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I suspect that your services will be liable to UK VAT because they are carried out in the UK.
Unfortunately there is no general relief from VAT simply because the customer/client belongs overseas. The VAT liability of services to overseas individuals or overseas businesses is complicated and falls within a set of rules which are called “the place of supply”. Basically, the place of supply rule enables certain services provided in the UK to be supplied without VAT if the recipient of the supply is an overseas business or private individual who belongs outside the EEC.
However this doesn’t normally apply to the provision of education and training services and other types of services which are physically “performed” in the UK. Education and training services which are held in the UK are normally liable to VAT. This applies even if the attendees are overseas attendees.
The “place of supply” rule is explained in VAT notice 741 a: Place of Supply of Services which is here http://tinyurl.com/ye67t2s on the HM asked in website. Services which don’t fall within the “Place of Supply” rule are explained in some detail and those which relate to the performance of training and education services are listed at section 8 of the notice. See the final bullet point of section 8.1.2.
Certain types of education and vocational training in the UK are exempt from VAT and you may wish to look at the VAT leaflet 701/30: Educational and Vocational Training http://tinyurl.com/64s43sw to see if this would apply to your situation. However, exemption rarely applies to the provision of professional or commercial training which is provided to or by commercial suppliers or recipients.
I hope this helps you to clarify the position. If you require more tailored guidance on your own specific business activities, I would, of course, be happy to help through my consultancy services.
Marie
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
Hi Lynz
I have to be honest, I don’t know why the new exam body is charging you VAT.
You will appreciate that here on the forum I can only give very general guidance about the VAT liability of any specific supply. However I’m not aware of any recent changes to the VAT legislation that would change the conditions whereby the provision of examination services can be exempt from VAT.
HMRC recently published an updated version of the VAT leaflet: Education and vocational training 701/30, (June 2011) http://tinyurl.com/64s43sw and the explanation of when examination services can be exempt from VAT at section 7 of the leaflet does not appear to have changed.
The legal provision which exempts examination services is VAT Act 1994, Schedule 9, Group 6, Item 3. As you are doubtless aware, the exemption only applies in limited circumstances, including when the supplies are made to “eligible bodies”, which normally includes colleges and universities, as explained in section 7 of the VAT leaflet. So unless there has been some change in your status as an organisation or the nature of the new contractual arrangement is somehow different, I don’t see any reason why the supply should be liable to VAT.
I would suggest asking the examination body concerned to review its policy about charging VAT by referring to the legislative reference above and the relevant section of VAT leaflet. If they are still not willing to exempt their services at this point, you may wish to contact HMRC to request a formal ruling on the issue. HMRC doesn’t normally give rulings to recipients of supplies (because the VAT liability of any supply is normally the responsibility of the person making the supply), but if the new examination board isn’t willing to reconsider the situation and you still feel that the supply should be exempt, then HMRC should be willing to look into the issue. And of course I’d be happy to advise formally through my consultancy service if you need any further help.
Marie
Hello Kenca
Thanks for your query and I apologise for the delay in replying but I hope this information is still helpful.
As I’ve explained below, I think that your confusion is probably because you are cross-referring two different rules.I assume that you’ve already seen the HMRC VAT Notice 708: Buildings and Construction http://tinyurl.com/3osr2gf which explains the main rules about the VAT liability of construction work. The main rules about construction of new dwellings are set out at section 3 of the notice. Section 14.2 of the notice explains in detail the meaning of the term “dwelling” and these are relatively straightforward:
• the dwelling consists of self-contained living accommodation;
• there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
• the separate use of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision;
• the separate disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision; and
• statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.See subparagraph 3.1.1 which refers to the definition of “dwelling” at section 14.2 of the notice. The fact that it may be used for holiday accommodation doesn’t affect the VAT liability of the construction work, as long as the above criteria are met at the time the construction occurs.
The phrase “designed to remain as or become a dwelling” appears at section 14.3 of the notice. However, the use of the term “dwelling” in this case is in connection with the VAT liability of approved alterations to certain listed buildings, which is explained in further detail at section 9 of the notice. See the cross reference to section 14.3 of the notice at subsection 9.2.1.
Therefore, in order to qualify for zero – rating as a new dwelling, the new property must satisfy the criteria set out at section 14.2 of the notice and not section 14.3 of the notice and the reference to “being designed to remain or become a dwelling” is not relevant in the case of construction of new dwellings.
Please bear in mind that while I can clarify the technical point you have raised here on the forum, I can never confirm the VAT liability of any particular transaction other than through my formal consultancy service. You shouldn’t treat the information given here in the same way as formal advice, especially if the issue would make such a difference to the cost viability of the project.
However I hope that this information has helped to clarify any confusion which you may have had when looking at the VAT Notice 708 and how the different definitions of the term “dwelling” apply different circumstances.
I also assume that your builder is aware of the correct rules and is prepared to zero-rate the construction work on the basis that the new property will fall within the criteria set out at section 14.2 of the notice. You might want to ask the builder to confirm in the contract that the work is zero rated, if necessary by reference to the guidance given in the notice or by reference to the relevant provisions in the VAT legislation.
Marie
1 September, 2011Hi Craigmar
It’s always difficult to comment on property issues without knowing the full facts of the case but if the transaction was liable to VAT (as opposed to being say a transfer of a going concern, which would be free from VAT) then I would say it’s very unlikely that HMRC would grant any sort of concession that would prevent the vendor from charging the VAT.
I have come across a few very limited examples in over 30 years of VAT when HMRC have agreed not to pursue a VAT liability but they have only been in very exceptional cases. I can’t see it happening in this sort of situation, but there is no harm in asking.
The vendor may have forgotten to advise his solicitors that the property was “opted”, but I am surprised that the professionals involved didn’t ask the question or that the issue wasn’t covered in the sales contract. The option to tax has been around for over 20 years now and I never see a property sale contract without a clause dealing with the issue.
Sorry I can’t be more helpful on this one.
Marie
18 August 2011Hi 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 2011Hi LouieLouieShop
It sounds as though you have very limited knowledge about VAT and I would suggest that you start by rreading teh HMRC short guide called “Should I be registered for VAT” which is here http://tinyurl.com/396kxa. It explains how the system works and when you need to register.
(You could also read my own “Beginner’s Guide to VAT” which you can download from this website. It’s written in less technical language so might be easier to read if you’re a complete novice. It’s a bit out of date as I need to update it to reflect the 20% VAT rate. But the principles are otherwise the same and you may find it a useful starting point.)
If you’re selling adults clothing, then you would need to register under the normal rules as explained in the leaflet, if the value of your sales will exceed the registration limit which is currently £73,000. So if you think that your sales will be below that limit, then you won’t have to register. A lot of small retailers aren’t actually registered because their sales are below the limit.
But if you do have to register, you would probably find that you’re eligible to use a “margin scheme” which enables you to pay VAT only on any profit that you make, rather than the whole selling price. You can find information on these schemes here on the HMRC website http://www.hmrc.gov.uk/vat/start/schemes/margin.htm
I’d also recommend that you find yourself a good accountant – they are really good at practical issues such as getting registered for VAT and most of them will have one or two clients who use the margin scheme and will understand how they work.
Otherwise, sit down for half an hour with a cup of tea (or something stronger!) and have a good read of the information I’ve suggested. Good luck with your new venture!
MarieJust to confirm the terminology so we’re all talking about the same thing – the delivery of goods from one EU country to a VAT registered customer in another EU country is an “acquisition”. The delivery of goods from outside the EU to anyone in the EU is an “import”. And as you point out, they are treated differently for VAT purposes.
Tthe transaction you describe is not a triangular transaction for EC VAT purposes as there is no movement of goods within the EU. So I’d agree with you that it is an import for VAT purposes and therefore there is no requirement for the UK company to include the sale on its ESL.
In this case, as the goods come from China direct to the Czech customer, then the transaction is an import for VAT purposes. The customer will have to pay Czech import VAT on the import, rather than accounting for acquisition VAT on its VAT return.
This is confirmed in VAT Notice 725 The Single Market, section 17.3 here http://tinyurl.com/6aap2g4 which sets out the situations in which ESLs are required:
You must complete an ESL if you:
• make supplies of goods to a business registered for VAT in another Member State, including transfer of your own goods, (see section 9), or
• are the intermediary in triangular transactions between VAT registered traders in other Member States, (see section 13) or
• make supplies of services subject to the reverse charge in your customer’s Member StateHope this clarifies the situation
MarieHi FFN
Unfortunately I don’t think that there is an easy answer to this one. You’re right that HMRC do have discretion to accept evidence other than VAT invoices but I’ve only ever seen this in very extreme circumstances. The law states that you have to have a VAT invoice to recover input tax on expenditure so HMRC only accept other evidence as an exception to the rule, for example if records have been destroyed in a fire.
You don’t say what sort of value the goods are and there are different rules for goods valued at over £100 or lower value. I assume that you do receive a receipt of some sort every time you purchase goods. Most “retail” invoices for purchases under £100 do include information that would be sufficient to treat the document as a less detailed VAT invoice or a modified invoice – see section 16.6 of VAT Notice 700 http://tinyurl.com/6fhta9r. All retailers are supposed to issue invoices if asked and most normal cash receipts do contain sufficient detail to qualify as a less detailed invoice. I know you’re not keen to ask for full VAT invoices but if you’re asked, perhaps you could say that your accountant has asked you to get proper invoices to match up to your bank records.
The alternative is that you could write to HMRC and explain your circumstances and see if they are willing to accept whatever receipts you currently receive from your suppliers as long as you can back up the expenditure with proper bank/cash records. There is no harm in asking, though bear in mind that your query might prompt them to come out and visit you!
Marie
Hi Mark
This is a very difficult area of VAT law and I’m not surprised that your accountants haven’t been able to help much. Even for specialist VAT consultants, it is difficult and there are a lot of factors to consider. I’m not going to be able to give you any more definitive help here but there are a few issues that I think you might want to consider before deciding how to proceed.
I know that the whole issue of misselling is very big at the moment and it would be useful to know how other IFAs are dealing with these situations to see how your arrangements compare. For example why have you set up the pension misselling firm (I’ll call it the PMF for brevity) in a separate company to your IFA company? HMRC are always curious about such arrangements.
But the main issue is whether the introduction service would be exempt anyway. You say: “The misselling firm refers the client to the ifa firm for financial advice and if the clients take the advice the ifa firm pays a fee to the misselling firm for the introduction, these fees are over 70k pa.” The way I understand the rules is that if the service provided by the IFA is financial advice, then this would be standard rated and not exempt so the associated introductory service would be standard rated.
So I’d have to know a whole lot more about what the IFA co is doing before I could even be certain that the introductory services are exempt.
There is an alternative that may work but again it would depend on the nature of the IFA co’s business and i’d need more information.
Sorry I can’t give you more helpful information, but I would be happy to help out via my formal consultancy if you want full advice. I’d be happy to have a no-obligation discussion with you about the situation before you have to decide whether to commit to anything. Send me your details using the contact form if you’re interested.
Kind regards
MarieHi Zatherus
Yes, it’s illegal. And HMRC will take action to recover the VAT as and when they become aware of the situation.
I’ve written a number of articles about this subject here on the website and the issue often comes up on the forum – here’s a typical query and reply where I’ve gone into the subject in more detail that you may find interesting: https://vatexchange.co.uk/node/309.
I do have some sympathy for small business owners dealing with VAT on on small business activities, but at the end of the day, they could end up paying a lot more in unpaid VAT, penalties, interest on unregistered activities as and when HMRC find out. The pub owners should make sure that they are taking advantage of all of the legal ways to minimise their VAT bills, particularly by ensuring that they are claiming back all of the input tax they incur and using the Flat Rate Scheme or retail schemes to minimise their VAT liability.
Marie
Hi Mark
Well nobody can tell you whether or not you have to be VAT registered if your turnover is below the registration limit, it’s up to you to decide whether it’s worth it and in your position, I’d be asking the company to explain why they want you to register.
But in practice, it might actually save you some money and they may be hoping that you will pass some or all of the saving back to them in reduced costs. Here’s how it works:
You would charge VAT IN ADDITION to the weekly £1k that you invoice the company. This is your output tax. So that means that you invoice for £1,200 instead of £1,000.. You pay the £200 to HMRC. So there is no cost to you on the sales side.
But it might save you some money on the purchases/expenses side as you can claim back the VAT on the cost of your van maintenance, petrol and other business expenses. This is your input tax. So if you pay £20,000 in expenses each year plus £4000 worth of VAT, you could recover this VAT and this would be a real saving to you. Obviously I don’t know how much VAT you incur on your costs, but claiming the VAT back could be a real bonus.
The way it works is that you submit returns, normally every 3 months, where you pay the VAT on your sales (eg if 13 weeks x 200 = £2,600) less the VAT on your purchases and expenses (eg £1,000). You’ve charged the £2,600 output tax to the company and you get to retain the £1,000 input tax so you pay the balance of £2,500 to HMRC.
So you can see that there could be a real benefit to you by registering. The issue is whether or not they expect you to pass that saving back to them!
Registering for VAT does, however, mean that you are liable to submit returns and retain certain records, so there is additional admininstration work involved for you, unless you pay an accountant or book-keeper to do the return for you. But it’s still your responsibility and you are liable to pay the VAT to HMRC and submit returns on time, even if you pay someone else to do it for you.
There are some special schemes to help small businesses with VAT that can also reduce the VAT that you pay to HMRC and it’s worth having a chat with an accountant to see how it would work for you in practice and help you decide. In particular the VAT Rate Scheme often generates really useful savings for small business owners.
If you don’t already have an accountant, then ask around for a recommendation (someone is bound to be able to recommend one) or look in your local yellow pages. Many accountants will give a prospective new client a free initial consultation, but otherwise you should be able to find one who will advise you on basic issues for a relatively minimal fee, perhaps around £100 an hour or less.
I hope this helps. I know it’s a big subject to deal with and there is a lot of information available about VAT online. See our own “Introduction to VAT” which is a very short summary of how it works. Also there is a lot of stuff on the HMRC website. But I’d really recommend having a chat with an accountant, I’m sure you’ll find it’s worth the investment.
Marie
Hi Tom
I don’t know of any specific list of countries that operates flat rate schemes but the best place to look on line for country by country info about VAT is the EC VAT website which is here http://ec.europa.eu/taxation_customs/taxation/vat/traders/vat_community/index_en.htm.Half-way down the page is a section entitled: Vademecum on VAT Obligations. It contains a country by country summary of information. Each country has supplied basic information about how they apply the EC VAT rules, including details of registration limits, invoicing requirements etc and which schemes they apply.
If you download each summary and go to section 51 of the document (or around that number – in some cases it’s a bit earlier or later, but something like 47 – 52), it will tell you which FRS schemes are implemented in that country. And if you wnat more information about that country’s detailed guidance on the schemes, then there is information elsewhere in the document about how to contact the relevant tax authority.
Alternatively, there are a few textbooks that contain more detailed information about VAT throughout the EC, but obviously these aren’t free! I can probably recommend one or two if you are interested, just let me know.
Marie