New rules from 1 December 2012

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Big VAT date for NETPs on 1 December – but what does it all mean?

By Neil Warren who is an independent VAT consultant, author and speaker. He worked for Customs and Excise for 14 years until 1997.

One of the great things about being a VAT writer is that you get a chance to challenge yourself by writing articles on new legislation encountered on a regular basis, and to consider some of the practical problems that a business will face in relation to new rules. So in this article, I am going to share with you some issues concerning the removal of the VAT registration threshold for a non-UK business with effect from 1 December 2012. What does it all mean? How and why are the goalposts being moved? What are the consequences at a practical level?

The case of Schmelz

To set the scene, Schmelz v Finanzamt Waldviertel (Case C-97/09) [2012] BVC 300 relates to a German resident who complained that her rental income from a flat she owned in Austria was subject to Austrian VAT but a domestic landlord in Austria avoided charging VAT in most cases because his total rental income was below the Austrian registration threshold. An overseas business (person) trading in Austria gets a zero VAT threshold for registration purposes. The argument of the appellant was that this outcome was discriminatory against an overseas trader. However, the European Court of Justice (ECJ) ruled that a business was entitled to a threshold in its own country but not in other countries. So to comply with the outcome of this case, and to bring the UK on an equal footing with the rules that have applied for many years in other EU countries, an overseas business will not get a registration threshold for its UK trading from 1 December – i.e. it will need to register for VAT if it expects to make any taxable sales in the UK. Before this date, it could make UK taxable sales of up to £77,000 a year (the registration limit since 1 April 2012) before needing a VAT number which is the same limit as applied for a domestic business. However, carry on reading because the new rules do not affect many business arrangements.

No need to register in many situations

What exactly is a non-UK business? The exact phrase is NETP (Non-Established Taxable Person) and you can be a NETP if you are based in an EU country (e.g. Poland or a non-EU country such as America). The phrase basically means that the business is ‘not normally resident in the UK, does not have a UK establishment and, in the case of a company, is not incorporated here’. (HMRC Notice 700/1, para. 9.1) A UK establishment generally exists if:

the business’ ‘central administration’ is in the UK; or

‘essential management decisions’ are taken in the UK; or

it has a ‘permanent physical presence’ in the UK ‘with the human and technical resources to make or receive taxable supplies in the UK’

(extracts are from Notice 700/1, para. 9.2).

However, the first good news is that there will be no need for an overseas-based business to register for VAT in the following circumstances.

The customer who the overseas person is providing services to is ‘in business’ in the UK and therefore accounts for VAT on his own VAT return by doing the reverse charge calculation (this applies to all services covered by the general B2B rule). This is because the person receiving the service is deemed to have made the sale for all VAT purposes, rather than the overseas supplier. Example – a management consultant based in Sweden invoices ABC Ltd in the UK for £10,000. ABC will account for output tax in Box 1 on this service (£10,000 × 20%), and claim input tax in Box 4 if it is a fully taxable business (i.e. not partly exempt, etc). This is the general rule for B2B services and avoids the need for the Swedish consultant to get a UK VAT number.

The place of supply is based in the supplier’s country so UK VAT is not an issue – this is very common with most services sold to non-business customers (B2C sales). Example – a firm of accountants based in Italy completing a private tax return for a UK based person will charge Italian VAT because the place of supply is Italy.

Goods are sold directly to UK customers by an EU business from premises in its own country – in which case, the sale will be based on the rate of VAT that applies in that country, unless the sale is to a business customer that has a UK VAT number, in which case the sale is zero-rated. Example – Dino is VAT registered in Italy and sells a computer to Dean in the UK. Dino will charge Italian VAT on the sale. However, if Dean goes into business and gets a UK VAT number, then the computer sales by Dino for Dean’s business will be zero-rated for Italian VAT purposes, and then Dean accounts for the VAT on his UK VAT return (acquisition tax) in Box 2. Note: In respect of the sales to UK customers without a VAT number, Dino will need to be aware of the ‘distance selling’ rules – if his UK sales to non-VAT registered customers exceed £70,000 on a calendar year basis, he will then need a UK VAT number and charge UK VAT on future sales to customers without a UK VAT number.

What situations are affected by the new rules?

Land services

Pierre – a builder, resident in France, has been given the chance to come to the UK and carry out two building jobs. He is going to work for a building contractor who is VAT registered in the UK in connection with a new restaurant being built in London. He is also going to come to my house and build a new conservatory for me, charging £5,000 for his labour (I will buy the materials separately from a local hardware store).

The place of supply for a ‘land’ service is where the land is based (i.e. UK in both cases) but the VAT is sorted out by the customer with the reverse charge calculation if he has a UK VAT number (i.e. in relation to the work on the restaurant for the building contractor). This is because of the extension of the reverse charge to land services where the customer has a VAT number.

But what about the work for me? Until 30 November, I would get a VAT-free invoice from him because his annual taxable sales in the UK would almost certainly be less than £77,000 (i.e. avoiding the need for him to register). However, the goalposts will move on 1 December: Pierre’s VAT threshold in the UK from that date will be zero and once I give him the contract (or order) to do my work he will need to apply to HMRC for a VAT number once he knows he is to make any taxable sales in the UK in the next 30 days. It will be £5,000 plus VAT for me after this date, which seems fair because I would have to pay UK VAT in most cases if I used a UK builder to construct my posh new extension. However, despite having a UK VAT number, Pierre will still not charge VAT to the building contractor in relation to the restaurant job where the reverse charge is still carried out by the contractor. What fun and games it all is!

As a practical challenge, what is the situation as far as Pierre’s expenditure in the UK is concerned? If he didn’t have a UK VAT number and wanted to recover VAT on his UK costs in relation to his restaurant contract (e.g. hotel bills, van hire costs, subsistence expenses) then he would need to submit an overseas VAT repayment claim to HMRC’s office in Londonderry (by making an electronic claim via his own tax authority in France). But with his new VAT number after 1 December, he can recover all of the VAT on his UK expenses (subject to normal rules) as input tax in Box 4 of his return.

Performance services

Another batch of services affected by the changes relate to B2C sales of what are known as the ‘performance’ services (e.g. the services of an entertainer – see Example below). For these services, the relevant issue for a B2C sale is where the service is performed rather than where the supplier is based.

Example: HMRC Notice 741A – para. 8.1 – what services are supplied ‘where performed’?

Services relating to cultural, artistic, sporting, scientific, educational, entertainment or similar activities (including fairs and exhibitions); and ancillary services relating to such activities, including services of organisers of such activities.

B2C supplies are made where the activities actually take place. (Author commentB2B supplies follow general rule (i.e. place of supply is where customer is based.))

B2B supplies of services in respect of admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events (including fairs and exhibitions); and B2B supplies of ancillary services relating to admission to such events. (Author comment – same outcome applies for B2C supplies of admission because of first paragraph.)

The place of supply is where the events actually take place.

So let’s consider an Italian opera singer called Maria, who I have asked to fly to the UK in April next year and sing a few numbers for me at my private 39th birthday party. This is a B2C service performed by an ‘entertainer’ and until 30 November, Maria could have avoided a UK VAT issue because her annual fees in the UK will be below £77,000. But unfortunately the four-figure sum I will pay her for singing at my party next year (£18.99!) will mean that she will need a UK VAT number 30 days in advance of her performance because of the zero registration threshold. What a nuisance!

Selling goods

I know someone who is resident in Holland and comes to the UK for about three months a year to do cricket coaching at local clubs. He also buys and sells a small amount of cricket equipment (e.g. bats, balls, pads, etc). He is a sole trader, so his coaching work is VAT exempt under the ‘private tuition’ rules and is therefore ignored as far as either the VAT registration limit or output tax is concerned. However, he buys the kit items from a supplier in Northampton and then sells them separately – about £3,000 of sales a year and he makes about £1,000 net profit. With effect from 1 December, if he applies the new legislation correctly, he will need a UK VAT number because he is a NETP making taxable sales in the UK above the zero threshold.

Getting a UK VAT number

The end result of my analysis above is that our French builder, Italian opera singer and Dutch coach will all need a UK VAT number for their various activities in our great country after 1 December. How do they get it? In basic terms, there are four possibilities.

1They could deal with the registration issues themselves by directly liaising with HMRC’s NETP Unit in Aberdeen (Ruby House, 8 Ruby Place, Aberdeen, AB10 1ZP). NETPs can also register by using HMRC’s new online service, effective from 1 November.

2They could appoint a UK tax representative to deal with their affairs – this is not the most desirable outcome because the representative is ‘jointly and severally liable for any VAT debts’ incurred by the business (HMRC Notice 700/1, para 11.1). This procedure involves the completion of a VAT1TR form to give authority to the representative and all matters are dealt with by HMRC’s Registration Service in Wolverhampton rather than Aberdeen (Deansgate, 62–70 Tettenhall Rd, Wolverhampton, WV1 4TZ). However, NETPs using the online registration service can provide details of their tax representative at the time of completing the online form.

3Appointing a UK tax agent is another option – and means the agent will be responsible for maintaining VAT records and accounting for UK VAT on behalf of the NETP – but will not be jointly and severally liable for any VAT debts – this seems a much more sensible option than appointing a tax representative. To be honest, a UK adviser agreeing to become a ‘tax representative’ rather than a ‘tax agent’ for an overseas client makes as much sense, in my opinion, as a football supporter living in Manchester going to watch City rather than United! Tax agent registrations are again dealt with by HMRC’s Wolverhampton office rather than Aberdeen. A letter of authority needs to be completed and signed by the client to confirm its appointed agent with HMRC.

4An accountant could be appointed by the overseas client with authority to liaise with HMRC on VAT issues through form VAT64-8. This opportunity would be useful to an NETP that has not appointed a VAT representative or agent – as considered in previous paragraphs. The VAT returns can be completed by the accountant acting for the NETP through the VAT for agents online service.

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