[Marie Stein]

In principle yes if the recharge to the client forms part of the consideration for the solicitor’s taxable supply of services.

Disbursements don’t form part of the consideration so aren’t liable to VAT. This is because the recharge is simply a mechanism to enable the solicitor to collect from the client the cost of something that is the legal liability of the client to pay. A good example would be stamp duty land tax. But of course you need to be certain that the recharge is a true disbursement – see VAT Notice 700: The VAT Guide section25.1 here http://tinyurl.com/2c4dyk for guidance about what is and isn’t a disbursement for VAT purposes.

However costs that the solicitor incurs in the course of carrying out his business – such as overhead costs, travel costs, subcontractors’ fees – form part of the consideration for his supply, even if separately itemised, and are liable to VAT.

If your engagement is with the solicitor rather than his client, then a solicitor would treat the recharge of your fees as part of the charge for his supply and therefore liable to VAT, the same as any other cost that he incurs in the course of carrying out his business. So while I can’t give a definitive answer to your query because I haven’t seen your engagement letters/contracts, it sounds to me as though the solicitors would be correct in treating the recharge of your fees in the same way as another cost that they incur in the course of carrying out their business and thus it would be liable to VAT.

Marie
26 September 2010

[Marie Stein]

The information IS on the HMRC website, it’s just that you need to know where it is. And of course it’s never as simple as it looks.

As with all of the forum queries, I can only give general information about the subject and tell you where to look on the HMRC website so that you can find the details you need to work out the answer. It’s a bit complicated in your case but I think that you’ll be able to figure out the answer once you’ve looked at the information that I’ve summarised below.

There are two separate issues that you need to consider – the first is the normal rules for membership subscriptions and second, the rules for services supplied to overseas customers.

As a starting point, remember that the default rule for anything VAT related is that if you’re in doubt, charge VAT. Unless the legislation states otherwise, the supply is liable to VAT at the standard rate.

• Membership Subscriptions

However in the case of membership subscriptions, the VAT liability of any supply normally depends on what the member receives in return for their subscriptions. If they are subscriptions for an online service, then it depends what that service includes and there are a wide variety of different types of membership schemes available on the internet. Each individual case could be different as it depends on the contractual agreement of the club/association/membership scheme etc concerned.

HMRC VAT Notice 701/5: Clubs and Associations http://tinyurl.com/3426qtr explains the VAT liability of supplies made by such organisations. Have a look at the notice to see how it might apply to your business. As you’ll see, some supplies are exempt from VAT, although the exemption is normally limited to certain non-profit making organisations such as trade unions and political, religious, patriotic, philosophical, philanthropic or civic bodies.

Section 5 of the notice here http://tinyurl.com/3ynux53 explains the VAT liability of membership subscriptions and as you’ll see, membership subscriptions are normally liable to VAT at the standard rate, unless they include specific zero-rated or exempt elements – such as printed matter or insurance cover.

• Overseas Members

Now about those overseas members – see section 5.13 of the notice about supplies to overseas members – it explains that where supplies are made to customers who belong outside the UK, the rules about the VAT liability are different. The supply of services to overseas customers comes under a particular rule called “the place of supply of services” (or “POSS” for short). It’s explained briefly here https://vatexchange.co.uk/node/325 in the Glossary on this website and I suggest that you read this so that you understand the principles involved before going any further.

The basic rule is that the if the customer is a private individual who belongs in the UK or any other EC country, then the supply is liable to UK VAT. If the customer belongs outside the EC, then the supply is not liable to VAT.

So that’s the starting point and applies to most situations. The POSS rules are complicated but in general, if the service concerned doesn’t qualify to be treated under the general rule or is otherwise free from VAT, then you charge VAT.

The general rule applies to certain services that are listed in the VAT legislation. It applies to a wide range of services although membership subscriptions aren’t specifically included in the list. As with the rules for UK clubs and associations, the liability is determined by the nature of the services supplied in return for the subscription.

The legislation includes certain electronically supplied services, such as the following:
“(c) the supply of images, text and information, and the making available of databases,
(d) the supply of music, films and games (including games of chance and gambling games)”

The above quote comes from the UK VAT legislation and is explained in further detail in VAT Notice 741A: Place of Supply of Services which is here http://tinyurl.com/yht446x on the HMRC website. See section 15 of the Notice for further information about the services that fall within this heading. Section 15.12.12 lists the electronically supplied services that are included and section 15.12.13 lists the services that aren’t included. N.B. If the services aren’t included in this list, it’s possible that they could be covered by the general rule under a different part of the legislation, but hopefully your situation will be covered here.

Membership subscriptions that allow members to access special members’ areas and download videos would typically come under this heading. In that case, income from UK and EC members will be liable to VAT, but income from non-EC members is not liable to VAT.

So this is the general rule and from what you’ve said, it’s likely that this will apply to your situation. But you need to confirm that your own membership falls within these provisions. If you need any further help, I’d be happy to provide formal advice through our formal consultancy services – see the contact details in the “Our Consultancy Services” section in the menu.

Marie
26 September 2010

[Marie Stein]

Hi Alex

Sounds like you’re a real newbie to VAT so welcome to the club!

In principle if you register for VAT, then you can claim VAT that is charged to you by your suppliers and you charge VAT on top of your net price to your customers. Then you pay the difference to HMRC.

That’s basically how it works but there are all sorts of rules and exceptions to rules so you need to read up on it a bit more. For example, your supplies (sales) could be one of the limited categories that is zero-rated – eg printed matter – so in that case you wouldn’t need to charge VAT to your customers. In other cases you aren’t allowed to claim VAT that you pay to your suppliers. It all depends on the nature of your business activities.

It is a complex subject and you need to make sure that you understand the basic rules properly. Can I suggest that you download a copy of my “Beginner’s Guide to VAT” and start with this as it’s a short introduction to the subject designed for people who are new to the subject and it should help you understand the main principles.

Once you’ve got your head around the main principles, other help is available from HMRC. The main official sources of information are on the HMRC website, 2 particular publications are “The Ins and OUts of VAT” which is here http://tinyurl.com/33crxs5 and contains guidance about many practical VAT issues. More detailed guidance is in “The VAT Guide” which is here http://tinyurl.com/3ajbugl. “The VAT Guide” is over 100 pages long and has a lot of detailed information, so you might only want to read the first few sections to begin with.

There’s also guidance on registering for VAT called “Should I be registered for VAT?” which is here: http://tinyurl.com/396kxa.

AS you’ll see, there’s a lot to take in so put some time aside and take the phone off the hook so you have time to take it all in. Once you’ve got your head round this initial guidance, there are several other publications which explain how the VAT rules apply to specific types of business and you’ll need to check out the guidance that applies to your type of business.

That lot of reading should keep you going for a while! But if you need help with any more specific issues relating to your business, let me know and I’ll point you in the right direction. And good luck with your new business venture!

Marie

[Marie Stein]

Just to clarify – you talk about services being supplied to “an agency located in UK”. I assume that the agency is the recipient of your services, and is not obtaining the services for anyone else. And when you say that your services are being provided “through a company in UAE” I assume that the company doesn’t have any branch or other place of belonging in the UK or other EC country.

Nirmal is correct in saying that no UK VAT has to be charged on the invoice to the UK agent, but I should add a couple of provisos to that. As always with VAT you have to be certain that your situation falls within the rules that normally apply to international services.

The VAT rules relating to international services are covered by a complex set of provisions called the “Place of Supply” rules which apply to all businesses in the EC. The rules are complex and long, but they generally apply to consultancy services as explained below.

First of all, overseas suppliers aren’t required to register for VAT in the UK and charge UK VAT unless they are making supplies in the UK or supplies that are deemed to be in the UK.

Most services are deemed to follow the new rule relating to B2B transactions which says that the “place of supply” of the service is where the customer belongs. So if the supplier is outside the UK but the customer is a business in the UK, then the place of supply rule is in the UK. The way it works is that the UK customer pays UK VAT on the value of the imported service.

So you need to establish whether your consultancy services are services that qualify for the B2B rule. For this you need to see the guidance issued by HMRC in VAT Notice 741: Place of Supply of Services. Section 15 of the notice sets out the types of service that are normally covered by the B2B rule, here’s the link to the paragraphs that cover consultancy services: http://tinyurl.com/37s48bl. You’ll see that this VAT Notice is a long document and really you need to read most of it to understand how the rules work. But I’ve tried to paraphrase the relevant parts that will probably apply to your situation here.

If your services qualify as “consultancy”, you don’t have to quote any article number or legislative reference on your invoice but you do have to be certain that your customer is registered for VAT in the UK. ASK YOUR CUSTOMER FOR THEIR UK VAT REGISTRATION NUMBER TO BE CERTAIN.

If your customer is not registered for VAT then the B2B rule doesn’t apply and the situation would be covered by the B2C rule. In that case, the UAE company might be liable to register for VAT in the UK itself – see section 5 of VAT Notice 741 for more information. If you’re doing a lot of work for UK customers, I’d recommend taking formal advice about the VAT position to be certain that you’re dealing with UK VAT issues correctly.

Marie

[Marie Stein]

Hi Jane

Not sure I agree with HMRC on this one but it depends on a number of factors. For the avoidance of any doubt, the examples below apply to companies with separate individual VAT registrations or separate VAT group registrations where the “purchasing” company and the “user” company have separate registrations.

It’s typical in group situations for one company to act as a central purchasing company for the whole group to take advantage of large purchase discounts from suppliers and simplify the admin function. For example if the group as a whole gets a discount on its electricity supply then the purchasing company would get a single invoice in its name and then recharge each company for it’s share. Or the group might take advantage of large discounts on the purchase of stationery or other office supplies.

The other thing that sometimes happens is that the purchasing company purchases things for other companies on their behalf – as an agent acting as in their own name as principal for VAT purposes (see VAT Notice 700: The VAT Guide section 23.2 here for details http://tinyurl.com/37929df about agency situations).

In the above situations, the purchasing company will receive an invoice from the third party supplier in its name for goods or services it will be re-invoicing to the other group company. If the invoice is for £100 plus VAT of 17.5%, then the purchasing company can recover the VAT of £17.50 as input tax. It then raises an invoice for £100 plus VAT of £17.50 to the other group company.

The important point about this is that the purchasing company is able to recover the VAT charged by the third party supplier as input tax as it will be making an onward taxable supply of the goods/services concerned to the other group company.

If the invoice is in the name of the user company and the purchasing company is merely making the payment on behalf of the user company, then this is a disbursement. The purchasing company cannot recover the VAT as it is not its input tax, but it recharges the full amount of £117.50 without adding any further VAT on top. See section 25.1 of Notice 700 for further information about this.

I can’t cover every eventuality that could apply here on the forum and it is possible that teh advice given by HMRC could be correct in certain limited circumstances. But from my experience, most group situations fall within one of the scenarios mentioned above. Either way, have a look at the information in the VAT Guide and I’m sure you’ll find that your situation is covered.

Marie

[Marie Stein]

Hi Vince

I’m a bit confused about your question as the sale of ANY hot take-away food or drink is liable to VAT regardless of where it is sold. The on/off premises issue applies to the liability of most cold take-away food or drink which is normally zero-rated, unless it is sold “on the premises”, in which case it is standard rated.

Hot Take-away food

First of all, to confirm the position about hot take-away food – see the information about this in VAT Notice 709/1: Catering and Take-away Food, Section 4 here: http://tinyurl.com/37p8wuh which confirms that hot takeaway food and drink is standard rated, regardless of where it is sold or consumed. So if you sell burgers, hot dogs, chips, hot drinks etc then you have to pay VAT on the sale of those items, wherever your van is located.

I know that this is particularly difficult as it basically means that you have to pay 7/47 of most of your sales income as output tax and you won’t have much in the way of input tax to offset against this. If you weren’t aware of this, I imagine it could come as a bit of a shock if you haven’t factored it into your sales prices.

You might be able to reduce your VAT bill by using the VAT Flat Rate Scheme or one of the retail schemes if you sell a mixture of hot and cold (and off-premises!) food items. I’m sure your accountant can advise you about these topics but let me know if you need further information and I’ll point you in the right direction

Premises

Back to your original question which was about the definition of “premises”. As I explained above, the sale of any food or drink on the premises on which it is sold is liable to VAT, so this applies to cold takeaway food and drink as well as the hot stuff. The definition of “premises” is explained at section 3 of VAT Notice 709/1 which you’ve probably already seen and as you say it refers mostly to “fixed” premises, not mobile premises.

There is some, however, useful guidance on the subject in the HMRC internal/staff manual which includes a very useful list here http://www.hmrc.gov.uk/manuals/vfoodmanual/vfood4580.htm which shows the types of venue where catering might be supplied and what is defined as “premises” for VAT purposes. You will see that under “Mobile Outlets in public” the definition includes:Only the outlet and facilities like the counter and any tables and chairs are treated as the premises.

So you have to apply this principle to your own trade and decide whether or not you sell in any circumstances where you provide any sort of premises – for example if you were selling in a car park at a football match or show of some kind, then you would probably treat as “premises” the van itself plus any adjacent area where you have tables, chairs or other facilities provided for customers to consume food.

Obviuosly I don’t know your circumstances but I hope that the information provided here will help you to work out your own VAT liability. I would suggest discussing the subject with your accountant in case you’re in any doubt.

Marie

[Marie Stein]

Hi Richard

It depends on a number of factors, in particular who is actually purchasing the goods from the German supplier, ie whether it’s you or your customers. There are a number of situations that could apply which I’ve mentioned briefly below and explained where to find further information.

First a bit of terminology – imports from other EC countries are called “acquisitions”. If you aren’t familiar with the subject, I’d recommend that you read VAT Notice 725: The Single Market here http://tinyurl.com/2gfatu on the HMRC website which explains how EC trade works for VAT purposes. It’s a bit lengthy but worth spending the time reading to get to know the subject, especially if you are going to be purchasing goods from EC suppliers on a regular basis.

The VAT liability of the machines will depend on who buys and sells the good as principal. You say that YOU want to sell machinery to UK customers. I assume that this means that you will buy and sell as principal or at least in your own name. Here are the main scenarios:

• If you are already registered for VAT here in the UK, you quote your VAT registration number to the German suppiler and he won’t charge German VAT but you would declare acquisition VAT @ 17.5% (or 20% after 31 December) on your VAT return and charge UK VAT to the UK customers.
• If you aren’t registered for VAT and not liable to register for VAT, then the German supplier will charge you German VAT on the supply and you don’t have to charge UK VAT on the onward sale in the UK.
• If the goods are sold directly by the German supplier to the UK customers, then you are correct that the supplier will charge German VAT and no UK VAT would be chargeable.

Information on these first 3 scenarios is included in VAT Notice 725 mentioned above.

• Finally, there is a provision whereby if you are not already registered for VAT in the UK but you ACQUIRE goods (or make “relevant acquisitions”) in the UK from suppliers in other EC countries and the value of those acquisition exceeds certain limits (which are generally in line with VAT registration limits – ie currently £70k) then you become liable to register for VAT in the UK. This means that if you purchase goods from Germany (and/or other EC suppliers) and then sell them onto UK customers, you have register and charge UK VAT on the sales to the customers. See VAT Notice 700/12: Should I be registered for VAT, Section 6 here http://tinyurl.com/2uun6vo for further information on this subject.

This summary covers the main possibilities so you should find the information that you need above, but let me know if you need any further help.
Marie

[Marie Stein]

Hi Keith

Well this whole subject of disaggregation of business activities is a real doozie and I have a lot of sympathy for small businesses such as yours trying to compete for business from domestic customers. I’m getting a lot of queries from accountants about the impact of the 20% VAT rate on small businesses and I know that a lot of small business owners are considering whether they can split their activities up to avoid VAT.

You know I don’t give specific advice here on the forum, hopefully my comments below will help you decide how to proceed.

There are lots of issues to consider so there is no simple answer. Every situation is different and you have to think through not just the VAT cost but the accounting, legal and practical costs and hassle of running an additional legal entity.

Taxable Persons

The first point about the disaggregation rules is that they only apply if the total value of the supplies made would require the person to be registered for VAT. In other words, they only apply if the total value of supplies made by the “taxable person” exceeds the VAT registration limit, which as you know is currently £70k.

The” taxable person” is a legal entity such as a sole proprietor, partnership, limited company etc and you have to take into account the income from all of the activities of the legal entity concerned for VAT purposes. And of course that’s why the disaggregation rules are concerned with “artificial” splitting of business activities between different entities to avoid VAT.

A hypothetical case

Let’s consider a situation similar to yours. Suppose the combined activity from all of my business activities as a sole proprietor is £50k, made up of £30k from business customers and £20k from domestic customers. If I’m registered for VAT as a sole proprietor, I’d have to account for VAT on all £50k income regardless of whether I can pass the VAT charge to all of my customers. The only way that could be avoided would be to set up a separate legal entity, for example a limited company, which doesn’t register for VAT, and transfer the domestic business into that company.

So yes, in principle it could work. But I’d have to keep on top of the VAT position in case the combined turnover reaches the registration limit. And this sort of arrangement is a bit like a red rag to a bull to HMRC – they look out for this sort of thing as a matter of course. It’s not just turnover from these 2 activities that they would look at, but any other related person/company/partnership etc and that’s when it can get messy.

For example, suppose they found that my husband/partner was carrying out separate business activities but he isn’t VAT registered. In that case they might argue that his income should be added to my combined income, both historically and going forward on the basis that we’ve been trading as a partnership from day one, regardless of the legal arrangements I’ve put in place to try and keep things separate.

That would always be my concern about the sort of business arrangements that you’re considering.

I can’t tell you what to do but I’d strongly recommend that you discuss your situation with your accountant as they understand your business and financial situation and will be able to help you to decide how to proceed. There are so many issues to consider, in particular whether it’s worth the cost and hassle of setting up and running separate legal entities in order to save maybe £2k- £3k a year in VAT . People come up with some inventive ideas but I rarely see anything that I think is worth the hassle of trying to run separate businesses for the relatively low VAT benefit.

Three final thoughts

• First, you should probably look at the Statement of Practice which HMRC have published about disaggregation which is here http://tinyurl.com/3yzw74h VAT Notice 700/12, Section 13. It’s a couple of pages long and has a fair bit of jargon, but you’ll get the gist of their approach to the subject and you’ll understand why it’s not possible to give a simple yes or no answer to your question.
• Second, are you using the VAT Flat Rate Scheme? If not, make sure you get your accountant to run the figures as this could give you a useful VAT saving without splitting things up to avoid VAT. Thousands of smaller businesses use this scheme to make VAT savings without splitting off activities to avoid VAT.
• Finally, if your total turnover is below the registration limit have you considered de-registering entirely? I know that sometimes it looks better doing business to business work if you’re registered but I wonder if you’d benefit more from getting more domestic work in the longer run if you just deregistered and kept your total income below the registration limit.

So please do talk to your accountant before you decide what to do. He’ll probably charge you for the advice but it could be money well spent if it avoids you getting into a mess in the future.
Marie

[Marie Stein]

Hi Sam

If the company’s only activity is the provision of IT consultancy to a French business customer, then it won’t be liable to register for VAT in the UK as the value of such supplies doesn’t count towards the UK VAT registration limit. I’ve explained why below as it’s important to understand.

As you know, you have to register for VAT in the UK when the value of your taxable supplies in the UK exceeds the registration limit, currently £70,000 in any 12 month period.

Therefore the value of supplies which are made “outside the UK” don’t count towards this limit, even though the supplies would be taxable if made in the UK. This concept is the EC “place of supply” rule which refers to the country in which the VAT liability arises; if the supply takes place in the UK, VAT is payable to HMRC, if in France to the French tax authority or other EC country as applies.

The supply of certain services that are made to businesses in other EC countries is deemed to be “where the customer belongs”. This means that if your customer is a French business (and confirms this by telling you his French VAT registration number) then your supply is deemed to take place in France even though you are a UK business. The customer accounts for French VAT on his French VAT return and pays the VAT to the French tax authorities instead of you charging UK VAT.

So you need to be certain that the services you are supplying qualify to be regarded as “supplied where received”. This applies to certain services that are listed within the VAT Act 1994, Schedule 4A, Section 16(2). This is a complicated subject and covers a long detailed list of services, but if you are making supplies of bespoke software then it will probably qualify.

The information is listed in HMRC VAT Notice 741: Place of Supply of Services, Section 15.5 here http://tinyurl.com/37s48bl which mentions IT consultancy services. “Off the shelf” software doesn’t qualify under this rule so the important thing is to be certain that the company’s services fall within this heading. Obviously I can’t be certain whether your services would qualify under this rule as it depends on the exact nature of the services that your company is providing, but I’m sure you can work it out for yourself.

Sections 2 and 3 of Notice 741 go into a lot of detail about the subject of the place of supply and I’d recommend that you read these so that you understand more about the subject. It’s not an easy read but worthwhile getting your head round if you are involved with non-UK customers. Have a word with your accountant about this, chances are they are familiar with the issue and I’m sure they’ll be able to help you decide whether or not the services you are providing fall within the “supplied where received” rule.

Finally, even though the services are deemed to take place outside of the UK and their value doesn’t count towards the UK VAT registration limit, the company can register for VAT on a voluntary basis if you want to be able to recover VAT on UK costs. See VAT Notice 700/12: Should I be Registered for VAT? See sections 1.5 and 1.11 here http://tinyurl.com/39jjyyu for further information on this, many businesses who supply overseas customers are only registered for VAT in order to recover VAT on their costs. The Notice also explains the other types of transactions that businesses have to count towards their VAT registration limits, including reverse charge services received from overseas suppliers, distance sales and EC acquisitions.

Marie

[Marie Stein]

Hi Annalisa

I can understand why you are confused, but I think that there is a legitimate reason for things being done the way you describe.

First of all, the normal VAT recovery rules state taht in order to recover VAT, you have to be carrying out a business activity which is TAXABLE, ie liable to VAT at 17.5%, 5% or 0%. If your supplies are exempt, you don’t charge VAT on the income (eg rental income) but you can’t recover the VAT on related costs.

Local councils are subject to certain special VAT rules which mean that they are allowed to recover VAT on certain non-business costs, including their statutory responsibilities such as care and welfare services, looking after the streets, and certain housing activities, including situations where they provide domestic accommodation to people seeking housing . Normally the sale or rent of refurbished homes is exempt from VAT and if it were a business activity, the council wouldn’t be able to recover VAT on the cost of the refurbishments.

The sale or lease of domestic accommodation by housing associations is a business activity when performed by housing associations (thus they are subject to the same rules as private landlords) and because it is exempt from VAT (ie VAT isn’t charged on the sale or rental income), the housing association can’t recover VAT on related costs.

It’s my understanding that local authorities are now required, by law, to dispose of most of their council house stock and housing associations have been given grants to purchase the properties concerned. However because councils are allowed to recover VAT on refurbishment costs under their special VAT rules, it makes sense for them to carry out the refurbishment work before the sale so that the housing association doesn’t have to bear the cost of the VAT on the cost of the refurbishments.

So it seems that the way that things have happened in your case are probably perfectly legal from a VAT perspective and I hope this helps clarify things for you
Marie

[Marie Stein]

HI Declan

As with all these things it depends on various factors.

First, I presume that by “VAT exempt” you mean VAT zero-rated? I’m sorry to be pedantic but there is a significant difference between the two as under the VAT rules, you can recover input tax on costs relating to zero-rated or other taxable supplies, but not on costs relating to exempt supplies.

Construction work is “taxable” for VAT purposes. The construction of most dwellings and certain residential and charitable buildings is normally zero-rated (but see *below for comment about subcontactors services relating to residential and charitable buildings), so if that’s what you mean by “VAT exempt building work” then yes, sub contractors can recover VAT on related costs . See VAT Notice 708: VAT and Construction which is here http://tinyurl.com/3557osk on the HMRC website. Section 2.3.1 of the notice confirms the basic rule about recovery of input tax relating to taxable supplies.

So the short answer to your question is probably yes but it depends on the rules which are explained in the notice.

Section 2.1.3 of the notice explains the VAT liability of services provided by sub-contractors and section 2.2 explains the general rules about the VAT that can be recovered by builders.

There are some important exceptions though relating to recovery of VAT on certain items of building materials. See sections 11 and 12 give more detailed guidance about VAT recovery on building materials supplied in the course of construction services by builders.

*An important exception is that construction services by subcontractors in respect of certain residential and charitable buildings are not normally zero-rated – see section 16.4 of the notice. In this situation subcontactors’ services are liable to VAT at the standard rate – ie are taxable though not at the zero-rate. As their suppies are taxable, this means that subcontactors CAN recover input tax on related costs subject to the rules set out in the notice.

Hope this helps you to work things out. I’d suggest you have a look at the guidance I’ve mentioned above and maybe have a chat with your accountant about it if you need any more detailed help.

Marie

[Marie Stein]

Hi Robert

My apologies for the delay in replying to your query. It’s actually a difficult area of VAT and I wanted to make sure that I’d considered the main issues properly before replying. I’ve been advising a client on the same subject this past week so the subject is quite topical!

Head Office/Branch or Company/Company

First of all, I can confirm the issue mentioned in FCE about transactions involving different parts of the same legal entity – eg head office in one country and a branch in another country. It’s important because generally speaking, transactions between different parts of the same legal entity, such as a recharge of management costs from head office to a branch – aren’t normally regarded as supplies for VAT purposes, as in FCE Bank.

This applies generally throughout the EC as the concept of VAT is that it applies to transactions between separate “taxable persons”, which means separate legal entities. So whether it involves recharges of management costs between a UK head office and a French branch or from the London head office to the Manchester branch, recharges of this nature don’t normally represent supplies for VAT purposes.

If the transactions are between separate companies within a corporate group, then they would be supplies for VAT purposes unless the companies were registered for VAT as part of a UK VAT group registration. Transactions between different members of UK VAT groups, ie separate companies are normally disregarded for UK VAT purposes, ie not subject to UK VAT or reverse charge VAT on imported services.

However there are some anti-avoidance rules that can affect the treatment of transactions between members of the same VAT group, so you’d need to be aware of these if your situation involves companies within a UK VAT group registration. Also the UK VAT treatment for UK VAT groups only applies to UK VAT – for example transactions between 2 French branches of different UK companies would be liable to French VAT even if the companies were members of the same UK VAT group registration.

Finally, I’m not sure how other countries deal with VAT group registrations – I understand that some countries don’t have the facility for group registration, so for the purposes of this note I’m only referring to UK VAT groups. And as is always the case, the VAT treatment of any transaction can differ between different EC member states so any information I can give here is in respect of UK VAT, albeit that EC countries are supposed to follow the same rules.

So let’s assume that we are dealing with transactions involving different legal entities, for example a French company (A)and a UK company (B) which are NOT registered in a UK VAT registration.

B2B Transactions: VAT Notice 741A: The Place of Supply of Services

VAT Notice 741A: Place of Supply of Services which is here on the HMRC website: http://tinyurl.com/ye67t2s. It deals with all types of international services including including those B2B transactions that are subject to the reverse charge. The Notice is long and detailed and quite difficult to read, but once you’ve got your head around the main issues it’s a very useful notice – I regularly refer to it when dealing with any issues involving international services.

As you will see from the Notice, different rules apply to establish the VAT liability of different types of services. But the types of services involved in FCE that fall within the B2B rule, such as professional, management, financial, insurance or consultancy services, are listed in detail at section 15 of the notice. These are the “supplied where received” services, usually regarded as “intangible” services, to differentiate them from services relating to land, or work on goods or performance type services. Normally these services are liable to VAT under the reverse charge rule in the country of the recipient.

There is a further category of services which have special treatment called the “use and enjoyment” rule, which are listed at Section 16 of the Notice, “Use and enjoyment of letting on hire of goods, telecommunications services and radio and television broadcasting services”. Under this rule, if your contract is to supply such services to say the New York head office of a US company, but the services are “used” by directors/employees of the company while they are in the UK, then the services concerned are liable to UK VAT.

There is a useful index at section 24 (page 90) of the Notice that lists all of the services dealt with in the Notice and where to look for information about the VAT treatment of that particular type of service. It’s very handy and I often use it.

Concept of “Belonging”

The other important issue in considering the VAT liability of international services is establishing WHERE the supplier and recipient of the services belongs. This is important as, of course, the VAT liability will of course be different if you are supplying services to a business in the UK or a different country, so for VAT purposes we have to establish in which country the parties “belong” – a bit like the concept of residence for tax purposes.

This is covered in section 3 of Notice 741A. You will see that it deals with a variety of situations, including transactions involving different parts of the same legal entity which are based in different countries.

Why is it important?

Quite simply it can change the VAT treatment – and hence the cost – of the supply. For example, suppose I was providing consultancy services to a US bank based in New York. As my services are covered by the B2B rule, then I don’t charge UK VAT and as the bank is outside the EC and not subject to the EC “reverse charge” rules, the bank receives my services free of VAT. That is how the rule is supposed to apply.

But if my services were in practice provided to the French branch of the US company, for example because I was required to work with the French branch and send my report to the Paris office, then under the concept of “belonging” the customer would be deemed to be the French branch. The French branch would be required to account for reverse charge VAT at the French standard rate of 19.6% on the value of the imported service. Most banks can only recover a very small proportion of their input tax so the addition of the VAT could add up to 19.6% VAT to the cost of my services, depending on the recovery rate of the French branch.

There have been several VAT cases over the years about the “place of belonging” in such cases so it’s worth understanding this concept.

Hope this all helps, probably a bit more information than you were looking for but I thought I’d write it down as I’ve been working on it for a client anyway and it was fresh in my mind.
Marie

[Marie Stein]

There is no easy answer to this issue and I’m sure that the Federation of Small Businesses, the CBI and other trade bodies will be inundated with queries about it over the coming months.

The main thing is to ensure that the business is taking advantage of the VAT Flat Rate Scheme as that normally saves money.

Here is the link to the information on the HMRC website http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm. The scheme works on the basis that you issue VAT invoices, as usual to your clients and charge the normal 17.5%/20% VAT. If you’re a retailer, you just take your normal Daily Gross Takings. When you come to completing your VAT return, instead of paying the difference between ouput tax and input tax, you simply apply a reduced VAT rate to your GROSS (ie VAT inclusive) income, although you don’t claim back any of your input tax.

The rate you apply to your turnover depends on the nature of business that you provide, at present the flat rate for secretarial services and hairdressers is just 11.5%, compared to the standard rate of 17.5%. Obviously that flat rate will go up next January to reflect teh 20% standard rate, but there will probably still be a good saving from using the scheme.

Have a look at the information about the VAT Flat Rate Scheme and see if you think it will work for your business. It is relatively straightforward to apply and I know that a lot of smaller businesses use it as they get a really good saving from using it. That way you could make yourself more competitive.

I’d suggest that you ask your accountant to run through the figures with you so that you can see how the scheme would work then you can decide whether or not it’s worth applying to use it.

Marie

[Marie Stein]

Hi Chiefy

A business can only charge VAT for supplies made when it is registered for VAT, so your landlord’s invoice will only be valid if his registration was effective for the period covered by the invoice. Obviously I don’t know his circumstances but it is possible that HMRC have required him to back-date his registration and charge VAT on his supplies from the earlier registration date.

If you want to be certain that the invoice is valid and that you can claim back the VAT charged (I assume you’re registered for VAT and will be eligible to claim the VAT as input tax) then you could contact the HMRC VAT Enquiries Helpline here: http://tinyurl.com/6l3udk to verify whether or not he was registered from the earlier date. They may ask you to send them a copy of the invoice so that they can confirm the position but that’s the only way you can be absolutely certain whether or not the invoice is valid.

Hope this helps
Marie

[Marie Stein]

Hi Simon

Unfortunately it’s not an easy question to answer, although you’d think it would be. There are several issues to consider, not just whether or not the subscription should be apportioned between standard and zero-rated elements, but there are also certain specific rules that apply to clubs and associations and can affect the liability of the subsrciptions, which I’ve mentioned below.

Mixed or Composite Supply

First of all, about the possibilty of treating some of the subscriptions as zero-rated. There is a concept in VAT whereby supplies can be “mixed” supplies or “composite” supplies when they include elements that are both standard and zero-rated (or reduced rate although that’s not at issue here). If something is a mixed supply then the price can be split between teh different rates and you only account for VAT on the standard rated element. Typical example would be a book and DVD package. If it’s a composite supply, then it’s regarded as a single supply at the rate of the main element on the basis that the other elements are only there as ancillary to the predominant element. A good example would be an instruction leaflet provided with a new TV set – the leaflet is clearly of no value in its own account so the supply is a composite supply at the standard rate.

There is some information about mixed supplies in Section 8 the HMRC VAT Guide here http://tinyurl.com/37xkwj7. It’s not much but is a useful place to start. Unfortunately there isn’t much guidance about composite supplies and there is no simple set of rules to determine what should or shouldn’t be a mixed or composite supply. The main principle is whether or not there is a main element to the supply and the other elements are simply “for the better enjoyment” of the main element – as in the case of the instruction leaflet supplied with the TV.

There have been several court cases that have considered how you define a mixed or composite supply. Each case is different and it comes down to what the customer is getting in return for their money and the specific contractual arrangements. For example, if I join a club and there are a number of benefits to being a member, including the right to discounts plus books/magazines, then I would argue that I’m paying for a mixed supply and should only pay VAT on the part of the membership fee that relates to the standard rated elements. However if the book and magazines simply contain information relating to the discount scheme or other membership benefits (eg a list of the retailers offering discounts or explanations about how the scheme works), then HMRC would probably argue that they have no separate benefit and are simply ancillery to the membership, so there is one composite supply and the whole lot is standard rated.

These are some of the issues to consider:

• What does the member think he is getting in return for his money?
• What’s in the publications?
• Do the books/magazines have a standalone benefit apart from relating to the membership? Can they be purchased separately from the membership, eg from retailers?
• What are the formal rules of membership/contract and how are the publications treated in the contract?
• How are the publications treated in advertising/marketing relating to the scheme?

If it is a mixed supply then you need to apportion the price between the standard and zero-rated elements. There is some guidance in the VAT Guide Section 32 here http://tinyurl.com/3alvyd9

HMRC Notice: Clubs and Associations

There are also special rules relating to clubs and associations that could affect the VAT treatment of the subscriptions. There is an HMRC notice called “Clubs and Associations” here http://tinyurl.com/38ou64d that you need to look at. It contains some further guidance about mixed/composite supplies that you might find helpful (see Section 4 of the Notice).

But the other main issue is whether the subscriptions could be exempt? Certain “not for profit” organisations can benefit from exemption for membership subscriptions. The downside for exemption is that the club couldn’t recover VAT on costs relating to the membership, but in most cases this is outweighed by the VAT saving on the subscriptions themselves. You can get more information about this in the Notice.

There is a lot to think about but if the membership subscriptions are the club’s main form of income, then it’s worth spending time getting it right up front. It might be worth asking HMRC for a ruling if you want to be certain.

Marie

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