Working in Germany, buying in the UK

[evildrome]

Hi,

I have a VAT registered limited company & I work in Germany and am paid into my UK business bank account.

I understand that I will not charge VAT on my services supplied in Germany and I will not claim back VAT on items/services purchased in Germany.

However, can I claim back VAT on business items & services purchased in the UK?

It may seem an odd question but a long time ago I was involved in a product development which lasted some years. During that time my accountant told me that I would not be able to continue claiming back VAT as long as I had no sales. I’m pretty sure the HMRC confirmed this on the phone.

Am in I now in the same boat i.e. no output VAT?

However, one of my friends has a manufacturing business and sells exclusively abroad. He claims back tens of thousands of pounds every quarter on input VAT despite never having any output VAT.

Your advice would be appreciated.

Thanks,

Wilson.

[Marie Stein]

Hi Wilson

Thanks for your query and I hope I can point you in the right direction!

Your query raises a number of basic VAT issues so I’ve taken the opportunity to write a somewhat longer reply than I would normally, as I’ve explained the main principles that would apply to any business supplying services to overseas clients. As you’ll see, there are a number of issues to consider.

And I should emphasise that the rules relating to supplies of goods (ie your friend and his manufacturing business) and services are different, even though you’re both deaing with overseas customers.

In principle, if you (ie your company) are a VAT registered business supplying services to an overseas business customer that would be taxable (ie liable to VAT) if made in the UK (ie to UK customers), you are entitled to recover VAT incurred on the cost of goods and services relating to that business in the UK (ie your input tax). The only time when VAT cannot be recovered would be if you’re services are exempt from VAT.

Taxable supplies

VAT is tax that is levied on the taxable supplies of goods and services. “Taxable” means any supply which is liable to VAT at 20%, the reduced rate of 5% or the zero rate. By default, every supply is liable to VAT at 20%, ie the standard rate, unless it is defined within the VAT legislation as falling within the reduced rate or the zero rate categories. However each of these rates is a rate of VAT.

Defining a supply as taxable is important as any business which is registered for VAT and makes taxable supplies is entitled to recover input tax on the cost of goods or services made in the UK, subject to the normal rules (ie certain costs on which VAT cannot be recovered eg entertainment and purchase of cars).

Exempt Supplies

There is a further category of supplies which is referred to as “exempt”. These supplies are defined in the legislation and apply to certain very specific commercial categories, including finance, insurance, property letting. These are just some of the main business categories where supplies are exempt from VAT.

When a supply is exempt from VAT, VAT is not charged on the fee/cost. So people often confuse the term “exempt” from VAT with “zero-rating” because they are both free from VAT.

HOWEVER there is a very important difference between the two

The difference between being a supply which is “taxable” at the zero-rate and one which is “exempt” is that businesses cannot recover VAT on the cost of goods or services used to make exempt supplies, other than in certain limited situations. And this also means that you can’t register for VAT and recover your input tax if the services that you supply your overseas clients would be exempt if made in the UK.

So the first thing you have to do is to establish whetehr your services would be taxable or exempt if made in the UK. Assuming they would be taxable, then you have to establish whether they are free from UK VAT because the “place of supply” is outside of the UK

The Place of Supply

The supply of services to overseas businesses comes under a set of rules which is referred to as “the place of supply” rule. This means that VAT is not charged on the supply of services which fall within this rule if the recipient is an overseas business; or alternatively if the recipient is a private individual who belongs outside the EEC. In other words, the “place of supply” is shifted to the country in which the customer belongs.

The term that is used to describe such services is that they are “outside the scope of UK VAT that would be taxable if made in the UK”. And – this is the important point – if you’re making supplies which fall within this category, you are entitled to register for VAT in the UK and recover VAT on the cost of goods and services incurred made in the UK.

The role covers the majority of services, but the subject is a whole is explained in some considerable detail in the HMRC VAT notice 741A: “Place of supply of services” http://tinyurl.com/ye67t2s. Section 15 of the notice contains a detailed summary of the services that are covered by this rule while advice on other types of services that may not be covered by the rule is covered in different parts of the leaflet.

If your services would be taxable if made in the UK, then you can register for VAT and recover input tax. You may also be able to backdate your registration and claim back VAT incurred in previous years.

One potential downside though is that if you do register, you will have to account for VAT on any supplies that are liable to VAT at 20% or 5% regardless of whether you’ve collected this money from your clients.

So I’d suggest you have a look at the information I’ve mentioned and see if you can figure out whether or not you are entitled to register. Obviously the information given here is very general, but I’d be happy to help through my consultancy service if you need any specific advice about your company’s situation.

Marie

[evildrome]

Hi Marie,

Thanks for your very informative answer.

To confirm your points:

1) Is the service taxable?

2) Is it outside the scope of UK VAT?

In Answer:

1) I’ve been supplying the same service in the UK for over 20 years and I’ve always paid VAT so yes, its a taxable service.

2) Re: HMRC VAT notice 741A: Point 2.1

■where the place of supply of services is in a Member State of the European Community (EC), that supply is subject to the VAT rules of that Member State and not those of any other country. If the Member State is not the UK, such supplies are said to be ‘outside the scope’ of UK VAT

I’m working in Germany which is an EC Member State so I am ‘outside the scope’ of UK VAT.

So, that’s cleared that up. Thanks very much!

Wilson.

[Marie Stein]

Hi Wilson

Glad that the information helped.

Just to clarify one point – re your services being “outside teh scope” of UK VAT – the place of supply is where the customer belongs, not where your services are physically carried out. So supposing your services were “taxable in the UK” eg consultancy services, your customer could be a company belonging in Germany and you could be physically carrying out the services in the UK. In that case, because the customer is a business belonging in Germany, your services would be “outside the scope”.

However you could be physically carrying out the services in Germany for a company belonging in the UK. In that case you would charge UK VAT as the place of supply would be the UK.

Kind regards
Marie

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