Q:
Hi,
I was in a discussion last night about UK VAT, which I know nothing about, and I was looking for guidance. We are a brand new US registered company and have just closed a deal for a UK university to license our software to use in London. Do we charge them VAT? even though we are based in US and have no UK VAT number? They say no, we should not!
Likewise, if I contract an independant (UK based) project manager to implement the software and he is UK VAT registered does he then charge me VAT on his invoice, which he bills to my US company?
Should I create/registered a new UK company and seek a UK VAT registration number, even though I won’t have a physical office or staff in the UK?
Before I engage a UK Accountant, I just wanted to get a general understanding?
Many thanks
Terry
A:
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