are exempt or ‘out of scope’, if they purchase goods over £85,000 from EU VAT registered suppliers to use in their business, they would still need to register for VAT.
International Sales: goods & services
Businesses must be aware of the various place of supply rules and the requirements involved with each. It is important to identify what is being supplied (goods or services) and who is being supplied to (B2B/B2C) as well as taking into consideration any cross border requirements.
There are different place of supply rules depending on who the service is made to and the nature of the supply. To be
able to determine who must account for any VAT due, the general rules for place of supply of services are as follows:
- Business to Business supplies (B2B) – where the customer/recipient belongs
- Business to Consumer supplies (B2C) – where the supplier belongs
There are a number of exceptions to the above general rules, therefore the business should consider the exact nature of their services against each of the special rules (Notice 741A: para 6.4) before falling back to the above general place of supply rules. For example, there are specific B2C services which are treated as supplied where the customer belongs, see VAT MOSS below.
Where the general B2B rule applies to a UK business supplying services to non-UK customers, the business should obtain commercial evidence to show that their customer is in business and belongs outside the UK (VAT numbers are ideal for EU customers). Where a customer is unable to provide a VAT number, or other evidence to clearly demonstrate business activities, the supply should be treated as a B2C transaction.
- VAT MOSS (Value Added Tax: Mini One Stop Shop)
From 1 January 2015 the place of supply rules changed in the EU for B2C supplies of digital services which are now being treated as where the customer belongs. The VAT MOSS scheme was introduced to allow businesses to send one single return and payment each calendar quarter, rather than having to register for VAT separately in each EU Member State.
There is no registration threshold for these cross border supplies, therefore a UK business in this position must first register for UK VAT (if they are not already registered), and then register for VAT MOSS by the 10th day of the month after their first digital service sale. If you only register for UK VAT so you can use the VAT MOSS scheme, you’ll only need to submit nil VAT Returns.
For the sale of goods to customers who are VAT registered in the destination EU country, the business can zero-rate the supply providing the goods are dispatched from the UK to another EU country within 3 months and evidence of removal is held. The business should also ensure their customer has a valid EU VAT number which should be displayed on the sales invoice and will be required in order to complete their EC Sales List.
For the sale of goods to non-VAT registered customers in other EU countries, UK VAT must be charged and accounted for just the same as sales to UK customers. However, each county has a distance selling threshold, therefore if the value of sales to that country breaches the threshold, the business must register for VAT in that country and charge their rate of VAT on sales.
If goods are exported outside the EU, UK VAT is not charged and the sale can be zero-rated providing evidence of export is held and the goods are exported within 3 months of sale, albeit this can be longer for certain goods.
- EC Sales List (ESL)
If the business supplies goods and/or services to VAT registered customers in other EU Member States, they must tell HMRC about those supplies by completing the ESL. This is submitted either on a monthly or quarterly basis depending on the nature and value of supplies.
Entertainment vs staff costs/subsistence
This is an old favourite of the VAT genre: where do staff costs and subsistence end, and entertainment begin? Here’s the chapter and verse:
- Travel and subsistence
Where the business reimburses the employee, directors or partners for meals, accommodation or other general expenses, all input tax can be claimed where there is a valid receipt. But, if a flat rate is paid to the employee, no VAT can be claimed.
- Staff entertainment
Staff entertainment costs are recoverable, provided the costs are business related and for staff only. Various scenarios can make this a little more confusing for businesses. Here’s a few points to consider:
Employee party – where only employees attend a staff party, the input tax is fully recoverable. Where directors or partners attend as well as the employees this is also recoverable.
In some instances, client or other non-employees will attend the party. Here the input tax would need to be apportioned as the business would be unable to claim input tax on the costs relating to the non-employees.
Directors and partners entertainment – HMRC deem this supply as not for the purpose of the business and so the input tax is blocked from recovery.
- Business entertainment
Business entertainment is entertainment that is classed as not being for business purposes like entertaining or providing free gifts to non-employees.
The only exception to this rule is where entertainment is provided to overseas customers. HMRC allows VAT incurred on the entertainment of overseas customers to be recovered if it is “reasonable in scale and character”.
By Propel by Deloitte
Propel by Deloitte delivers real-time accounting and analytics, including the preparation and submission of your quarterly VAT returns, annual corporation tax return and your year-end accounts. Contact us to discuss how we can support your business.