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When an overseas VAT registration is required

Imagine your business is based in the UK and registered for VAT. You have the chance to make a quick profit on some goods that are stored in Ireland. You will buy them from an Irish business for £3,000 plus 23% Irish VAT of £690 and sell them for £5,000 to a private individual there – the goods never leave Ireland. What is the VAT position?

Three VAT myths

There are three important myths to dispel with this scenario:

Myth 1: Sales are less than the Irish registration threshold

You might think that Irish VAT is not relevant because the £5,000 sale is below the Irish registration threshold. You are wrong: an overseas business does not get a registration threshold in another country – only its own. The threshold for a non-Irish business making sales in Ireland is ‘nil’.

You might decide that Irish VAT is not an issue because you have no ‘fixed establishment’ or ‘business establishment’ in that country – in other words, no head office, warehouse or trading premises. This is also incorrect: VAT registration depends on whether a business is making taxable supplies of goods or services in a country – it doesn’t need to be established there.

Myth 3: Can claim the VAT paid to the seller from the Irish tax authorities  

You may conclude that you don’t need to register for Irish VAT but can still reclaim £690 VAT from the Irish tax authorities by submitting a 13th Directive claim; the system for a non-EU business to claim VAT paid in the EU. A successful 13th Directive claim would mean your profit is £2,000 – life is looking good.

Import of food

Jota Jota Alimentos Global SL is a food company based in Spain. For one particular shipment, goods purchased from South America came into the UK before going to Spain. The only reason for this arrangement was because it was the quickest transport route.

VAT of £8,456 was paid when the goods arrived in Tilbury and the company reclaimed this VAT from HMRC’s Overseas Repayment Unit, which was rejected. It was an 8th Directive EU claim, rather than 13th Directive non-EU claim, because it happened in 2018.

HMRC reasons for rejection

HMRC said that JJAG was “importing goods into the UK and then selling the goods on from the UK”. The correct outcome would have been for JJAG to register for UK VAT, claiming input tax on the import of the goods, and then making a zero-rated onward supply to its premises in Spain. The transfer of ‘own goods’ from one EU country to another is a ‘deemed supply’ under EU law.

The decision

I was surprised that the taxpayer won the case; the refund claim was correct and there was no need for JJAF to register for UK VAT. The judge concluded that the entry into and out of the UK was “no more than part of the transit arrangements in order to ensure fast delivery to JJAG in Spain”. The business was not making taxable supplies in the UK.

Irish tale

The circumstances in JJAG were very unusual, that is not the case for the Irish case study. There is only one correct outcome here; the UK business must register for Irish VAT and pay output tax of £934.95 on an Irish VAT return (£5,000 x 23/123) and claim input tax of £690 on the purchase of the goods. It has still made a healthy profit of £1,065.05.

It’s understood that 19 EU countries require a non-EU business to appoint a local tax representative if they register for VAT there, but fortunately Ireland is not one of them.

These issues are very relevant for many businesses in the post-Brexit world, especially when deciding if they need register for VAT in the EU or vice versa.

VAT: New partial exemption concession

Partially exempt traders can apply for a retrospective special method, if they have been impacted by the pandemic restrictions. Some taxpayers could save thousands of pounds.

R&C Brief 04/21

Revenue and Customs Brief 04/21 concerning VAT and partial exemption is very complicated and verbose. Many readers will have given up the ghost by the end of the first paragraph! But HMRC is actually giving a great opportunity here, which might help many partly exempt businesses whose trading patterns have been badly affected by the coronavirus pandemic.

Here is a practical case study to explain things.

Gym and insurance

Sports Ltd has two activities – it operates a successful gym charging membership fees and also sells sports insurance, earning commission as a broker. Both activities trade from the same rented premises. The company is partly exempt because the insurance commission is VAT-exempt and the gym income is VATable. The insurance commission is 20% of total sales.

Partial exemption and input tax

The company has three major expenses that are subject to VAT:

  • rent on the premises
  • marketing costs for the insurance activity
  • equipment for the gym

The VAT treatment of two of these expenses is simple – the equipment wholly relates to the taxable gym, so input tax can be fully claimed. The marketing costs wholly relate to the exempt insurance activity so no input tax is claimed.

It is the rent that causes the challenge. This is an example of ‘residual input tax’ – a cost that relates to both taxable and exempt activities, and so input tax can be partly claimed.

Standard method

Sports Ltd is likely to use the standard method of calculation for partial exemption, the default position, where the residual input tax claimed each period is based on the following formula:

Input tax to claim = Taxable sales (excluding VAT)

Taxable sales (excluding VAT) + Exempt sales

The percentage is rounded up to the nearest whole number as long as total residual input tax is less than £400,000 per month on average, – 85.1% means you will claim 86%.

Without coronavirus, Sports Ltd would claim 80% of its residual input tax in a typical trading period.

Reduction in taxable sales

The impact of coronavirus has been massive on gyms and many other businesses because of local and national restrictions.

If Sports Ltd continues to sell insurance to customers, but has frozen gym membership subscriptions because of coronavirus lockdowns, its VAT position has changed dramatically. The 80% VATable income percentage is probably now 50% for the last 12 months. If annual rent is £200,000 plus £40,000 VAT, input tax claimed will have reduced from £32,000 to £20,000 with the standard method. This is clearly not fair.

Special method request – retrospective opportunity

HMRC has recognised situations like Sports Ltd and Brief 4/21 gives a business the chance to apply for a temporary special method of calculation without a lot of questions and delay. The method can be applied retrospectively from the time that coronavirus first took its toll.

The application must explain how coronavirus has affected the business trading. A special method is any method of calculation that is not the standard method.

Square footage?

Sports Ltd might consider a temporary special method based on square footage splits: how much of the premises is used for the gym and how much for the insurance activity? An estimate would be that an 80/20 split would probably be accurate.

Alternatively, it could request a method that introduces a notional turnover figure for taxable sales for weeks where the gym is closed because of lockdown, based on past turnover. The logic is that the costs haven’t gone away (landlords still want rent) so income must be included to balance the books.

Fair and reasonable

A taxpayer can propose any method that is fair and reasonable. Special methods must always be approved by HMRC and the taxpayer must certify that it is ‘fair and reasonable’ in terms of input tax recovery. When coronavirus restrictions have ended, taxpayers will revert to their previous method.

Standard method override

For larger partially exempt businesses, there is an extra twist to the tale where a standard method override calculation might be necessary. That is beyond the scope of this article but see VAT Notice 706, section 5. If the override adjustment gives a fair outcome, there will be no need to apply to HMRC for a temporary special method.

IR35 reform rolled out in the private sector from 6 April

Off-payroll working rules for clients, workers (contractors) and their intermediaries.

An intermediary will usually be the worker’s own personal service company, but could also be any of the following:

  • a partnership
  • a personal service company
  • an individual

The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees. These rules are sometimes known as ‘IR35’.

The client is the organisation who is or will be receiving the services of a contractor. They may also be known as the engager, hirer or end client. The client will be responsible for determining if the off-payroll working rules apply.

Get help on the off-payroll working rules (IR35) with webinars, guidance and resources from HMRC.

You may be offered schemes that wrongly claim to get around the off-payroll working rules. Find out how to recognise tax avoidance schemes aimed at contractors and agency workers.

Who the rules apply to

You may be affected by these rules if you are:

  • a worker who provides their services through their intermediary
  • a client who receives services from a worker through their intermediary
  • an agency providing workers’ services through their intermediary

If the rules apply, Income Tax and employee National Insurance contributions must be deducted from fees and paid to HMRC. In addition, employer National Insurance contributions and Apprenticeship Levy, if applicable, must also be paid to HMRC.

You can use the Check Employment Status for Tax service to help you decide if the off-payroll working rules apply.

Employment status for tax purposes is whether a worker is employed or self-employed. It’s used to determine the taxes the worker and client need to pay.

When the rules apply

The rules apply if a worker provides their services to a client through an intermediary, but would be classed as an employee if they were contracted directly.

A contract for the purpose of the off-payroll working rules is a written, verbal or implied agreement between parties.

The off-payroll working rules apply on a contract-by-contract basis. A worker may have some contracts which fall within the off-payroll working rules and some which do not.

Before 6 April 2021

If you’re a worker and your client is in the public sector, it’s their responsibility to decide your employment status. You should be told of their decision.

If you’re a worker and your client is in the private sector, it’s your intermediary’s responsibility to decide your own employment status for each contract. The private sector includes third sector organisations, such as some charities.

From 6 April 2021

From 6 April 2021 the way the rules are applied will change.

All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply.

If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.

Recovery Loan Scheme Launches on 6 April

A new government-backed loan scheme launched on 6 April to provide additional finance to those businesses that need it.

  • new loan scheme will provide further support to protect businesses and jobs
  • loans will include 80% government guarantee and interest rate cap
  • government has backed £75 billion of loans to date as part of unprecedented £350 billion wider support package

The Recovery Loan Scheme will ensure businesses continue to benefit from Government-guaranteed finance throughout 2021.

With non-essential retail and outdoor hospitality reopening from 12 April, Ministers have ensured that appropriate support is still available to businesses to protect jobs. From today, businesses – ranging from coffee shops and restaurants, to hairdressers and gyms – and can access loans varying in size from £25,000, up to a maximum of £10 million. Invoice and asset finance is available from £1,000.

The Chancellor of the Exchequer, Rishi Sunak, said:

“We have stopped at nothing to protect jobs and livelihoods throughout the pandemic and as the situation has evolved we have ensured that our support continues to meet business needs.

As we safely reopen parts of our economy, our new Recovery Loan Scheme will ensure that businesses continue to have access to the finance they need as we move out of this crisis.”

This is in addition to furlough being extended until 30 September, and the New Restart Grants scheme launched last week, providing funding of up to £18,000 to eligible businesses. The Government is also supplementing this with the Plan for Jobs, focused on protecting, supporting and creating jobs across the country through the Kickstart scheme, T-level and a National Careers Service.

The scheme, which was announced at budget and runs until 31 December 2021, will be administered by the British Business Bank, with loans available through a diverse network of accredited commercial lenders. 26 lenders have already been accredited for day one of the scheme, with more to come shortly, and the government will provide an 80% guarantee for all loans. Interest rates have been capped at 14.99% and are expected to be much lower than that in the vast majority of cases, and Ministers are urging lenders to ensure they keep rates down to help protect jobs. The Recovery Loan Scheme can be used as an additional loan on top of support received from the emergency schemes – such as the Bounce Back Loan Scheme and Coronavirus Business Interruption Loan Scheme – put into place last year.

So far, the government’s emergency loan schemes have supported more than £75 billion of finance for 1.6 million British businesses and this new scheme will build on that success. This is part of the government’s unprecedented £350 billion support package which has included paying millions of workers’ wages through the furlough scheme and generous grants and tax deferrals.

Business Secretary Kwasi Kwarteng said:

“We’re doing everything we can to back businesses as we carefully reopen our economy and recover our way of life.

The launch of our new Recovery Loan Scheme will provide businesses with a firm foundation on which to plan ahead, protect jobs and prepare for a safe reopening as we build back better from the pandemic.”

Reactions from business groups:

Rain Newton-Smith, CBI Chief Economist, said:

“The coronavirus loan schemes have provided a critical lifeline to businesses, and so its successor – the new Recovery Loan scheme – comes as a huge relief to firms.

These loans can be taken alongside existing COVID loans to help firms refinance, restructure and go for growth.

It’s vital support remains as restrictions relax and demand returns to normal, allowing businesses to recover, save jobs, and support for reopening.”

Commenting on the Recovery Loan scheme, Suren Thiru, Head of Economics at the BCC, said:

“Accessing finance remains crucial to the lifeblood of a business and so the launch of the Recovery Loan scheme is welcome. The new scheme can play a potentially pivotal role in supporting the recovery by getting credit flowing to the firms who most need it.

Chambers of Commerce will continue to work with government and the banks to ensure that businesses have the clarity they need to enable them to use the new scheme to help them return to growth.”

David Postings, Chief Executive of UK Finance, said:

“The banking and finance industry remains committed to supporting businesses of all sizes through the next phase of the pandemic response. As focus turns to economic recovery, we know that many firms are still facing uncertainty. The new Recovery Loan Scheme, alongside other commercial financial support, will help firms rebuild and invest for future growth.”

Five ways Brexit and DRC will impact VAT returns

VAT returns submitted for the March 2021 quarter will be very different for many businesses, due to the impact of Brexit and the new reverse charge rules for builders.

Businesses will need to take extra care before pressing the ‘send’ button to fire off their March 2021 VAT return to HMRC. The figures will be very different in many cases compared to the previous quarter.

Since that time, we have had both Brexit and the new domestic reverse charges (DRC) rules for the construction industry to deal with. Extra time spent reviewing systems and checking VAT codes on accounting software will be a sound investment of resources to ensure there are no major errors. Here is a step-by-step guide.

Step 1 – check there are zero entries in Boxes 2, 8 and 9

For a GB based business, Boxes 2, 8 and 9 of VAT returns will always have zero entries – see below about Northern Ireland.

These boxes were only relevant when the UK was a member of the EU, recognising that the VAT treatment of EU trading in goods was different to imports and exports from outside the EU. But since 1 January 2021, there is no longer any difference between EU and non-EU trading – therefore, check these boxes are zero.

The starting point is that John or his agent would hopefully have elected for postponed VAT accounting (PVA) when the goods arrived from France and were declared as an import.

No VAT is payable at the border and it will be accounted for by John in Box 1 and Box 4 of his March return with a reverse charge entry based on the value of the goods. The net value of the import is recorded as an input in Box 7. John’s entries in Boxes 1 and 4 will be based on postponed import VAT statements downloaded from HMRC’s Customs Declaration Service (CDS).

Step 3 – consider Northern Ireland trading

Northern Ireland is still part of the EU’s single market as far as goods are concerned, so acquisitions will still be made from EU countries, with entries in Boxes 2, 4, 7 and 9 for each acquisition.

Sales of goods to VAT registered customers in the EU will be recorded in both Box 6 and 8, the outputs box and the EU disposals box. But a business in Northern Ireland can also use PVA for non-EU imports, a welcome cash flow boost.

  • Reverse charge for builders

The new DRC system for the construction industry finally started on 1 March 2021. The DRC transfers the VAT payable on a sales invoice from the supplier to the customer.

Step 4 – code sales and purchase invoices correctly

The new rules affect both suppliers and customers of construction services. The correct coding of purchase and sales invoices should ensure that the correct VAT return boxes are completed:

Example

Plumber Pete has charged £500 for labour and £2,000 for materials on a ‘supply and fix’ job for Steve on 1 March 2021, which is standard rated and subject to the DRC.

John will charge £2,500 and no VAT on the invoice issued to Steve, recording the sale in Box 6 of his next return (outputs box). Steve will account for the VAT not charged by John in both his output tax and input tax boxes 1 and 4 (£500) and include the net amount of £2,500 in Box 7, the inputs box.

Step 5 – prepare for higher or lower VAT payments to HMRC

An important issue with DRC is its impact on the net amount of VAT payable or repayable in Box 5 – the deadline date to pay the March return is 7 May:

  • Suppliers: For a builder selling DRC services, there will be less output tax to declare, meaning either lower payments to HMRC or even repayments. If significant repayments will be the norm, it might be worthwhile to submit monthly returns;
  • Customers: For many builders receiving DRC services, their VAT payments will increase because they are no longer paying builders VAT. This will definitely apply if the onwards sales to their own customers are still subject to normal VAT rules. It is important to be ready for the higher payment due to HMRC.

Conclusion

Many businesses will only have a Brexit or DRC challenge to deal with in March – hopefully not both. It will be business as usual for many.

As a final tip, there are 1.1m voluntary registrations in the UK that will need to join the Making Tax Digital (MTD) regime for VAT periods starting after 1 April 2022.

According to HMRC, a quarter of these businesses are already signed up. Once the March 2021 return has been dealt with, it might be a good time for other businesses to follow suit and get ready for the compulsory starting date. Alternatively, perhaps deregistration might be an option to escape VAT completely?

Brexit: Postponed VAT accounting and VAT return

HMRC has updated its guidance relating to difficulties obtaining Monthly Postponed Import VAT Statements (MPIVS) which are needed to account for import VAT on VAT returns.

Import VAT

This article concerns itself with GB VAT registered businesses that are importing goods into the UK from anywhere in the world. Those goods, when they enter the UK, will be subject to import VAT.

Where the overseas supplier is registered for UK VAT, then the overseas supplier will be liable for the import VAT and the GB business would receive a normal GB VAT invoice from the supplier with GB VAT number and GB VAT is charged.

In most other situations when buying goods from the EU or the rest of the world, the supplier won’t be registered for GB VAT. In that case, the UK buyer will be liable for import VAT.

There are three options for dealing with the import VAT:

  1. Freight agent pays the duty/VAT to release the goods and then recharges the duty/VAT back to the buyer, plus an admin fee.

  2. Buyer has their own deferment account and freight agent uses the buyer’s deferment account to release the goods without payment and HMRC takes the duty/VAT by direct debit around 45 days later.

  3. Buyer is using Postponed Import VAT Account (PIVA) and instructs freight agent that PIVA is to be applied when goods enter the UK, goods are released with freight agent or buyer paying HMRC and buyer accounts for import VAT on their VAT return

All of the above are possible but require the buyer to communicate with the freight agent, so that they know what instructions to follow. If the buyer is not responsible for the shipping, then the buyer needs to ensure the supplier instructs the freight agent as to what basis import VAT will be settled.

Enrol for Postponed Import VAT Accounting

The first matter is to enrol for the service, but how to do so is not obvious. The link takes you to your government gateway login and once logged in, you proceed to answer the questions and then enrolment is achieved.

If the enrolment fails, it is usually because the address or postcode doesn’t match HMRC’s records, so check your VAT certificate to confirm the address and postcode.

It does not seem possible to log into your government gateway first, there is no menu link or “services you can add” option for postponed accounting, going via the special link first and then logging into the government gateway seems to be the only way to do this.

Once enrolled, HMRC will send a reminder email each month and the MPIVS will appear on your government gateway home page.

How to use postponed Import VAT Accounting

First, ensure the freight agent knows you want to use it, if they don’t know they will not necessarily default to using it, so avoid surprises by ensuring clear instructions given (to the supplier as well if they are arranging shipping).

Once a month, HMRC will produce your Monthly Postponed Import VAT Statement (MPIVS) which lists all the imports in the previous month, for example, imports in January will appear on the portal from the third week of February.

The MPIVS shows the import VAT that has been “postponed”, and this is declared in box 1 of the VAT return. The figure is also declared in box 4 of the VAT return so the effect of this is VAT neutral, the benefit to the business is no cashflow implications as the VAT is declared and reclaimed on the return. If the business is partially exempt, then box 4 will be subject to the partial exemption calculation. Box 7 (purchases excluding VAT) is populated with the net value of the goods.

VAT Groups

Entities within a VAT group may have their own GB EORI numbers. In such cases to produce a group VAT return may involve downloading the MPIVS from each VAT group entity, and combining them into a single VAT group return.

Estimated VAT

There may be occasions where the MPIVS are not available or VAT returns periods not aligned with MPIVS, HMRC does allow the import VAT to be estimated, but the figure should be corrected on the following VAT return once the correct amount is known.

Accounting records

The MPIVS should be downloaded from the portal and stored carefully, as they are your only record of the import VAT that has been postponed, without the MPIVS statement, your box 1 and 4 figures will not be correct.

The statements are only available online for six months, so it is important they are downloaded in a timely manner.

Certificates C79

The business may still receive forms C79, these are produced when import VAT is not postponed and instead, paid upon arrival by the freight agent or business’ own deferment account. A business may typically see some imports postponed/MPIVS and some imports paid by freight agent/C79.

Key message

Freight agents must be instructed so they know what to do. Enrolment into PVA and completing the VAT return is straight forward.

HMRC have stated that the first run of MPIVS (covering imports in January) may also include some earlier February imports. This is a glitch and businesses should only reclaim import VAT relating to January and include any February imports on the February VAT return.

Brexit: Impacts on national insurance contributions

Following the end of the Brexit transition period, on 31 December 2020, it was inevitable that there would be some changes for payroll, particularly within those companies that employ workers travelling from the UK to carry out work in other countries.

This is also true where businesses deal with workers travelling from the EEA or Switzerland, who are coming to work within the UK.

NICs for workers from the UK working in the EEA or Switzerland

HMRC published a guidance page solely on this topic in late December 2020, which has been updated intermittently since to mirror any changes.

Where social security contributions are paid is largely dependent on the individual circumstances of an employee, self-employed individual, or employer, but can also be dictated by the location that the work is being completed in.

If work is attached to a specific occupation, or the work is only being carried out on a temporary basis in the EU, Iceland, Liechtenstein, Norway or Switzerland, then it may be possible for a worker to obtain a certificate or document from HMRC. This will permit the payment of NICs in the UK, with no requirement to pay social security contributions elsewhere.

The guidance page provides detailed information confirming which individuals working in the EU, and additionally, those working in Iceland, Liechtenstein, Norway, or Switzerland, should apply for a certificate or document from HMRC to ensure that they only pay NICs in the UK. Either the individual in question can do this, or they can ask their employer to do it on their behalf.

Where individuals believe they may be eligible for a certificate or document, then there are several different forms to complete, dependent on their circumstances. They are: Form CA3822, Form CA3837, Form CA8421 and Form CA3822.

Where HMRC determines that individuals must pay UK NICs, a certificate or document will be issued which can be used to demonstrate why social security contributions do not need to be paid in the EU, Iceland, Liechtenstein, Norway, or Switzerland.

As always, a change in situation may mean amendments to the ways in which the rules apply. Individuals need to inform HMRC of these changes, confirming what their previous circumstances were, what has changed, and when the changes took place.

NICs for workers from the EEA or Switzerland coming to work in the UK

Just as the end of the transition period signalled changes to NICs for UK workers going to work in the EEA or Switzerland, it also meant changes for those from the EEA or Switzerland coming to work in the UK.

Individuals coming to work on a permanent basis in the UK from the EU, Norway, or Switzerland, will only be expected to pay into one country’s social security scheme at any given time, and this will often be in the UK, if that is where the work is being carried out.

Again, those working in select occupations or only working on a temporary basis in the UK, may be able to receive a certificate or document from the social security institution that they come from, which will enable them to pay social security contributions there, with no requirement to pay NICs in the UK.

There is a separate guidance page which explains which individuals coming from the EU, and those coming from Iceland, Liechtenstein, Norway, or Switzerland should apply for the relevant certificate or document to allow them to only pay social security contributions in that country.

The forms for completion are the same as those used when a worker from the UK goes to carry out work in the EEA or Switzerland, and, again, which form applies will be dependent on a worker’s circumstances. This will need to be discussed with the relevant social security institution.

The certificate or document that relates to where an individual pays social security contributions/UK NICs is not a work permit. Further information on the UK’s immigration rules is available online.

Where an individual coming to work in the UK cannot obtain the appropriate certificate or document from the relevant social security institution, then they will be required to pay NICs in the UK. This also applies if they are coming to work in the UK on a permanent basis.

Future implications

It is widely accepted that the implications of Brexit are vast and far-reaching, and it would not be possible to cover them all in an article such as this. However, it is important for payroll professionals to be aware of the potential changes to NICs (as outlined), the changes to Right to Work (RTW) documentation that can be accepted following the end of the transition period, and the possible impacts on employment law in the future.

There is still much to be confirmed in these areas, so payroll professionals should be alert to any changes that may be introduced over the coming weeks and months.

Brexit: Freight and transport

Advice for freight agents about the VAT treatment of freight services post Brexit, and how to decide which country’s VAT regime should apply.

Is customer a business or consumer?

The first stage for the freight agent is to identify whether their customer is a business (B2B) or a consumer (B2C) as the rules are slightly different for each. Confirming the status of the customer should be straight forward; no rules have changed in that regard.

Business customers (B2B)

From January 2021, the place of supply of freight transport and associated services fall under the general (or default) rule. The general (default) rule is that the place of supply is where the business customer belongs.

There is an exception to the general rule; if the place of supply of services is the UK (because the customer belongs in the UK), but the services take place wholly outside of the UK, then the supply is deemed to take place where it is performed. For example, a UK freight company has a contract with a UK business to load goods in France and deliver them to Germany.

HMRC provides some further examples in their guidance in VAT Notice 744B at section 4:

  • French customer – the goods move within France, place of supply is France.
  • Australian customer – the goods move from Australia to the UK via France, the place of supply is Australia.
  • Dutch customer – the goods move from Italy to Ireland, place of supply is the Netherlands

VAT treatment of B2B freight transport

If the place of supply of freight transport is determined to be the UK, the supply is standard rated.  For example, a movement of goods from England to Scotland for a business customer in Wales

There is an exception where the supply is connected with an import into the UK or an export from the UK – in that case the supply is zero rated. Be mindful that goods moved from England to the Republic of Ireland would be an export in this post-Brexit landscape.

If the place of supply of freight transport is determined to be outside the UK, then the supply is outside the scope of UK VAT, but there may be a liability to register for VAT in the other country where the supplies are made.

Consumers (B2C)

HMRC published a useful table to explain the variations for consumers (VAT Notice 744B):

Journey

Place of supply

Transport within the UK UK
Transport between Northern Ireland and EU Where the journey begins
All other journeys Where transport takes place in proportion to the distance covered
Ancillary transport related services Where physically performed

When looking at transport between Northern Ireland and the EU, the place of supply is determined by where the journey begins. Transport from England to Northern Ireland would continue to be a standard rated supply (UK to UK), whereas transport from Northern Ireland to Republic of Ireland is deemed to take place where the journey beings. Remember, this is for consumers (B2C). The B2B rules for business are simpler.

Sub-contractors

It is common for a main contractor to subcontract all or part of a journey. The place of supply of subcontractors, and the place of supply of services, is based on the location of your immediate customer.

Example

A French business moves goods from Italy to the Republic of Ireland on behalf of a UK business (UK customer).

The main contractor is a French freight agent who transports the goods to England (Dover), a UK based subcontractor then moves the goods to Wales (Holyhead) and the French freight agent picks up the goods in Ireland for delivery.

In this scenario, the UK sub-contractor is contracted with the French freight agent, therefore the place of supply of the freight agent services is France, even though the journey the sub-contractor performed was entirely within the UK.

All of the above are possible scenarios, but require communicating with the freight agent so they know what instructions to follow. If the buyer is not responsible for the shipping, then the buyer needs to ensure the supplier instructs the freight agent as to what basis import VAT will be settled.

One stop shop in the future

It is clear that there are different rules for B2B and B2C.

The EU will implement new rules from 1 July 2021 called One Stop Shop (OSS) which concern the supply of services to EU consumers (B2C). Included in the list of B2C services that are subject to these rules are  transport and ancillary transport-related services such as loading, unloading and handling.

One Stop Shop is optional, but indicates that when making supplies to consumers (B2C) in the EU, there may be a requirement to register for VAT in the EU member state where services are being supplied. Whilst One Stop Shop may simplify that situation for some, it is important that freight companies seek advice ahead of the implementation of these future rules.

Domestic Reverse Charge: Tips for cash flow management

 

How can builders cope with the cash flow challenges of the new DRC rules, whether VAT invoices can be split, and when to file monthly VAT returns.

Working capital

The introduction of the domestic reverse charge (DRC) for builders will have a big impact on the working capital of many builders selling construction services.

For example, a builder using the cash accounting scheme who received £84,000 including VAT on 1 January 2021 will not have to pay the £14,000 of VAT to HMRC until 7 May, if he submits calendar VAT quarter returns.

But that will change on 1 March 2021 if the work is subject to the reverse charge, ie £70,000 will be paid by the customer without VAT. Is there still scope to charge some VAT to help the cash flow position of the seller?

Split labour and materials?

Could the builder raise separate sales invoices for each reverse charge job; one for labour (no VAT), and one for materials linked to the job (20% VAT)?

“If a customer places a single supply and fix order within the scope of the CIS with a supplier, the reverse charge will apply to the full value of the order even if the supplier issues separate invoices for the supply and fix elements,” (see HMRC guidance, para 7).

Separate orders?

You might wonder if a solution is to raise separate orders for labour and materials, but HMRC is on the ball again:

“If the works are to be provided at the same time and on the same site…they comprise a single supply for VAT purposes,” (see HMRC guidance, para 7).

It is important that builders receiving DRC services are alert to possible invoice splits being proposed by a seller. A priority for businesses receiving construction services is to not accept a VAT charge from a builder if the reverse charge should apply.

Monthly VAT returns

If most or all of a builder’s work will be subject to the DRC, it might be sensible to accelerate input tax recovery by electing for monthly rather than quarterly VAT returns. This will mean extra administration work – 12 VAT returns a year instead of four. But it will provide a cash flow boost if a builder has a lot of input tax to claim on, say, materials.

Tax points

If a builder receives a reverse charge invoice from another builder, he must apply the reverse charge according to the invoice or payment date, whichever happens first. This will usually be the invoice date. If a builder uses the cash accounting scheme, the principle of entering purchase invoices on VAT returns according to the payment dates does not apply to DRC supplies.

Three priorities

There are three main priorities for builders and advisers to consider, that will hopefully produce a smooth outcome for most DRC transactions:

  1. Scope of the DRC

Identify if a job is subject to the new DRC rules – this is important for both customers and suppliers. Don’t forget to use the clear flowcharts issued by HMRC for both suppliers and customers.

  1. Administration

Deal with the paperwork and VAT returns correctly. This not only relates to sales invoices issued by builders but also the terms and conditions of proposed contracts. For example, confirming if an end user or intermediary supplier situation will apply.

Also don’t forget to check that your suppliers and customers are genuine, for which you can use HMRC’s VAT number checker service.

  1. Cash flow

The new DRC rules will produce massive cash flow challenges for many builders selling DRC services, and these need to be considered as soon as possible. Builders selling services should think about electing for monthly VAT returns and possibly asking their bank for an increased overdraft facility.

Bounce Back Loans repayments delayed by six months

The government has announced greater repayment flexibility under its Pay As You Grow scheme for businesses that took out Bounce Back Loans.

Following pressure from Labour and business groups to increase coronavirus support for businesses, Chancellor Rishi Sunak has expanded the Bounce Back Loan Scheme’s (BBLS) Pay As You Grow repayment plan:

  • BBLS borrowers can now tailor payments according to individual circumstances

  • Businesses can delay all repayments for a further six months and extend their loan term

  • Pay as You Grow will be available to over the 1.4 million businesses that took out nearly £45bn in BBLS

Delayed repayments

Businesses can now opt out of making payments on BBLS loans until 18 months after they originally took them out. The option to pause repayments will now be available to all from their first repayment, rather than after six repayments have been made.

Extend loan term

Pay as You Grow now allows loan-holders to extend the length of BBLS loans from six to ten years, and reduce monthly repayments by nearly 50%. The updated scheme also means businesses can make interest-only payments for six months, in a bid to tailor the scheme to match individual business needs.

“These flexible repayment options will give businesses the time they need to recover from the pandemic before paying back loans, giving them the breathing space and confidence to build back better,” said Business Secretary Kwasi Kwarteng.

Businesses will not have to pay any interest for businesses to pay in the first 12 months of taking out the Bounce Back Loan Scheme.

Lenders ordered “to show due consideration and appropriate forbearance”

According to GOV.UK, lenders will proactively and directly inform their customers of Pay as You Grow from this week, and borrowers should only expect correspondence three months before the first repayment is due.

All businesses will be offered the following options:

  • Extend the length of the loan from six years to ten

  • Make interest-only payments for six months, with the option to use this up to three times throughout the loan

  • Pause repayments entirely for up to six months

GOV.UK also states:

“The government has made clear that lenders are expected to offer PAYG options to all borrowers under the Bounce Back Loan Scheme.

Following discussions with lenders, all borrowers should receive identical information on PAYG being offered.

The Financial Conduct Authority’s conduct rules require lenders to show due consideration and appropriate forbearance to borrowers in difficulty.

Under the Bounce Back Loan Scheme, no repayments or interest are due from the borrower during the first 12 months of the loan term.”