Indirect tax snapshot
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Value Added Tax (VAT) is the main type of indirect taxation in the UK and in other European Union (EU) countries.
It is a tax on consumption which is applied during the production and distribution process to most goods and services. It is also applied to goods, and certain services, entering the country. Although VAT is ultimately borne by the consumer by being included in the price paid, the responsibility for charging, collecting and paying it to the tax authority at each stage of the process rests with the business making the supply ie the sale.
A business registered for the tax will charge VAT (output tax) on its sales, and incur VAT (input tax) on its purchases (including any VAT paid at importation). The difference between the output tax and the deductible input tax in each accounting period will be the amount of VAT payable by the business to the tax authority. Where the input tax exceeds the output tax, a refund can be claimed.
A transaction is within the scope of UK VAT if the following conditions are met:
- it is a supply of goods or services. Although the term 'supply' is not defined in the legislation, it has a broad interpretation.
- it takes place in the UK
- it is made by a taxable person. For these purposes, a taxable person is a person or entity who is registered for VAT in the UK, or has a liability to become registered
- it is made in the course or furtherance of any business carried on by that person or entity.
There are three rates of VAT that are applied to goods and services in the UK; the standard rate, the reduced rate, and the zero rate. In addition, some goods and services are exempted from the tax.
Businesses that make exempt supplies are unable to claim all of the input tax that they incur, so the VAT paid to suppliers will be a 'real' cost.
Most goods imported into the UK from outside the EU are subject to VAT. Following Brexit, importers may elect to account for import VAT on their VAT return via a “reverse charge” mechanism called Postponed Import VAT Accounting. If they do not make this election, then the tax will have to be paid by the importer at the time of importation. Where the importation is for business purposes and the importer is registered for VAT, it may be possible to reclaim the tax (subject to certain rules).
It is also important to note the interaction between VAT and Customs duty. Customs duty is levied at the point that goods are imported into the UK. It is levied in order to bring the cost of goods produced outside the UK up to a similar level as those produced within it. Once duty (and VAT) has been paid by the importer, the goods are in 'free circulation' and they can then be released for use in the UK. Unlike other indirect taxes, such as VAT, once duty has been paid it is not usually recoverable by the importer. It therefore represents a bottom-line cost to the importing business if it cannot be passed on in higher prices. It is therefore very important to ensure that the correct rate of duty is applied. VAT is charged on the value of the importation, including any customs duty.
A 'person' who either makes or intends to make taxable supplies of goods or services in the course or furtherance of a business must register for VAT if the value of its taxable supplies in the UK exceeds the annual registration limit (ie £85,000), or is expected to exceed the limit in the near future. A business can register on a voluntary basis even if the registration limit has not been exceeded.
For these purposes, a 'person' includes any legal entity. Therefore, once a person is registered for VAT, all of his business activities will be covered by the registration - even if the nature of some of those activities are very different.
Two or more corporate bodies can be registered together as a VAT group if:
- each of the bodies is established, or has a fixed establishment, in the UK
- they satisfy the 'control' test ie one of them controls each of the others, or one person or a business partnership controls all of them
- they satisfy anti-avoidance rules that apply in certain circumstances.
A corporate body cannot be treated as a member of more than one VAT group at a time.
The main advantage of VAT group registration is that, apart from a few limited exceptions, any supply of goods or services by a member of the group to another member of the group is disregarded for VAT purposes. This reduces the risk of VAT being accidentally omitted on supplies between separately registered connected companies.
However, there are some disadvantages and any decision on whether to group register should be taken with care. For example, all VAT group members (including former members) are jointly and severally liable for the VAT debt of the group during the period of their membership.
A penalty may be imposed by the tax authority if a business fails to register at the correct time.
The normal VAT registration limit does not apply to businesses who are not established in the UK, but for the purposes of the tax are making taxable supplies there. Those businesses will need to register for VAT as soon as they commence trading in the UK, irrespective of the level of turnover.
Following Brexit, the UK no longer has European 'distance selling' rules.
HMRC has introduced a number of changes that came into effect from 1 January 2021 which impact non-UK businesses trading via online marketplaces and online marketplaces themselves. These rules are complex and to determine whether they affect the business further clarification should be sought.
With effect 1 January 2015, Article 58 of Directive 2006/112/EC was amended. The rules determining the place of supply of electronically supplied services supplied to private consumers (B2C) changed from the Member State where the supplier belongs (ie where established) to the Member State of the consumer. The result of this is that local VAT is chargeable at the applicable rate in each of the Member States in which electronically supplied services are made (ie where the customer belongs). Therefore, B2C supplies of electronically supplied services to customers in the UK are subject to UK VAT. To ensure compliance with this, suppliers have to register for VAT in the UK. Prior to Brexit, there was an EU VAT MOSS simplification scheme available.
The tax authority in the UK may direct a person to appoint a VAT representative to act on his behalf for VAT purposes where the person:
- is a taxable person or makes taxable supplies or acquires goods in the UK from one or more other EU countries
- is not established, and does not have a 'fixed establishment' in the UK
- is established in a country or territory which is not an EU country (or part of such a country) and where it appears to the UK tax authority that there is no provision for mutual assistance similar to that which provided between the UK and other EU countries
- in the case of an individual, he does not have his 'usual place of residence' in the UK.
In general, the UK does not require EU or non-EU resident businesses to appoint a fiscal representative, however in some cases, for instance when the business has a poor compliance records, the tax authority in the UK may direct a person to appoint a fiscal representative.
VAT returns normally cover an accounting period of three months, ending on the last day of a calendar month, A businesses can request a specific accounting cycle to coincide with its financial or management reporting. Businesses that are in a net repayment position (because of the nature of their activities) and those incurring exceptionally high expenditure (eg as a result of set up costs or a capital project) can apply to submit returns on a monthly basis to improve cash flow.
All VAT returns have to be submitted within 30 days of the end of the relevant accounting period, together with any tax due. As all returns and payments have to be submitted electronically, taxpayers get a further seven days (in addition to the normal 30 days) in which to submit the return and pay the tax due.
All VAT-registered businesses with a total VAT liability of £2.3 million or more in any 12-month period (or less), are required to pay advance instalments of their VAT return liability. The tax authorities in the UK will usually provide a payment schedule outlining the payment deadlines.
Businesses whose estimated taxable turnover is £1.35 million or less (excluding VAT) in the next 12 months, can join the Annual Accounting Scheme. The annual accounting scheme helps small businesses by allowing them to submit only one VAT return annually rather than the normal four. During the year businesses who use the annual accounting scheme will need to pay its annual VAT liability via nine monthly or three quarterly instalments during the tax year.
A default surcharge penalty may be imposed by the tax authority if VAT returns are not submitted on time, or the related tax is not paid by the due date.
For the first late submission or payment, the tax authority will issue a notification to the taxpayer confirming that a penalty may be imposed in the future. If another submission or payment is late within the next 12 months, a fixed percentage penalty is imposed on that occasion. The percentage penalty is increased for subsequent defaults (up to a specified maximum), unless returns and the related payments are made on time for a 12 month period.
Intrastat declarations for Arrivals and Dispatches and EC Sales Lists may be required if there is trade with Northern Ireland. Otherwise, these reports are no longer required since Brexit.
Yes. A range of penalties can be imposed where businesses do not comply with the VAT rules.
Civil penalties and interest can be applied for errors and omissions made on tax returns, or where the tax is paid late. Penalties can also be applied where the business has failed to maintain adequate records, provide information (including additional declarations), or makes repeated mistakes.
Criminal proceedings may be brought in the case of more serious matters.
Yes, it may be possible to reclaim the VAT incurred in certain circumstances.
Following Brexit, there is one scheme available for businesses that are not registered in the UK to potentially reclaim VAT.
The VAT refund scheme can be used to reclaim VAT for a non-UK business which bought goods or services in the UK to use in that business.
Examples of expenses on which UK VAT may be recovered are:
- accommodation and meals
- trade fairs
- travel costs
- 50% of the VAT charged for hiring or leasing a car
- other goods and services you buy and use in the UK
VAT cannot be reclaimed on the cost of buying a car, or for goods and services
- bought for resale
- used for business entertainment
- used for non-business activities
The claim must be made no later than six months after the end of the ‘prescribed year’ when the VAT was incurred. The prescribed year runs from 1 July to 30 June, so claims must be made by 31 December.
A VAT invoice must show:
- an invoice number which is unique and sequential
- the seller's name and address
- the seller's VAT registration number
- the invoice date
- the time of supply (also known as tax point) if this is different from the invoice date
- the customer's name and address
- a description sufficient to identify the goods or services supplied to the customer
- the rate of any cash discount
- the total amount of VAT charged expressed in sterling
For each different type of item listed on the invoice, the following must be shown:
- the unit price or rate, excluding VAT
- the quantity of goods or the extent of the services
- the rate of VAT that applies to what's being sold
- the total amount payable, excluding VAT
Where a VAT invoice includes zero-rated or exempt goods or services, it must:
- show clearly that there is no VAT payable on those goods or services
- show the total of those values separately
Where a business makes retail sales and makes a sale of goods or services for £250 or less including VAT, a simplified VAT invoice can be issued.
VAT invoices can be issued, received and stored in electronic format and there is no need to tell the tax authority. Electronic invoices must contain the same information as paper invoices. The method used to ensure the authenticity of origin, the integrity of content and legibility of the invoices is a business choice and can be achieved by any business controls which create a reliable audit trail between an invoice and a supply of goods or services.
While there is no SAF-T requirement in the UK, the UK Government’s Making Tax Digital (MTD) programme took effect for VAT beginning from 1 April 2019 with gradual implementation over the following few years depending on certain factors. From 1 April 2022 all VAT registered businesses are required to keep specified minimum records in the VAT account and to submit the current nine- box VAT return to HMRC via Application Program Interface (API) software.
There is also a requirement for each step of the VAT return journey from the digital records to the VAT return data to be 'digitally linked'.
For further information on indirect tax in the United Kingdom please contact: