Sticking to the system
Mike Adams and Sharon Jessop of Chantrey Vellacott look at operating in the UK’s VAT system
Following on from last year’s article in which we provided an introduction to the general operation of the VAT system within the European Union, we thought that this year we would provide a more detailed overview of practical issues concerning VAT registration, notably in the UK.
As we explained in last year’s article, it can pay to take time out to consider your business’s VAT position; not only in order to ensure that it meets any requirements it may have regarding VAT registration and reporting, thereby avoiding possible penalties, but also to benefit from advantages that may be achieved through the implementation of relatively simple steps. But what happens once it has been determined that your business could or should register for VAT? Below, we explain some of the practical considerations of operating within the VAT system.
Compulsory VAT Registration
First, we should point out that the VAT registration threshold varies significantly between EU member states. There is only a requirement to register for VAT in the UK if the value of a business’s ‘taxable’ supplies (that is, sales falling within the scope of the UK VAT system and which would be chargeable to UK VAT or zero-rated if the business were VAT registered) exceeds the current VAT registration threshold of £67,000. This is when looking at either:
a) the previous 12-month period at the end of any month
b) the next 30 days alone.
In some member states, the VAT registration threshold is much lower than in the UK, and in some, such as France, foreign businesses are required to register for VAT as soon as they start to operate there. It is therefore advisable to take advice regarding the VAT system of the member state in which you are operating, and not to assume that the position will be the same across the EU.
Historic Test
In the UK, if you have a requirement to register for VAT due to meeting the historic test (a) above, then you must notify the UK tax authorities within 30 days, and will be registered with effect from the beginning of the following month. For example, if a business exceeds the VAT registration threshold at the end of March, it must notify the tax authorities by 30 April, and will be registered for VAT with effect from 1 May.
Future Test
If you have a requirement to register under the future test (b), you must notify the tax authorities within 30 days of when you first had the expectation that the business would exceed the registration threshold. For example, if on 15 March a business anticipates that it will exceed the registration threshold during the next 30 day period, it must notify the tax authorities by 14 April, and will be registered with effect from 15 March.
It is worth mentioning that, as explained in last year’s article, businesses established outside the EU that make supplies of electronic services to private individuals in the EU are governed by a different set of VAT registration rules. If you are involved in such supplies we would strongly recommend that you take advice on your business’s VAT position.
Voluntary VAT Registration
Even if a business does not have a requirement to register compulsorily, it may still benefit from registering for VAT in the UK on a voluntary basis. Grounds for applying for a voluntary registration are:
- The business makes “taxable” supplies, but has not exceeded the VAT registration threshold;
- The business has not yet made any such supplies in the UK, but intends to do so in the future; or
- The business has a fixed establishment in the UK (as created by staff and premises) and does not make any ‘taxable supplies’ in the UK, but makes supplies which would be subject to VAT if made there.
An example of this would be a branch office or subsidiary of a US company, established in the UK to perform marketing services for the US entity.
If applying for a VAT registration as an intending trader (point 2), the business will need to provide some supporting evidence to demonstrate its intention. This should generally be something in the name of a third party, such as a purchase invoice addressed to the business, or a copy of its agreement for leasing premises in the UK. Without such documentary evidence the tax authorities will generally not process the application and the business will not be able to register for VAT until it starts to make taxable supplies.
The main benefit of registering for VAT voluntarily is that it enables the business to start recovering VAT it incurs on its expenditure. This could include the costs of leasing business premises, as well as general set-up and marketing activities etc. Once registered for VAT, a business can recover VAT incurred on supplies received prior to the VAT registration date. VAT can be recovered on:
- Services received up to six months prior to the effective date of VAT registration (provided not relating to a good that was no longer owned at the effective date of registration)
- Goods purchased up to three years prior to the effective date of VAT registration (provided not sold on or used up).
Another benefit is that the business will not have to perform an ongoing check on whether it has exceeded the VAT registration threshold and therefore has a requirement to register for VAT compulsorily. This eliminates the risk of incurring penalties as a result of late registration.
Voluntary registration also avoids the requirement to reissue sales invoices issued during the period between applying for a compulsory VAT registration and the VAT registration number being issued, or for invoicing to be delayed until the VAT registration number has been issued. The UK tax authorities can take several weeks or, in some cases, months to process a VAT registration. It can therefore be beneficial to apply for VAT registration before it becomes an actual requirement.
The downside of registering for VAT voluntarily is that the business will be required to charge and account for VAT on its ‘taxable’ supplies. It should not be assumed that all sales made by the UK business will be chargeable to VAT, however, and advice should be taken on this point. The effect of complex ‘place of supply’ rules could mean that a supply is deemed not to have taken place in the UK, and that VAT is therefore not chargeable. This would be the case where a UK subsidiary supplies marketing services to its US parent company, for example. Assuming the UK company did not have any other income streams, it would not be required to charge or account for VAT, and would instead be in a regular repayment position, recovering the VAT it incurs on its purchases.
Registering For VAT
An application for UK VAT registration (on either a compulsory or voluntary basis) can be made either by downloading and completing a hard copy application form or by applying online, both available via the HM Revenue and Customs website (www.hmrc.gov.uk).
Subsequent to receipt of the application for VAT registration, the tax authorities may request specific additional information concerning the activities and structure of the business. Once this has been provided satisfactorily, the business will be issued with a VAT registration certificate showing its unique VAT registration number, and details of the effective date of registration and VAT return filing dates.
VAT Filings
Many businesses will choose to use the services of a UK agent
to file their VAT returns, and to deal with any VAT related correspondence
from the UK tax authorities. A specific agent authorization
form will need to be signed by the business if this is the case,
together with a letter of authorization if the business requires the
agent to sign on its behalf.
VAT returns are generally filed on a quarterly basis, although monthly VAT returns can be requested at the time of applying for registration if this will assist the business with cash flow. This has been a brief run through of some of the issues and considerations associated with VAT registration in the EU, but primarily focusing on the position in the UK. As advised previously, we would strongly recommend that professional advice be taken if you are thinking about expanding into the EU. It pays to take advice!
For further information, contact:
Mike Adams, Partner
E-mail: madams@cvdfk.com Tel: +44 (0)207 509 9457
Sharon Jessop, VAT Manager, Tax Consultancy Services
E-mail: sjessop@cvdfk.com Tel: +44 (0)207 509 9137
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