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Hi, new to the forums, please redirect me if this is covered elsewhere.
1. My VAT registered limited company purchases online services (data and document storage, and the software interface to access that data) from a US based company. I sell this on to resellers/end-users here in the UK. The US company does not charge me VAT, of course. If I understand it correctly, I should use the reverse-charge rule – charge myself the VAT on the purchases and charge VAT to my customers in the UK. Effectively, whatever VAT I charge my UK customers will be paid in full to HMRC, but accounting-wise it’s a wash. Is that correct?
2. I also do consulting work for US companies. I provide software customization services on a software platform (same as above, but different customers) hosted in the USA. All the customers are strictly US-based and all the data and software resides on US based servers. If I understand it correctly, these services are invoiced as zero-rated services. How do I account for this on VAT returns? Do I need to pay VAT or is this just subject to Corporate Tax.
I know there’s a lot to this and I do intend to have an accountant in the next year, but just getting started and would appreciate some simple advice.
Hi JP
Thanks for your query and welcome to vatexchange. I’m sorry for the delay in replying but I hope that you find the information below helpful.
International VAT is complex and as you have already established, the liability depends on both where the client belongs as well as the nature of the services being carried out. These principles sound simple enough but there are all sorts of criteria to consider, so any information I give here is only general guidance. But based on the information given in your question it sounds as though you understand the principles correctly and how the VAT treatment works, so you’re along the right lines.
A couple of points for clarity. I know that I’m being picky but if you get these right now then it’ll make life easier when dealing with VAT issues going forward. Strictly speaking the correct terminology is not that the services being supplied to your US clients are “zero-rated” but that they are “outside the scope of UK VAT”. The effect is similar in that you don’t charge VAT on your sales but you can recover VAT on your inputs, ie purchases and expenses.
Re your query at point 2 about your consultancy services – there is no VAT to pay as the supplies are “outside the scope of UK VAT”. All you need to do is to include the value of your sales in box 6 of the VAT return.
If you want to understand the “outside the scope” principle in more detail, you could have a look at this short article https://vatexchange.co.uk/node/325 which briefly explains the “place of supply” rule. The important HMRC Notice is Notice 741a: Place of supply services. It is a long and detailed read but you only need to read teh bits that are relevant to you.
Finally, I can’t really comment on whether your services are the type that fall within the “outside the scope” rules as I only advise on specific contractual issues if I see the contracts and provide advice through my formal advisory service. It sounds as though your business would fall within that rule, but you should check out paragraph 15.5 of VAT Notice 741a http://tinyurl.com/43hfjed which explains which the types of consultancy services that fall within the “outside the scope” rule in more detail.
Let me know if you need any further information or if you need any formal advice, otherwise good luck with your business.
Marie
August 2011
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