UK VAT -
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If you are looking to establish a business in the UK or EU, it is critical that you are aware of UK VAT. Michael Camburn of Ryan looks at when UK VAT applies, where UK VAT applies and finally, how you need to deal with it

One of the many challenges that face businesses looking to establish operations in the UK and the EU is tax administration and, in particular, Value Added Tax (VAT). UK VAT is the common system of VAT or “turnover tax” that applies across the entire EU and in 27 of the 28 major Organisation for Economic Co-operation and Development (OECD) countries. The turnover tax is assessed on both goods and services, including the importation of goods, certain business transfers, and the provision of a number of services, including services that may be imported from abroad. Put simply, VAT is an indirect tax that is similar in nature to a sales tax or goods and services (GST) tax, as it is generally assessed in respect of transactions as opposed to turnover or revenues.

The good news is that it comes with a credit or refund mechanism that, in most cases, means the business concerned is able to get a full credit for VAT incurred on its purchases. If you are looking to establish a business in the UK (or the EU), it is critical that you are aware of UK VAT – when it applies, where it applies, what it applies to, and finally, how you need to deal with it.

This article addresses some of the basics around managing the tax, registration, compliance, and credit mechanism. It also provides some practical and effective planning techniques that will allow businesses to negotiate some of the common pitfalls with UK VAT.

UK VAT

UK VAT - The Basics

If you supply goods in the UK to domestic customers or provide services to domestic customers from your establishment in the UK, you will most likely have an obligation to account for UK VAT at 17.5%. There are certain exceptions and exemptions that apply in certain circumstances, but by and large, if you are registered for UK VAT, you will need to account for VAT on your sales. The standard rate of UK VAT is 17.5%. In the EU, the standard rate of VAT can be as high as 25%, and as a result, the effect of incorrectly accounting for VAT can be material. There are some reduced rates, the most common being those that apply to domestic fuel, for example, at 5%. There is also a zero-rate of VAT that applies to items such as exports, children’s clothes, newspapers, and food.

Registration for UK VAT

Within the UK, there is a relatively high registration threshold1 (ie, the level at which a business must become compulsorily registered). Once a business is registered for UK VAT, it has an obligation to account for VAT related to its sales and other revenue-generating activities that take place in the UK. It is also possible for a business to register for UK VAT on a voluntary basis. This may seem a little counter-intuitive at first, but bear in mind that there is a credit mechanism for UK VAT that is paid by the business on goods and services. This makes a lot of sense, particularly as in a start-up phase when a business may have limited sales but proportionately greater purchases.

Pre-registration UK VAT that has been incurred on goods – up to three years prior – that are on hand at the date of registration can be recovered. In addition, UK VAT incurred on services can also be recovered in the six-month period prior to the registration date. The key requirement in both cases is to have proper UK VAT invoices as evidence that UK VAT has been incurred.

In the EU, be aware that the mere commencement of business activities in most of the Member states can oblige a company to register for VAT almost immediately, as the registration threshold in these jurisdictions is generally lower or in some cases, nothing.

Compliance

VAT is especially popular with governments, as the collection of the tax is the taxpayer’s responsibility and, therefore, the onus is on the business to get it right. There is a more stringent penalty and assessment regime in operation in UK VAT as of late, where the emphasis is moving to the taxpayer to be able to demonstrate that adequate systems and processes are in place to deal with the management of the tax. Thankfully, the penalty regime in the UK is not quite as draconian as that of some jurisdictions where penalties can be as high as 400% of the tax due.

Reporting

From a reporting perspective, UK VAT returns are typically filed on a monthly or quarterly basis. For smaller companies, there are various schemes available that assist with the cashflow effects of dealing with UK VAT and with the calculation requirements (ie, flat rate schemes). UK VAT returns are the means by which the business files for UK VAT on sales and also reclaims VAT on purchases. The difference between the two amounts as reported on the return will either result in a net payment to HM Revenue & Customs (HMRC), which administers the tax in the UK. If a credit exists under normal circumstances, it will be repaid within four–six weeks to the taxpayer. Where possible, HMRC is keen to ensure that taxpayers file their returns online with effect from 1 April of 2010. This is a requirement for all new UK VAT registrations where the annual turnover exceeds £100,000 p.a.

As commented, in order for a business to be able to obtain a credit for the UK VAT that has been paid on goods and services purchased for the business, it is critical that original UK VAT invoices are retained. In the UK, retailers’ invoices are acceptable for purchases that are less than £250. As a minimum, these invoices must show the supplier’s UK VAT registration number, address, and a description of the supply.

For larger purchases, the invoice needs to show the name and address of the purchaser, a more detailed breakdown of the pricing outlining the rate of UK VAT charged, and some additional details concerning the nature of what is being supplied. In addition to the UK VAT returns, if a business is involved in cross-border trade from an EU perspective (of goods or services), a requirement also exists to complete additional statistical reporting requirements (for example, Intrastat and European Commission Sales Lists). Should your business be involved in these sorts of activities, we would recommend that professional advice is sought in order to comply with the relevant rules.

Practical Planning

The onus is on the business to collect and account for the tax where relevant. If a mistake is made, it may not be possible to recover the additional tax due from the purchaser. We recommend that all businesses, no matter how small, bear the following in mind when commencing operations.

All sales contract documentation allows for UK VAT to be charged if appropriate. All too often, contracts are silent on UK VAT. If VAT is due, then it will be deemed to be inclusive of the price charged. This is a simple mistake that can be easily avoided with some simple contract wording.
Many businesses import goods without due regard to the (un)intended consequences. Bear in mind that if you import goods into the UK and subsequently sell them to your customer, you will have an obligation to account for VAT on the sale, potentially creating a UK VAT registration obligation. On the positive side, however, you will be entitled to recover your VAT paid at import.
Consider the benefits of a voluntary registration that will allow you to recover UK VAT on the costs associated with running the business.
Retain all invoices that are associated with running the UK operation. Remember that these are crucial in determining your entitlement to a UK VAT credit.
Do not forget that VAT applies across the whole of the EU. If you have operations in other EU member states, it is likely that you will have similar VAT registration and reporting requirements in these jurisdictions.
If you have frequent trips to other EU member states, bear in mind that locally incurred VAT can usually be recovered through a special filing scheme known as the “8th or 13th Directive Reclaim scheme”.

Typically cumulative sales over the period of 12 rolling months of £70,000 or a reasonable expectation that this level will be breached in the next 30 days.

At Ryan, we are recognised for our innovative approach to searching out and securing every available opportunity to recover overpaid taxes, as well as minimizing future tax liabilities through prospective performance solutions. Our seasoned team of US- and European-based international VAT professionals includes the most respected tax and technology professionals in the industry, providing years of experience in the global deployment of tax automation and recovery solutions. And every client of Ryan has our unconditional guarantee that we will deliver the very best results possible. We won’t quit until you are satisfied.

Michael Camburn
Managing Director, UK Operations
1 Northumberland Avenue
Trafalgar Square, London WC2N 5BW, UK
Tel. +44 207 872 5500
Fax +44 207 872 5611
E-mail: michael.camburn@ryan.com
Website: www.ryan.com