Top 10 cross-border VAT issues when trading with the UK
The deadline for the UK’s ‘Brexit’ from the European Union is drawing closer. Though consensus has still not been reached, it is clear that whatever decisions are agreed, Brexit will bring challenges and be one of the top tax considerations in the coming year if you are doing business across Europe. Aside from Brexit, there are many other potential tax pitfalls that need to be considered and circumnavigated now. If you are trading with the UK, VAT and Customs Duty rules need to be given a high priority.
What, to whom, and where am I selling?
VAT basics are crucial and where most errors are found. To remain compliant, it is essential that your business understands and categorises what is being sold, who your customers are, and where they are located. Things to consider include:
- Are you selling goods or services?
- Is the customer an individual or a business?
- For goods, where are they moving from and to, and who is responsible for any acquisitions/imports?
- For services, where is your customer located?
- Does the supply attract VAT, and as such do you have a registration obligation in another country such as the UK?
- Are you supplying one item, or a package?
For those beginning to trade in the UK, getting to grips with the basics will allow you to determine whether you have to register for VAT.
The VAT thresholds vary across EU member states, and in some cases there is no threshold. The current threshold for a UK established company is £85,000, which is one of the highest in the EU.
If you are not established in the UK, but make sales deemed to take place there, a nil threshold applies. For example, if you move goods from another EU country into the UK for onward sale to businesses or private customers, you will have an immediate requirement to register for VAT in the UK. This is particularly relevant if the trade is one-off, such as a trade exhibition.
If you do have a business in the UK, you also need to remember the ‘general rule’ for services received from outside the country in question, such as a management charge from a parent company. These will have a ‘place of supply’ where the recipient entity is established (i.e., the UK), meaning that they are potentially subject to the ‘reverse charge’. The value of services received from abroad counts towards the local registration threshold.
Some categories of business, such as financial services companies, are exempt from VAT; this income does not in itself require a registration, but even those types of entities can be caught if the value of reverse charges on services received from abroad exceeds the threshold.
The standard rate of VAT in the UK is 20%. There are a number of VAT reliefs, but these are quite tightly defined and need careful analysis. Examples include:
- Food, books, newspapers and children’s clothing (zero rated).
- Domestic property conversions (reduced rate).
- Finance, health care, land, and property services and transactions (exempt).
Exemption, unlike reduced or zero rating, has an impact on the recovery of related VAT on expenditure, similar to restrictions on VAT recovery that apply in other EU states. In addition, the treatment of sales can depend on the type of entity making the sale and whether the sales are to individuals or businesses.
If you are trading in goods from one EU country to another, this will create another level of uncertainty. You will need to consider whether your customer is an individual or in business, and the place of supply. The general rule for the trade in services between businesses in different EU countries is, as mentioned above, that the recipient rather than the supplier accounts for the VAT in its country under the reverse charge. However, there are exceptions, such as services relating to construction, land and property. The place of supply is generally where the land is situated, but the UK has exercised its discretion in respect of services supplied by non-established businesses to UK VAT registered businesses. A reverse charge will apply, provided you have confirmed that the recipient is established in the UK. Advice on property matters should be sought from a local VAT specialist.
If VAT registration is needed, whether there is an establishment in the UK or not, VAT may represent an additional charge for some customers, not just for individuals. VAT is often a cost for businesses that have exempt sales such as schools, hospitals, banks, insurance companies and property companies, or organisations that undertake activities that are freely given (and are not in ‘business’), such as charities.
To remain competitive and not to reduce profit margins unnecessarily, a business should consider at the outset of a new service or product line what reliefs are available and be clear about its pricing thereon.
Care should also be taken when advertising prices and when agreeing contracts to ensure that they provide for the addition of VAT even if the business does not think that the service is, at that time, subject to VAT. The ability to go back and recover VAT undercharged (from business customers) in error at a later date is essential in mitigating larger exposures.
Not charging VAT on all sales?
Where VAT is not added to sales within an EU country, this creates a potential exposure. As such, a reasonable, cautious, approach should be taken in deciding whether to charge VAT because the exposure belongs to the supplier. The customer may encourage the business not to charge VAT if it represents a cost to it, but this may not be correct, and the situation may require a view from a VAT specialist.
If VAT should have been charged or accounted for, then the UK tax authorities, HMRC, will require the VAT to be paid to them. This can potentially be backdated for 20 or so years if a registration is late. Unless the customers are all still in existence, registered for and able to recover all of their VAT, inaccuracies in establishing the correct treatment of income streams may be significant.
Claiming VAT on expenditure
Most businesses that are registered for VAT in an EU country can recover VAT that they incur; however, some VAT is never recoverable. If your business makes exempt supplies, as mentioned above, VAT often cannot be recovered.
If your business incurs VAT costs in the UK but does not have a requirement to be VAT registered, you may be able to submit a claim via the EU or non-EU VAT reclaim mechanism.
It is worth speaking to local specialists to determine if a claim can be made and when, as there are time limits each year to be aware of.
Electronic software and telecommunications supplied to individuals
If you supply any telecoms or fully automated online services, such as app-based products, e-training solutions or games, you will likely have a registration obligation in the UK. There is a Mini One Stop Shop (MOSS) registration facility that allows an EU business to register in just one country and to account for VAT due on sales to private persons in all EU countries, although a business can decide to register for VAT in each country if preferred. This issue may well need to be revisited after Brexit.
Clearly compliance obligations are important in order to avoid penalties, which in the UK depend on the conduct leading to errors or a late registration. Penalties can also be applied to inappropriate claims.
HMRC (with other jurisdictions following suit) are on the lookout for businesses selling goods to consumers via online marketplaces. HMRC has introduced obligations for marketplaces to exercise due diligence in ensuring that traders are appropriately registered, and so there really is no option but to be compliant if you wish to trade successfully in the UK.
The UK’s Making Tax Digital (MTD) initiative also requires a mention. This will be a legal obligation to digitally link VAT return information through to HMRC’s system with compatible accounting software. This goes live in April 2019, although overseas entities without a UK establishment will be given a further 6 months to comply. From the outset of MTD, businesses will only have to ensure compatibility in filing returns digitally, but they will also have more stretching obligations to adhere starting in April 2020. These obligations will include digital links between spreadsheets and companies/divisions within a group (or VAT group). This information should be embedded in any VAT return process.
Managing risk: Systems and controls to avoid penalties
If you do decide that a UK establishment is the most appropriate way forward from a commercial and tax-efficient perspective, and if your operations grow as quickly as you would wish, it is important not to forget systems. Your VAT accounting procedures and controls must keep pace with the rate of business growth. HMRC and other EU tax authorities will be more interested in the business, with the possibility of larger compliance errors increasing and the risk of inherent inaccuracies in systems that may surface as turnover increases.
Reviews by VAT specialists to consider systems, structure and controls, as well as additional qualified staff or outsourcing of reporting, are all options which could be considered.
Duty incurred on import
There is currently – depending on the outcome of Brexit – a uniform approach within the EU to customs duty rates applied to imports of goods into the EU, but accuracy in classification remains an art. Forwarding agents responsible for entries will fit items into appropriate descriptions where possible, but if the ‘square peg does not fit the round hole’ the item will be awarded a general classification, often with a higher than appropriate duty rate. In our experience of reviewing importers with diverse or unusual goods, there are often claims for refunds to be made, or at least claims to correct errors and achieve the best rates for the future.
Customs duty entries should therefore be reviewed periodically, to ensure the right amount is being paid and that you are taking advantage of any reliefs available – such as preferential rates for certain goods from certain countries, and goods on temporary importation. Payment deferment options may also be available.
Dealing with HMRC
Routine VAT audits by tax authorities such as HMRC do not usually require VAT specialist assistance. However, remotely managed businesses will need to rely to some degree on local expertise, and there are also occasions when a degree of sensitivity in how sales and activities are described is needed from a VAT perspective. VAT is, after all, an inherently interpretative tax, as demonstrated by the broad spectrum of court decisions since its inception.
If a business is concerned about any issue, a VAT specialist should be consulted before entering into negotiations with UK tax authorities. This ensures that technical matters are explained in the right way, reducing the amount of follow-up work and aggravation for all parties concerned.
It is also advisable for all tax authority decisions to be reviewed by a local specialist, as these may well be incorrect and could have wider implications for the business.
The impact of Brexit
What will happen to VAT and customs duty taxes at Brexit remains uncertain. It depends largely on whether a deal is reached with the EU, and what that is. Nevertheless, EU businesses trading within Europe after Brexit will need to consider the issues that may arise.
HMRC have issued a brief that clarifies and tempers some of the concerns if there is no deal.
A key point is the movement of goods into the UK from the EU: HMRC specifies that although these would be imports, there will be a simplified measure for paying import VAT if the importer is registered for VAT in the UK. This suggests that the method of paying import VAT may be similar to that currently for arrivals from the EU – that is, where VAT is declared and paid under the VAT return filing process rather than at the airport/port of entry. This would alleviate cash flow issues.
There is also confirmation that duty may be payable where goods move from the UK into an EU country.
EU businesses with interests in the UK will need to pay close attention to the Brexit deal and prepare for its effect on trade. A tax adviser experienced in cross-border UK and EU tax issues may be able to help with the evaluation and preparation process
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