VAT can be complex, technical and difficult
VAT is one of the most complex, technical and difficult issues to tackle head on for businesses. When you have a business to grow, you really don’t have the time to learn each and every fine detail and subtle nuance within the realm of VAT. As a result errors made with regards to VAT can catch up with you rather quickly.
The question is how do you find time to learn how to report VAT error free while balancing the business? Having the right system in place and the right advice is a huge step in the right direction. Even knowing how to avoid some of the often reported confusion areas with VAT can be a great asset. In this article, we will take a look at some VAT issues that confuse a lot of business owners and how to overcome that confusion.
What Does It Mean To Cross The Threshold?
The VAT threshold in the UK is £85,000, any business that goes over this threshold is required to register for VAT. Taxable supplies is the umbrella term for supply of goods or services in the UK made by a taxable person.
It is important to understand the real purpose for registering your business for VAT. There is two ways of looking at why you should get your business registered- the ‘backward look’ and the ‘forward look.’
The Backward Look
At the end of each month, some businesses looks back at taxable supplies from the previous 12 months. If at any point in the last 12 months, your taxable supplies exceeded the threshold, you will be liable to register and must do so within 30 days of the month you exceeded the threshold.
The Forward Look
Businesses that use the ‘forward look’ seek to determine if they will exceed the VAT threshold within the next 30 days. If it is believed that the threshold will be crossed, it is required to register for VAT with the revenue.
To recap, the reason for applying the ‘backward look’ would be to ascertain if sales from the last 11 months exceed the threshold even if the next 30 days don’t. If your previous 11 months total above the threshold then you will need to register regardless of whether the next 30 days exceed or not.
It is worth remembering that if the collective previous 11 months combined in total (not isolated) make up the £85,000, you will liable to register within 30 days of the current month. This also applies even if you bought goods over or at the threshold from registered VAT suppliers in the EU.
Awareness Of Rules Surrounding International Sales
It is very important to be fully aware of ‘The place of supply rules for services.’ There are separate rules for B2B and B2C businesses and it is essential to be aware of the differences.
Two general rules apply regarding supply rules:
- B2B Supplies Regarding Customers & Recipients
- B2C Supplies Regarding Where The Supply Belongs
To facilitate ease of understanding, we provide some examples:
A UK supplier providing services (financial, administrative) to a customer in the EU with a valid VAT registration number would be regarded as B2B meaning the place of supply is the place of the recipient of services. This type of transaction is regarded as out of the scope of UK VAT.
A UK based law firm provides services to a private (non-business) customer in the EU. This would be regarded as B2C. In this case, the supply place is the place of the supplier and within the scope of UK VAT.
A UK consultancy firm provides services to a limited company in the EU. This customer cannot provide a VAT registration meaning this is a B2C supply. Here the place of supply is the place of the supplier and UK VAT is applicable in this situation.
An EU based business provides services to a UK non profit organisation. The services provided are intended to boost fund raising campaigns for the non-profit. As the non-profit is VAT registered, the place of supply is that of the customer (the UK non-profit) and would require a reverse charge mechanism for VAT accounting.
If your business falls into the category of the general B2B rule of supply, you will need to show your customer is a non UK customer. If the customer has an EU VAT registration number, that should suffice otherwise if they are for any reason, unable to provide a VAT number, the supply will fall under the B2C rule of supply.
Changes To B2C Supply Rules In The EU
Since January 2015, B2C digital services are deemed as being in the place of the customer with regard to supply. This change of rules is referred to as ‘VAT MOSS (Value Added Tax: Mini One Stop Shop).’ The introduction of VAT MOSS allows businesses to send single returns and payments each quarter and eliminates the necessity to make separate Vat registrations in each EU member state.
Because there is no registration for VAT threshold for cross border supplies, UK businesses involved in B2C digital sales need to register for Vat under the UK threshold. They will also need to register for VAT MOSS no later than the 10th of the month from which your business initiated it’s first digital sale.
Zero Rate Supply
Businesses can ‘zero rate’ the supply of goods to VAT registered customers in the EU as long as the goods are dispatched from the UK to the EU within three months of sale and evidenced. Your customer must be EU VAT registered and able to prove so by providing the registration number on your sales invoice.
When selling goods to non VAT registered EU customers, UK VAT needs to be charged and accounted for in the same way that would be done for UK customers.
Be aware of the ‘distance selling threshold’ in different countries. If the value of your sales breaches the threshold of that particular country , you will need to register for Vat within the country you are selling to. Your business will also need submit a monthly or quarterly EC Sales List (ESL) to the HMRC if supplying goods or services to VAT registered EU countries.
For all your VAT accounting needs, give our specialists at Numerion a call for a dedicated, tailored and personable service that will ensure you get the best return on your VAT accounting.