[Marie Stein]

Hi Jooles

Thanks for your query and welcome to the forum. To start at the end first, I don’t know anything about Capital Gains – it’s difficult enough to stay on top of the VAT rules never mind any other tax stuff. But I can confirm the correct rules about recovering VAT on the cost of constructing a new dwelling.

You say that you’ve had “no other income” from your self employment so for the purposes of this post, I’ll assume that means you made no other sales of goods or services at all.

Now, bear in mind that the information I give here isn’t to be taken as definitive advice. But it does seem to me that you’ve been given misleading information about your situation and that’s probably because of confusion about the two different ways of recovering VAT on newbuild dwellings. You either register for VAT as a business because you intend to sell the property OR you claim VAT under the DIY housebuilders scheme (ie the selfbuild scheme) if you’re going to use the property as your own home.

And because the rules about reclaiming VAT in each situation differ, you have to be careful about time limits as you normally have to make a claim under selfbuild scheme withinh three months of completion.

Normally, you’d only register for VAT if you are carrying something out as a business activity. I won’t go into the technical terms here as it would take all day but just to avoid any doubt, you can only register for VAT and recover VAT on your purchases and expenses if your supplies (ie sales) will be TAXABLE for VAT purposes, which could be at teh standard rate, the zero-rate or the reduced 5% rate.

The freehold sale of a new dwelling, or a long lease, over 21 years, is zero-rated for VAT purposes. Letting the property on a shorter lease, whether its 20 years or 6 months, is exempt from VAT. If your supplies will be exempt from VAT, then you can’t register and you can’t recover VAT on your purchases and expenses other than in certain limited situations.

And just to make things even more complicated, remember that the definition of the term “taxable” is different as it applies to different taxes, such as income tax or tax on capital gains. Here I’m only talking about VAT.

So when you registered for VAT, you would only be able to recover the VAT on the materials and equipment if the intention was to sell the new home as a taxable supply, ie a freehold sale or a lease exceeding 21 years. If you rent the house out on a short term lease – which for VAT purposes is 21 years or under, then your supplies would be exempt and in principle, you wouldn’t be able to register for VAT. I know that a lot of housebuilders have been forced to do short term lets because the market has been slow and that affects their entitlement to recover the VAT on the construction costs.

In principle, there’s no time limit on reclaiming VAT if you’re registered for VAT. However there is normally a time limit of 3 months from the date of completion for making a claim under the DIY housebuilders scheme. Here’s the link to the HMRC information about making such claims – http://www.hmrc.gov.uk/vat/sectors/consumers/new-home.htm.

So, you have to decide what you’re going to do with the property before you can recover the VAT on the costs because claiming the VAT through a VAT registration or through the self-build scheme.

I know that the VAT rules on property are complicated and I never give definitive advice other than through my formal consultancy business. But I hope that this information at least helps you to understand the difference between claiming the VAT back by registering for VAT because you’re carrying out a business activity and the DIY selfbuild scheme.

Marie

[Marie Stein]

Hi Terry

Welcome to the wonderful world of VAT!

I’m sorry to start by saying that I can’t give you a definitive answers to any your question as I don’t provide advice on specific transactions here on the forum. But I can explain the main principles so you can get to grips with the subject a bit.

I should say as a starter that your query is typical of a lot that I receive about the VAT treatment of international services. It’s always difficult explaining how the rules apply in these situations, even to UK business or businesses in other EC countries who are familiar with how the VAT system works. US businesses are often starting from a pretty blank slate because your sales tax is a different system, so you’ve not only got to get your head round how the tax works, but then you’ve got to get to grips with some very specific concepts that only apply to international services. And even then, your situation cuold be made even more difficult if you appoint someone to manage the process in the UK on your behalf.

But to start, you need to understand what VAT is and how the system works.

What is VAT and how does it work?

See the section “What is VAT and how does it work?” on the menu. It’s a 5 minute read and was originally written with US businesses in mind as I know the whole subject of VAT can be a bit difficult to get your head round, especially when you’re used to dealing with traditional sales taxes that operate in a much less construed manner. But once you’ve got your head round the main principles, you can at least understand how it applies to your situation.

Now, as far as overseas businesses are concerned, what you need to establish is whether or not you are required to register for VAT in the UK, or whichever EC country your customers are based. The rules don’t require overseas businesses to set up special companies or offices or even appoint staff in the country concerned for the purposes of dealing with VAT. However you have to establish what is referred as the “place of supply” as this will determine whether you have to register for VAT in particular country or whether your customer can account for the VAT on your behalf, which would mean that you don’t have to register.

Also, there are different rules for the supply of goods and services, also different rules if the customer is a business or a private individual. Granting a licence to use software would normally be regarded as a supply of services.

Overseas business supplying services to UK businesses

This is how it works. In the case of certain services, as long as the recipient of the supply (ie your customer) is a UK business, then they are allowed to account for VAT on behalf of the overseas supplier. So that would mean that the overseas supplier providing these services to a UK business, eg a US company, doesn’t have to register for VAT in the UK.

The list of services covered by this rule is long and detailed and covers most professional or intellectual services, including granting licences to use software.

What you are required to do is to ensure that the recipient is a “business” and the best way of doing that is to ask them to provide their UK VAT registration number. Universities are normally treated as businesses and will be registered for VAT, so as long as they provide their UK VAT registration number, they can account for VAT on the reciept of such supplies from overseas suppliers and their suppliers don’t have to register for VAT in the UK.

The procedure falls under a very specific technical provision which is called the “reverse charge”. It operates in the same way as though you were importing goods into the UK and paying VAT or excise duty at the port of entry. It’s simply a mechanism to collect VAT on imported services and it exists so that overseas suppliers of certain services DON’T have to register in every EC member state in which their customers belong.

Obviously I can’t say definately that it applies in your case but it certainly sounds as though the contract with the UK university would be covered by this provision. You can get more information about this subject in the HMRC VAT notice 741a: Place of Supply of Services which is here http://tinyurl.com/ye67t2s on the HMRC website. But I would caution that it is a long and detailed notice and you have to know your way around teh rules to be able to follow it, so I wouldn’t recommend it for a novice about the subject. It uses a lot of very specific terminology which reads like normal English, but actually has very specific meaning. However if you appoint an accountant in the UK, then he/she will be familiar with the rules in principle.

Appointing an independent UK project manager

However your proposal to appoint an independent project manager could affect your “non-UK” status. One of the main principles involved with VAT is that you have to establish where a business “belongs”. The term sounds deceptively simple and is often confused with the concept of “resident” for tax purposes. It is similar, but not the same. And it is fundamental to VAT for the following reason:

The VAT liability of the supply of services arises in the country in normally that in which the supply is made. The place of supply is normally where the supplier “belongs”. This is normally where the business is established, but if the business has more than one establishment, then the place of supply is where the establishment most directly concerned with teh supply of services is located. So the place of supply of a US company providing services to a UK business would normally be the US. Any UK VAT liability is accounted for by the UK customer using the reverse charge procedure, as explained above.

Creating an “establishment?”

The reason it would be important in your case is that the appointment of an independent project manager could be seen to create an “establishment” (again another word with very specific VAT connotation) in the UK, even though it would be an unconnected and as you say independent business. However there are many situations when the appointment of a UK agent or self-employed consultant who act on behalf of overseas businesses would be regarded as acting on behalf of the overseas business and require the overseas business to register.

Obviously I can’t say for certain how this would work in your case, but have a look at the VAT Notice 741a: Place of Supply of Services, section 3 which explains how the concept of belonging works. It is a relatively short section and read in isolation shouldn’t be too difficult to follow. Unfortunately I don’t think that it gives you an answer to your situation but it does explain how the principle works and the issues that you need to take into account. There is a lot of caselaw on this subject and it really would require some further research to advise correctly. It’s not necessarily a big task but it would need to be done by a VAT specialist who understands the technical issues properly.

The issue of whether any such project manager should then charge VAT to you on his own services becomes a bit of a side issue in all of this – he might or might not have to but again it depends on a number of factors. But it’s worth pointing out that even if he does charge VAT (or anyone charges you VAT) then even if your company isn’t registered for VAT in the UK, there is a refund procedure for overseas businesses who aren’t registered for VAT to recover VAT incurred on UK purchases and expenses.

My advice: Get it sorted out before you start trading!

I’d strongly recommend that you get all of this stuff sorted out before you start trading.

If you appoint an accountant in the UK they should be able to help you deal with your VAT issues to some extent – most of them have a good working knowledge of VAT, but aren’t specialists in the subject. But unless they have inhouse specialist consultants (ie those of us who ONLY do VAT) it is unlikely that they will be able to give you detailed advice on the subject and I do think that you need some.

I’d not sure what sort of stage you are with starting this business, but I’d certainly recommend that you get advice on the VAT issues before you appoint anyone to implement the project in teh UK, whether they are independent or whether they are employed by you or whether you set up a UK limited company for the purpose. As you’ve signed up a UK university as a client, I assume that your business is an established business in the US and you understand the importance of getting your tax affairs right from the start. I’d also assume that you want to get things organised properly to avoid any embarrassment when dealing with large clients! Furthermore, you could end up with penalties if you don’t register and/or charge VAT when you should have done – being an overseas business doesn’t give you the benefit of the doubt on these things.

In this sort of situation where there is any element of doubt, I’d normally recommend requesting a formal ruling from HMRC, the UK tax authority. But they don’t give rulings on “possible” scenarios – you’d actually have to have some formal arrangements in place and ask for a ruling on what is actually happening.

I should stress that while it might sound messy to begin with, the nature of your business is such that once you’ve got things set up and running, VAT should not be an additional cost to your business in the EC. But you have to get it right to begin with

Anyway, I’m sorry if i sound like a teacher giving a lesson in this reply, I don’t normally write so much but I got carried away with the detailed stuff!

I’d be pleased to help through my formal consultancy service if your accountants don’t offer VAT specialist consultancy services – our fees are very reasonable compared with the accountancy firms. If you want more details, please drop me a line using the contact form.

Marie

[Marie Stein]

Your query raises a number of complex issues and the forum is really for dealing with simple queries or where I can tell you where to find further information. Giving advice on such a complex area is normally something that I’d have to do through my formal consultancy services.

However the subject matter covers a number of fundamental issues about the interaction of UK and EC VAT law and practice that I thought it would be interesting to write about in more detail. The answer to your query depends on many factors, but hopefully after reading this reply, you’ll have a better understanding of the issues involved and how to proceed.

I don’t know how familiar you are with VAT so bear with me if I’m telling you stuff you know already, but it’s important to get these principles correct from the start.

The short answer is that you probably won’t need to register for VAT in the other EC countries in which you perform services for one of two main reasons:
• Either your services are exempt from VAT under UK and EC legislation.
• If your services are taxable, then you may in theory be required to register for VAT in other countries under teh “Place of Supply of Services” rules. However the rules also allow the recipient of the service – ie your customer – to account for the VAT so that the supplier doesn’t have to register.

But first it’s important to understand how the EC VAT system works. The VAT system is inherent to the operation of EC trade and every member of the EC is required to implement a VAT system as set out in the EC VAT Directive, so the principles are similar in each member state. Of course there are local differences in practice and interpretation, but at least it means that you are starting from a common set of principles, and our UK and VAT legislation in other EC countries is based on the EC rules.

There are two classes of supplies: taxable and exempt. You are only required to register for VAT if you make taxable supplies, not exempt supplies. Some countries have registration limits – including the UK; some don’t – for example Germany.

The other factor is that there are different rules that apply to the VAT treatment applying to goods and services. This is fundamental so I’ll deal with this one first to get it out of the way.

Goods or Services?

Looking at your query, you’ve obviously done some research but the references to distance selling only apply to supplies of goods, not services and the difference is important. You may have been looking at VAT Notice 725: The Single Market, which sounds as though it would deal with EC VAT issues. Which it does, but mostly only as it pertains to goods, not services. So you don’t need to consider issues such as distance selling or acquisition VAT unless you are making supplies of goods.

You may provide some goods as part of your education service – perhaps books or CDs – but they might be treated as ancillery to the supplies of services. At this stage, let’s assume that they are but you can come back to that later if it’s not the case.

The notice that you need to be looking at is VAT Notice 741a: Place of Supply of Services which is here http://tinyurl.com/ye67t2s on the HMRC website. But it is a detailed notice and you really need to have some understanding of the main principles to be able to follow it. You won’t find the answer to your query in any one part of the notice as your query deals with a range of issues, so I’d suggest that you make sure that you read this post and the other suggested reading first and then use Notice 741a to confirm your detailed answers.

UK VAT Liability

I’ll start by setting out the UK provisions as I assume that the majority of your income will be from your work in the UK. It will also help to understand how the VAT system works and define the meaning of various bits of terminology.

Taxable or exempt?

The UK VAT liability of any supply is taxable at the standard rate (which is currently 17.5% in the UK) unless otherwise defined in the UK VAT legislation. The classification of the supplies as taxable is fundamental as you are only required to register for VAT in the UK if the value of your taxable supplies exceeds the VAT registration limit. If you only make only exempt supplies, or a mixture of both and the value of your taxable supplies is below the registration limits, then you won’t be required to register for VAT at all in the UK. You may, however, opt to register on a voluntary basis if you make some taxable supplies where the value is below the registration limit.

Just to clarify a further point, the UK also classes certain supplies as taxable but at the zero-rate. This is different from exempt in that you can recover VAT on supplies (purchases of goods and services) that you receive (this VAT is called “ input tax”) if you are making taxable supplies, at the standard, reduced or zero-rate. VAT on the cost of goods or services used to make exempt supplies cannot in principle, be recovered, with some limited exceptions.

And just to make life more interesting, in many other EC countries and the EC VAT Directive the zero-rate is referred to as “exempt with credit” rather than a zero-rate of VAT.

• Defining what you’re supplying

You say that you are providing “education services” and mention that you have been offered teh change to do teaching in the EC. The term “education services” is very broad and there are some sorts of education services that can be exempt from VAT in the UK or the EC. If the services are exempt from VAT then the value of their supplies doesn’t count towards the UK VAT registration limit and you wouldn’t have to register for VAT in the UK if that’s all that you are doing.

So to start, we’d need to know what sort of services you are providing. It could be anything from teaching in a school or university or certain types of personal tuition which are normally exempt from VAT; to training provided by commercial organisations to other businesses, which would typically be taxable. Here is the link to the HMRC VAT Notice 701/30: Education and vocational training which explains when education services are exempt from VAT in the UK: http://tinyurl.com/3y8elgk.

Please read the leaflet carefully as there are a number of factors that you need to consider when deciding whether or not your supplies are exempt in the UK. Although the supply of education by a school or university is exempt, the provision of teaching staff to that establishment is not covered by the exemption so if the teacher or lecturer was registered for VAT their services would be liable to VAT. A contract to provide the services of a self-employed teacher to cover for a member of staff on maternity leave, for example, wouldn’t be exempt.

EC VAT liability

The fact that your services might be exempt from VAT in the UK doesn’t mean that the same liability applies in other EC countries. However there is a provision in EC law that sets out the basis for the exemption of education services throughout the EC, so the same principle applies in all member states.

The EC VAT Directive states that the following supplies are exempt from VAT:
“the provision of children’s or young people’s education, school or university eduction, vocational training or retraining, including the supply of services and of goods closely linked thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objects;
tuition given privately by teachers and covering school or university education..”

EC VAT Directive 2006, Article 132 (i) – (j).

This provides the framework for the exemption of education services throughout the EC.

What I can’t tell you exactly is what the legislation in each EC member state says about the VAT liability and this could differ from country to country. Some countries might interpret the EC legislation more broadly than the UK and allow exemption in more cases and in this case you can rely on the broader exemption provided under the national law.

For the purposes of this post, I assume that your customers are businesses in other EC countries. If they are not businesses then the rules relating to your supplies will be different as I’ve explained briefly later.

If you want to be certain that your services are exempt, you’d have to contact the tax authorities in the member state concerned and explain the nature of your services in their countries and ask them to confirm the VAT liability of your services in that country and whether or not you need to register. You could also have a look at the information provided on the EC Commission website here http://tinyurl.com/2cq6sp. There is a lot of detailed information here including useful summaries of the VAT rates and reliefs in the different member states. Remember it’s only a summary though and you’d still have to establish whether your services are exempt in the countries concerned by reference to their national legislation.

One other way to find out would be to ask your prospective client if the services you are providing would be exempt in their country by reference to the EC Directive. If they’ve engaged overseas suppliers in the past, they can probably tell you whether or not your services would be exempt or taxable in their country.

And what if it’s taxable?

In principle, if you provide taxable services in other countries, then you would be required to register for VAT in that country and charge VAT at their national rate. This is because in most cases, the service would be deemed to take place in that country and as such is liable to VAT in that country for certain services that are currently deemed to be “supplied where performed”.

However from 1 January there are changes to the place of supply rules and some of these services will be covered by what is known as the general rule. This means that the place of supply will be where the customer belongs.

The general rule exists to avoid the difficulty of having multiple businesses registering for VAT in multiple EC countries. Instead of having to register in every country where you perform services, there is a procedure called the reverse charge (or sometimes the “tax shift”) mechanism whereby the customer – if a VAT registered business in that country – accounts for the VAT on the service so that teh supplier doesn’t have to register. That means that you don’t charge VAT on your invoices or submit VAT returns in that country.

Now the only real difficulty would be if your customer isn’t registered for VAT or isn’t a “taxable person”. In order for you to use the reverse charge procedure, your customer has to be a business and are receiving your supplies for the purposes of that business. The distinction might be important for you as the supply of education by certain public bodies may not be regarded as a business activitiy in the country concerned – for example in the UK, the provision of education by local authorities is a legal requirement, not a business activity. In those circumstances your customer may not be able to account for VAT on your behalf and you may have to register for VAT, whatever the value of your supplies in that country.

The whole subject of the place of supply is complicated but I’ve explained the main principles in an article and also explained how the reverse charge works here http://tinyurl.com/nw8ofr. If you want more detailed information, you can look at the HMRC VAT Notice 741a: Place of Supply of Services – Section 8 deals with teh provision of education services and explains when the supplies are covered by the revised “supplied where the customer belongs” rules from 1 Jan 2011. There are also detailed requirements about the information to be shown on invoices for such supplies at section 18 of the notice.

In conclusion

So based on these principles, you probably won’t need to register for VAT in other EC countries; either because your supplies are exempt from VAT OR your services are taxable but your customer can account for the VAT using the reverse charge procedure. However I can’t be certain of this because I don’t know all of your circumstances and in any event I don’t give advice on specific issues on this forum.

I’d recommend that you take some time to do some reading of the literature I’ve mentioned in this post to decide how you need to proceed. You might want to have a chat about it all with your accountant who probably has some experience of the EC VAT rules which I’ve mentioned here.

Let me know if you have any queries about the general principles and if you want formal advice about your specific circumstances, contact me here https://vatexchange.co.uk/contact.

Marie
6 December 2010

[Marie Stein]

Hi Steve

Unfortuntately there is no simple yes or no answer as it depends what the recharges represent. Typically income from overseas associated company can represent anything such as charges for consultancy services, management advice, staff charges, directors’ costs, etc. You have to establish the actual VAT liability of each type of recharge as the mere fact that the charges are made to overseas businesses doesn’t prevent them being liable to VAT. For example, the provision of “management services” isn’t actually included in the list of services that are free from VAT so that means that the income is liable to VAT even if the recipient is an overseas business.

I’ve already posted an article here http://tinyurl.com/24pubh7 which explains the subject in more detail and should help you to decide whether or not you need to charge VAT.

The application of the reverse charge to payments to overseas companies also depends on the nature of the service that the payment represents. This subject is also covered in teh above article.

I know you were looking for a simple yes or no, but you really need to look at this in more detail. Let me know if you need any further help.
Marie

[Marie Stein]

Hi Denlian

You make a good point about the invoicing as there are actually regulations that require businesses to issue invoices in sequential number etc. I’ve never known HMRC to penalise a business because of failing to do this, but I’m sure that it has happened. It’s also important to get the B2B reverse charge VAT done – strictly speaking failing to do so is an underdeclaration of VAT on the return even if the VAT is fully recoverable. The penalty regime now takes into account the business’s compliance history and these are the sorts of things that go against the business.

As for commercial practice going against the VAT regs – well remember that the French invented VAT so we can blame them for that!

Thanks for your involvement on the forum this year and I hope to hear from you again soon.
Have a great Christmas and New Year!
Marie

[Marie Stein]

Hi Gary

Any time a VAT consultant receives a query about supplies of services involving overseas customers or suppliers, we go a bit quiet and have to think carefully about the answer because there are so many potential issues that could apply.

To start with the main principle, you are correct in thinking that the customer has to have an invoice for a supply in its own name in order to recover the VAT charged on goods or services that it has acquired. Forgive me if I’m telling you stuff you already know, but I don’t know how familiar you are with the VAT rules.

The simplest way of dealing with the situation is to ensure that the training provider issues the invoice for the supply of training to the customer and you issue your invoice for the booking fee separately. This should be possible if you are acting as disclosed agent, ie both supplier and customer know that you are acting as agent and that your service is limited to the service of booking the seat. But if you’re acting as principal or as undisclosed agent, then it wouldn’t be possible.

Agent or Principal?

This is because the VAT treatment depends whether you’re buying and selling as agent or principal for VAT purposes and how the invoicing is done. And just to make life more complicated, you can act as principal for VAT purposes if you act on behalf of the customer or supplier as undisclosed agent or if the invoices for the main supply are issued to you and by you for any other reason.

How does this work in practice? If the invoice from the training company is issued to you and doesn’t show the customer’s name, then for VAT purposes you’d be treated as buying and selling as principal. In that case the only way that you can pass the VAT charge onto your customer so that they can recover it is for you to act as undisclosed agent which means that for VAT purposes this you would be treated as principal even though you’re not a principal in contractual terms. And then the value of the training would count towards the VAT registration limit, in addition to your booking fees.

The only alternative would be to charge the customer the gross amount so that you recoup the full cost. Suppose you book a classroom seat for £200. It will be liable to VAT at 17.5% (20% from 4 Jan 2011) so the invoice from the supplier (ie the training company) will show the net of £200, VAT of £35 and gross of £235. If you’re not registered for VAT, then you can’t recover the £35 VAT, so in order to recoup the full cost that you’ve paid for the set, you’ll charge the customer £235.

Obviously, the disadvantage of this arrangement is that the customer – presumably a UK based business which is registered for VAT – doesn’t have an invoice in its name from the training company that it can use to recover the VAT.

I can’t give definitive advice in any case as I don’t know what the contractual arrangements are between you and the supplier/customers concerned, but there is more comprehensive guidance on the subject in HMRC’s VAT Notice 700: The VAT Guide, section 22 here http://tinyurl.com/2uj4f67
I suggest that you have a look at the guidance shown in the VAT guide and then let me know if you are still confused! But hopefully this will help you work out what to do.

Other issues

There are two further (and potentially complex) issues that might also apply to your business. If you start to buy and sell EC hotel accommodation, travel etc as principal, then your business might be covered by a special scheme that called the “Tour Operators Margin Scheme”. Furhter information is here http://tinyurl.com/2rbowd in HMRC’s VAT Notice 709/5.

Also, the rules relating to the supply of training and related services are covered by special “Place of Supply” rules that apply to EC business buying and selling certain supplies of services. These are explained in VAT Notice 741a: Place of Supply of Services here http://tinyurl.com/ye67t2s on the HMRC website – see section 8 which deals with services of training etc. In certain circumstances you don’t need to register if the customer can register for VAT and account for the VAT on services that you supply your behalf. However, they won’t apply if you need to be registered for VAT to ensure that your customers receive a VAT invoice, but you should be aware of the whole picture.

Marie

[Marie Stein]

Hi Denlian

When you say that the agent is “raising the VAT invoice on behalf of the band”, I assume that you mean that the agent is physically preparing the invoice on behalf of the band and issuing it to the promoter?

If that’s the case, then I don’t see it as a problem, as long as all of the parties involved are accounting for the correct amount of VAT on their VAT returns. I understand that in the entertainment industry, it’s common practice for agents to take care of this sort of stuff for their client and there are many situations in other businesses when agents raise the invoice on behalf of their clients. A good example would be property management, where land agents issue regular invoices for rent or other property costs on behalf of landlords

It is a valid point to raise though, because of course the band is always responsible for its own VAT affairs, even if the agent has taken over the administration of their accounting and tax affairs for them. But HMRC probably wouldn’t be concerned as long as the correct information is shown on the invoice and that the VAT is correctly accounted for on the bands’ VAT return.

Marie
22 November 2010

[Marie Stein]

Hi Dana

Well it depends on the type of business but assuming that you are a retailer, then as Robert has suggested, the first point of call would be to consider the retail schemes. Your accountant will probably have experience of using these schemes with other clients so should be able to help you decide whether they’d be appropriate for you. They look complicated as explained on the HMRC website, but actually they are very simple in principle and once you’ve done it for the first time, you’ll get the hang of it very easily. In practice it’s basically a case of working out the proportion of your sales that are standard rated (usually this is based on the proportion of purchases that are standard rated) and then calculating the VAT on that proportion of your total sales.

The other thing that you might want to consider is whether the Flat Rate Scheme would work for you. Y ou can only use this if your total turnover is £150,000 or less but if you can, then it’s a very simple scheme as you don’t need to calculate your input and output tax separately, but just apply a single VAT rate to your gross income. Have a look here for more info: http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#5.

Marie
20 November 2010

[Marie Stein]

Hi Joeacca

My apologies for the delay in replying to your query – we’ve had a couple of family bereavements in the past couple of months and I’m a bit behind with lots of things.

As you know, I don’t give advice about any specific transaction here on the forum, but I’ll tell you what I believe to be the normal rule for such transactions. In your case, I would strongly recommend that you take formal VAT advice about your plans or at the very least speak to your accountant as its a complicated, costly subject and you don’t seem to understand how complicated the rules about VAT and property work in detail.

Unfortunately I think that you’re wrong in thinking that the supplies of converted property in the circumstances you describe will be zero-rated. As you know the rules on construction and development of property are very complicated and the zero rated status applies only in very limited sitations, especially in the case of converted property. See VAT Notice 708: Buildings and Construction section 5 here http://tinyurl.com/27ypsdh which explains when zero rating is available.

Zero-rating is only available in certain limited situations for the supply of non-residential buildings which have been converted to residential use, under the “non-residential conversion” rule. The defination of what is non-residential is that either the buildings have never been used as dwellings or for residential purposes or have not been so used in the previous 10 years. So if the buildings have recently been used as dwellings as you describe, then the sale of the converted properties wouldn’t qualify for the zero-rating relief under the non-residential conversion rule.

This obviously will be important as if the sale of the properties will be exempt rather than zero-rated, you won’t be able to recover the VAT on the costs incurred in the conversion work. In that case, you need to consider whether the conversion work is eligible for the reduced rate of VAT, which is explained at section 7 of the notice. The reduced rate normally applies to conversion work when the work creates a different number of dwellings/relevant residential properties – see section 7.2 for details. But either way, you have to be working on the presumption that the conversion will be liable to VAT at either 5% or 17.5% (or even 20% depending on when the work is done).

I know that this isn’t the answer you expected or wanted. However I should emphasise that the information that I give here is only for general guidance and should not be regarded as definitive guidance on any VAT issue. In order to give definitive advice, I would need to see contracts, plans etc about the proposed transactions and I can only give that sort of advice via my formal consultancy service.

This is particularly important in the case of property transactions as the rules are complicated and the costs involved are high and the addition of VAT can make the difference between making a profit or loss on any deal.

In the circumstances I’d strongly recommend that you take some specialist VAT advice or at least speak to your accountant about the subject as it may well be the case that your proposed venture has become significantly more expensive than you’d anticipated as you may not be able to recover the VAT on the conversion work. I would be pleased to help through my formal consulting services – please contact me via the “Contact Us” link.

Marie

[Marie Stein]

Hi Robert

You never ask easy ones and EC VAT isn’t my favourite subject!

I’m not aware of any rule/percentage split that enables you to treat something as a supply of installed goods as opposed to work on goods, or vice versa, particularly in the cases you mention. It may exist but I’ve not seen it.

But I actually think that there is another factor involved in your situation that means your “upgrade” query isn’t an issue.

This is how I understand the basic rules. If you install a machine in a building, the place of the supply and installation would take place in the country where the machine is installed. And as you know, the simplification procedure will apply to that initial supply and installation if the country concerned has applied it.

But it’s at this point where things change. And it’s because once the machine becomes installed as a fixture, it becomes part of the land, and therefore “immovable property” which means that it is regarded as land. And yes, you’ve guessed it, there is a different place of supply rule for work on land.

Place of supply of services relating to land

The place of supply for services relating to land is where the land is located. This is explained in section 6 of VAT Notice 741a: Place of Supply of Services. This means that suppliers are normally required to register for VAT in the country where the land is based. And while work on land isn’t covered by the simplification for installed or assembled goods, some EC countries allow VAT registered recipients of such services (ie work on land) to account for VAT under the reverse charge so that the supplier doesn’t have to register in that country.

So the issue is whether or not the work that is being carried out is defined as work on goods or work on land.

Tangible movable property or immovable property?

Section 8.5 of VAT Notice 741A explains what is regarded as work on goods as opposed to installed goods as far as the UK is concerned. Goods are defined as “tangible movable property” but “does not include immoveable property such as permanently installed goods and fixtures”. The definition of “work on goods” in para 8.5.2 is quite extensive and includes alterations as well as repairs and other work. So if it involves work on “fixtures” then it becomes a supply of work relating to land and the place of supply is in that country. If the work doesn’t involve work on “fixtures”, then as far as I can see it’s work on goods – and thus services relating to movable property – and the supplier isn’t liable to register for VAT if the customer is registered for VAT and can account for reverse charge VAT.

So if you are “installing” an upgrade to a machine and the machine is a permanently installed fixture, the place supply would be where the machine is located as it’s a service relating to immovable property. If the machine is movable property – ie not a fixture, then the supply would be a supply of services covered by the “work on goods” rule.

I’m sorry I can’t give individual answers to each of your scenarios – it would take me some time to do so, although of course I’d be happy to help through my formal consultancy service if you need more detailed information. And as always with these issues, each country will interpret the term “immovable property” differently so you might want to ask your customers how they understand their local rules to apply. In most cases they will be able to account for local VAT under the reverse charge which would avoid the need to register in the country concerned.

Marie

[Marie Stein]

Hi Tony

Yes in principle I agree with Robert’s comments above that if the goods are going to Germany but the purchaser is not registered for VAT in Germany, then your sale is liable to UK VAT. But it could be even more messy as depending on the circumstances. There are several possible scenarios which could involve triangulation (which is possible even involving non-EC suppliers) and/or either you or your customer being liable to register for VAT in Germany and it really isn’t possible to cover everything here.

In order to give more detailed information, I’d need to know why the goods are going to Germany and not to Norway. This is important as if your customer is not registered for VAT, you may be liable to register for VAT there as the sale is to a non-registered person. This would be regarded as a “distance sale” to Germany and as I understand that Germany has a nil registration threshold (I’d have to double-check to be certain, but in any event unlike the UK VAT registration limit of £70k) you would have have to register for VAT there. More information on this can be found in VAT Notice 725: The Single Market, section 6 http://tinyurl.com/3a8v9zq. I’m guessing that you won’t want to have to register in Germany!

Either way, it is correct that if the sale is to a customer who isn’t VAT registered, then in principle the transactions don’t have to be included either on the EC Sales List or the Intrastat.

Marie

[Marie Stein]

Hi, sorry for the delay in replying, I’m just catching up on stuff after a family bereavement last month.

In principle if you are simply buying and selling printed material of any kind, the purchase and sale will be zero-rated. The rules about what qualifies are here in VAT Notice 701/10 http://tinyurl.com/344mkyr. The general principle is that if you sell on items which are zero-rated in their own right – say a leaflet, brochure, magazine or book – then your supply is zero-rated.

Where it can get a bit complicated for designers is if you are charging clients for designing stuff rather than for the production of the finished zero-rated item. The VAT liability depends on what the exact terms of the contract, but what often happens is that designers will contract for a “design and produce” type of supply so that you design the look, the cover etc of say a brochure then you subcontract the actual printing of the finished item to a printer. If you make a separate charge for the design service of the original proof, this would be standard rated. However if the printer is supplying you with a number of finished brochures which you then sell on to your customer, then in principle this would be an onward supply of printed material which should be zero-rated.

There’s some guidance on this issue in section 7 of the VAT notice. It’s worth reading through the notice as a whole as you’ll probably find that your situation is covered there – it’s not very long and quite easy to read.

Marie

[Marie Stein]

Sorry for the delay in giving you an answer on this one – just catching up after a family bereavement.

You’ve probably found the answer to your query elsewhere by now but this is what I think.

My understanding of the general principles is that that the triangulation procedure can’t be used for installed/assembed goods and I’ve never come across it being done in practice. As you know there is a simplification procedure that allows the customers of installed or assembled goods to account for the VAT so that the supplier doesn’t have to register for VAT in the country concerned – see VAT Notice 725: The Single Market, section 11 here: http://tinyurl.com/2wb3mwr for details. But this can only be used when the recipient of the supply is registered for VAT in the country in which the goods are to be installed.

The triangulation rules – which I’m sure you’re familiar with – are specifically for supplies of goods and not installed goods. The difference is relevant as the place of supply of goods and goods which have to be installed or assembled is different under EC VAT law. The triangulation procedure for supplies of goods is a specific easement facility which is a concession approved by all EC member states and under the current rules can’t be used for installed or assembled goods.

You can find more details about the simplification for installed good and triangulation here http://www.hmrc.gov.uk/manuals/vatsmanual/VATSM5000.htm in the HMRC manuals. I can’t see any reference to using triangulation for installed goods.

While there isn’t an EC wide triangulation procedure for installed/assembled goods, it’s possible that certain individual member states will allow a similar facility for such supplies. You’d have to contact the VAT authorities in the member states concerned for more information.

I’d certainly be interested if you find any way of using triangulation in this way, but I can’t see it working.

Marie

[Marie Stein]

Bit of a difficult situation for you to find yourself in.

I know from experience that there is a lot of confusion – and yes in some cases VAT fraud – in the construction industry, but very often both builders and their customers don’t fully understand how the VAT rules work and that’s why things don’t look right. It may well be the case that your builder has got his invoicing arrangements wrong but it could be a genuine mistake rather than deliberate.

As you rightly point out, the basic rule is that unless you are registered for VAT, you should not charge VAT on an invoice. It is both a criminal offence and civil offence and in any such situation, the VAT shown is a debt payable to HMRC.

However that may not be what is happening in your situation and that’s what you need to establish. Suppose your builder has purchased goods and services in order to carry out the work at your home. It’s likely that he will have paid VAT on the purchases concerned – certainly if they have purchased goods from any VAT registered builder’s merchants, DIY superstore – and it’s possible that the subcontractor providing the services, perhaps a plumber or decorator, is registered for VAT. That means that the builder will have paid VAT, which of course he can’t recover as he isn’t registered for VAT.

Typically building contracts are based on the builder passing on to the customer the full cost, including any VAT that he can’t recover, of any goods and services that he has to obtain, to carry out the work, in addition to his own charges which are usually based on hourly rates and overheads.

So as an example, let’s say that his own costs are £5,000. He also purchased materials costing £2,000 plus VAT of £350 and subcontracted some work to a plumber for which he’s charged £1,000 plus VAT of £175. His final bill for you is for £8,525 which covers his own charges plus the goods and services he’s bought in and the VAT on those invoices. I don’t see anything wrong in that, as all he’s doing is passing onto you the cost of the irrecoverable VAT on the cost of materials and labour. He might also enclose copies of those invoices to prove to you the amounts that he’s paid out as evidence of his costs.

What he can’t do is to add any VAT onto his own charges nor should he be showing a VAT registration number on his own invoice. So if he was charging VAT on top of his own costs of £5,000 without being registered then that would be wrong.

I can’t tell for certain without seeing your contract and I can’t cover every scenario here, but this is what might be happening. If you want some further information about this subject, have a look at the guidance given for consumers on the HMRC website here http://tinyurl.com/354pxp3 and you might also want to have a look at the guidance given to businesses about VAT invoices here http://tinyurl.com/y2bt2j.

If you aren’t satisfied with the builder’s explanation about VAT, you can notify HMRC by contacting the VAT helpline – details are given on the consumer information pages mentioned above. I don’t think that you are legally required to notify HMRC, it’s up to you. But either way, you can give the information anonymously and HMRC will follow it up. I don’t know about whether or not you are required to notify any other authorities as I can only comment on the VAT side of things, you might find some information on the Citizens Advice Bureau website.

Hope this helps you sort things out.

Marie

29 September 2010

[Marie Stein]

Hi Simon

First of all, congratulations on trying to digest PN 741 – even for seasoned VAT consultants it normally requires a strong G&T before reading!

There are 2 aspects to your queries; first whether the service you are providing qualifies to be treated as supplied “outside the UK” when the customer belongs outside the UK; and second whether or not the customer “belongs” outside the UK.

General B2B Rule

As you have rightly stated, the supply is liable to UK VAT if the supply is deemed to take place in the UK. However under the Place of Supply of Services rule, if the customer is an overseas business, whether EC or non-EC, then most services are deemed to take place where the customer belongs under what is now called the general B2B rule. The services covered by the B2B rule are listed in section 15 of PN 741 – they include the provisin of information and I would guess that your services fall within this category. See section 15.5.12 for a detailed list of what is included under this heading to satisfy yourself that your services are covered.

However for the purposes of this reply, let’s assume that the services are covered so normally would qualify to be supplied VAT free if the recipient is a business that belongs outside the UK.

Where does the recipient “belong” for VAT purposes?

So the issue that we need to consider is whether the recipient belongs “outside the UK” and this is where the confusion arises. The concept of “belonging” for VAT purposes is explained in section 3 of PN 741 and is similiar to the concept of residence or domicile for tax purposes. There are a series of criteria that HMRC use to establish whether or not the recipient of a supply belong in or outside the UK – see paragraph 3.2 which sets out the criteria. First of all, you find out whether the recipient has its main business establishment or a fixed establishment in the UK, or any other UK establishment which is most “directly concerned” with receiving the supply.

It’s this last point that is the most important. Suppose the recipient is a US company, with a fixed establishment – say a branch office or even a subsidiary company which acts on behalf of the US parent company – in say Germany, France and the UK. What you need to decide is which establishment is most directly concerned with receiving the supply. If it’s the US, German or French establishment, then the supply is deemed to take place in that country under the general B2B POSS rule. If it’s in the UK, then the supply is deemed to take place in the UK and is liable to UK VAT. Paragraphs 3.6 – 3.8 tell you how to decide the POSS in certain scenarios.

Now in both of the scenarios you set out, you say that the “news service” is being “used in the UK” and it’s this that makes me wonder if the clients concerned have some sort of establishment in the UK – even if it’s just “one man and a dog” – that could qualify as the place most directly concerned for the purposes of your contracts. If the client is a US news agency with a UK office which uses the information you supply to provide, for example, UK business reports then it would seem likely that the establishment which receives the supply is in the UK and therefore VAT is chargeable.

In your second scenario, you say that you sell your news to a UK company but the contract “is for an entity of the parent company registered in Grand Cayman”. In this case I assume that your client is a company registered in Grand Cayman. You say however that you sell your news to a UK company and it sounds to me as though this company could be acting on behalf of your client and therefore creating an establishment of the GC company in the UK.

Two points about the “Place of belonging” issue.

First of all, it is not an easy subject and there have been several VAT Tribunal and court cases over the years which have considered the issue from different angles, including complex situations involving multi-national suppliers providing services all over the world to multi-national clients.

The second point is that if your clients have UK establishments and you decide that you should be charging UK VAT, then it’s possible that they could register for VAT and recover the VAT that they incur in the UK. Alternatively they may be entitled to recover teh VAT through the EC VAT Refund Scheme for overseas businesses. However if they are businesses in the financial services sector, they may not be entitled to recover VAT because of their VAT exempt status so that may explain why they are adamant that you shouldn’t charge VAT.

But as the VAT registered supplier, it’s your liability and you need to make sure that you are treating teh fees correctly or you’ll end up bearing the VAT cost. It’s normal business practice to ensure that contracts allow suppliers to add VAT to their fees so that the customers are required to pay the additional VAT amount even if they disagree with the VAT liability.

Obviously I can’t give definitive answers without seeing your contracts and some more detailed information about the clients and I would be happy to help through our formal consultancy services, but hopefully the information which I’ve set out above will help you to work the answer out for yourself.

Marie
26 September 2010

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