Brexit VAT changes: a practical step by step guide

The Brexit transition period ended at 11pm on 31st December 2020, and there are changes that you need to be aware of when preparing your VAT return. 

Some of the key changes relating to businesses in Great Britain and their implications on the running of their business are outlined below. Please note however that businesses in Northern Ireland are subject to a new NI protocol and that the rules below don't apply to them. 

VAT Returns 

Boxes 8 and 9 were used for reporting sales of goods to, and purchases from the EU, so those will no longer be required for transactions from 1st January 2021 onwards. You will however need to report any transactions which took place prior to 1st January. These boxes will eventually be removed from the VAT return format. 

Box 2 was used for reporting ‘acquisition tax’ on goods bought from EU VAT registered businesses. From 1st January this box will only be used by businesses in Northern Ireland who buy goods from the EU. 

Service supplies

Business to Business (B2B) supplies of services

The general rule is that the place of supply is where customer belongs  and that does not change. So treatment of these sales will remain the same.

• EU customers will continue to account for local VAT in their own countries via the Reverse Charge.
• EU suppliers will continue to supply their services to UK businesses free of any VAT.  UK businesses must continue to account for reverse charge VAT on receipt of these services.
   

Business to Consumer (B2C) supplies of services

The general rule is that the place of supply is where the supplier belongs  and that does not change either. So UK VAT will continue to apply (note there are some exceptions to the general rule).

 

There is an another exception for businesses making B2C supplies of digital services as the current threshold of £8,818 no longer applies from 1st January (see below for more details).

Goods sold to the EU 

Goods sold to a EU customer will now be reported as zero rated sales - regardless of whether the customer has an EU VAT registration number or not. 

UK businesses who sell to non-VAT registered EU individuals will need to consider whether they or their customer will be responsible for paying EU VAT when the goods arrive in the EU. This must be made clear to the purchaser in the terms and conditions of sale. If the UK business is responsible then it will need to register in the relevant EU countries. 

Brexit done! Now what happens to VAT?

Today is the last day the UK is in the EU. Or is it? As the UK has agreed to leave the EU with a deal, there is now a transition period until 31 December 2020 (or later if both parties agree to extend that transition). What it means in terms of VAT, the most visible EU linked tax, is that nothing changes immediately. During the transition period, the UK will remain part of the single market and customs union meaning that we will continue to follow the rules regarding Intra-EU movement of goods set out in VAT Notice 725. In other words, that means one can continue to zero-rate their sale of goods, as long as they have their customers EU VAT number and the goods are sent or transported to another EU member state and that they keep valid commercial evidence that the goods have been removed from the UK within the relevant time limits. And it also means that one must continue to submit EC sales lists monthly or quarterly as appropriate.

Now some people might have been advised by HMRC to obtain an EORI number ahead of the EU exit, in case the UK left the EU with no deal. This reference while of no use for now should be kept as we are still likely to need this at the end of the transition period. Equally if one has registered for Transitional Simplified Procedures (TSP) for imports, one should keep this paperwork ready for the end of the transition period.

Lastly, during the transition period, businesses will still be able to submit valid EU refund claims via HMRC, and those businesses that are registered for VAT MOSS because they supply B2C supplies of digital services to EU consumers, may continue to submit VAT MOSS returns for the time being in the UK, rather than needing to register in an alternative EU member state.

In other words, no change for now!

Change in VAT treatment of retailer vouchers

HMRC issued guidance recently aimed at simplifying the tax treatment of retailer vouchers and at bringing it up to date with a revised EU VAT directive.

Those changes are to be effective January 1st 2019 and even though they may seem like a minor, it could mean significant tax increases for some retailers who will see some of their vouchers reclassified and their VAT treatment altered.

Currently there are 3 different types of vouchers:

1. Experience vouchers that have no face value but entitle the bearer to redeem a specific service.
2. Single purpose vouchers (SPVs) which entitle the bearer to redeem for only one type of goods or services which are subject to a single rate of VAT
3. Multi-purpose vouchers (MPVs) which can be redeemed for any type of goods or services and are subject to different rates of VAT

For experience vouchers and SPVs, VAT needs to be accounted when the voucher is issued or sold rather than when it is redeemed. This is regardless of whether it is ever redeemed. There is no provision for adjusting the VAT if the voucher is not redeemed before the expiry date. The new guidance actually widens the definition of an SPV: going forward an SPV will be defined as one where, at the time of issue, both the VAT liability and the place of supply of the underlying goods or services are known. An MPV is then a voucher which is not a SPV.

Don't expect HMRC to be rational with VAT rules

February 14th saw Nestlé lose an appeal made to the UK’s Upper Tribunal Tax Court regarding the VAT rating of their strawberry and banana flavoured Nesquik powders. This case provides an excellent example of the complications and oddities that can arise in the VAT realm, and especially when it comes to food products.

Everyone will remember the Jaffa Cakes case where McVities actually managed to come on top in its fight with HMRC. No VAT is charged on plain biscuits or cakes. But when a biscuit is covered in chocolate it becomes a luxury and standard rate VAT at 20% is added to the price. Mcvities, the market leaders for Jaffa Cakes added chocolate to the cake and tangy orange base, so classifying them as cakes, not biscuits. Although the taxman challenged this, claiming chocolate biscuit status, the court ruled in favour of McVities and we don’t have to pay VAT on our Jaffa Cakes.

As a reminder, chocolate chip biscuits where the chips are included in the dough or pressed into the surface before baking are zero-rated. Bourbon and other biscuits with a chocolate sandwich layer between two halves also escape VAT. However, if your biscuit is wholly or partly coated in chocolate then VAT will be added at the standard rate. The situation is even more complex for Gingerbread biscuits. No VAT is charged for gingerbread with just two chocolate spots for eyes. However, if your gingerbread man is dressed with any chocolate-based additions, such as trousers, 20% VAT will be added.

What is a European VAT number?

In July 2013, VAT rules for digital services sold to individuals and non VAT registered businesses were changed. From that date, these services, when supplied to EU consumers, are to be subject to VAT in the Member State where the customer belongs, even if the supplier has no EU presence. This means that non-EU businesses would have been required, under the normal rules, to register separately and account for VAT in each and every Member State in which they make those supplies. For example, a Canadian business with customers in the UK, France, Germany and Holland would have to register in, and submit declarations to each of those Member States.

In order to simplify the process, a special scheme was created that offers eligible non-EU businesses the option of registering electronically in a single Member State of their choice and account for VAT on their sales of electronically supplied services to all EU consumers on a single quarterly electronic VAT declaration which provides details of VAT due in each Member State. It's called the Mini One Stop Shop (MOSS). The return is submitted with payment to the tax administration in the Member State of registration which then distributes the VAT to the Member States where the services are consumed. Those businesses are issued a VAT number that starts with EU rather than the 2 letter code of the European country where they are registered.

An update on VAT MOSS

Furious at the upcoming changes regarding VAT on sales of digital services to non-business customers in the EU, many small businesses have taken their anger to social media as the surge in messages tagged #VATMOSS or #VATMESS can attest.

We mentioned the upcoming changes in a previous article but to recap, from 1st January 2015, if a UK business sells digital services (e.g. apps, music, e-books) to a consumer in the EU (B2C) then that UK business would normally need to register for VAT in the country of the consumer. To avoid having to register for VAT in multiple countries HMRC offer the Mini One Stop Shop (MOSS) where a UK business can declare their EU B2C digital service sales and pay the appropriate VAT to HMRC. MOSS returns are due quarterly to 31 March, 30 June etc and to be submitted, together with payment in the domestic currency, sterling for the UK MOSS, by the 20th of the following month.

The problem is that to be able to use MOSS a UK business must be registered for VAT in the UK. This lead to concerns that many unregistered businesses would now have to register in order to use MOSS, and be forced to charge VAT on their UK sales even though those sales are below the UK threshold.

When doctors need to charge VAT

Medical services are VAT exempt in the UK. Which means that a locum doctor providing medical services either as a sole trader or a limited company typically will not charge VAT. However, if an agency is involved, i.e. the doctor provides services to the agency which in turns bills the hospital, then both services (between the doctor and the agency and between the agency and the hospital) will attract standard rated VAT.

Taxing Bitcoins

Because of Bitcoin skyrocket increase this past year from $17 to over $1,200, you cannot escape hearing about those cryptocurrencies and how they will change world commerce for ever. While the Federal Reserve gave tacit approval, stating “virtual currencies like bitcoin have legitimate uses and should not be banned,” and while it's been acknowledged by the Chinese authorities as a valid currency (even though Banks have yet to gain authorisation to use it) there is still a lack of guidance from the tax authorities as to how those new currencies should be treated. There are basically 2 possibilities on how Bitcoins should be treated for tax purposes: either as an intangible asset or as a foreign currency. If a Bitcoin is considered an asset, profits will be taxed as capital gains, i.e at either 18% or 28% depending on your tax band. However if it's considered a foreign currency, then profits will be taxed as income, and therefore as high as 45%.

The problem with saying that it’s a currency is that it is not issued by a government, and traditionally currencies are legal tender issued by governments. In California Bankers Assn v. Shultz, the Supreme Court stated (in a non-tax context): “‘Currency’ is defined in the Secretary’s regulations as the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued.”

What is the Mini One Stop Shop (MOSS)?

Last year, the EU decided to change how VAT is collected for e-services, telecommunication or broadcasting services to B2C clients within the EU. Examples of telecommunications services include fixed and mobile telephone services; paging, fax and telex services; access to the internet. Examples of broadcasting services include radio and television programmes transmitted over a radio or television network, and live broadcasts over the internet. Examples of e-services include video on demand, downloaded applications (or “apps”), music downloads, gaming, e-books, anti-virus software and online auctions. Starting in 2015, every business involved in such activities will have to collect VAT at the rate where the client resides. Today, unless the business in a given country exceeds the VAT threshold, VAT is collected at the rate where the business is located (distance selling rules).

Recharge vs. Disbursement

When you pass on costs onto clients, it is important to understand if those costs should be treated as a recharge or a disbursement. Their VAT treatment is indeed quite different.

Disbursements

In this situation it's the customer, not you, who buys and receives the goods or services - you're acting as their agent. Before you treat a payment as a disbursement for VAT purposes, you'll need to make sure all of the following apply:

• you paid the supplier on your customer's behalf 
• your customer received or had the benefit of the goods or services (this condition usually prevents the agent’s own travelling and subsistence expenses, phone bills, postage, and other costs being treated as disbursements for VAT purposes)
• it was your customer's responsibility to pay for products
• your customer knew that those products were from another supplier
• you show the costs separately on your invoice
• you pass on the exact amount of each cost to your customer

It's usually only an advantage to treat a payment as a disbursement for VAT purposes if the supplier didn't charge VAT on it, or if your customer can't reclaim the VAT. In that case you can pass on those costs as is, without adding any VAT.

New VAT rules for non UK established businesses

HMRC have made changes to VAT notice 700/1 'Should I be registered for VAT?' They have added guidance on registering for VAT online and have also set out new rules for businesses not established in the UK.

From 1st December 2012 the VAT registration threshold will be removed for businesses with no UK establishment. Currently these businesses do not need to register for UK VAT where their UK sales are below the VAT registration threshold (currently £77,000). After 1st December 2012 the threshold will be removed for these businesses, so if they make any sales liable to VAT in the UK then they will be required to register.

Keeping your accounts in a Spreadsheet: 5 reasons why it's a bad idea

Spreadsheets are very powerful tools. They were the main reason the PC revolution got started in the first place. While most people have forgotten Visicalc or Lotus 123, their successor Excel -- or even Google Docs --  is now so powerful that some businesses run their entire operations on spreadsheets.

But is it wise to do keep your books on a spreadsheet? I would argue that it's not and for the following reasons:

1. Getting the right functionality is hard

Out of the box, a spreadsheet will not provide the functionality you need to keep track of revenue, expenses, VAT, bank accounts etc... It can be done but it does require some work. You can find ready-made spreadsheets that will provide some of that functionality (and as a matter of fact we do provide such a template to our clients) but the functionality will never be as good as what a dedicated bookkeeping package can offer.

Mobile Apps Developement and VAT

Selling online is complex because once you reach a certain turnover in a foreign jurisdiction, you are required to register for VAT in that jurisdiction, start collecting VAT at the local rate and then pay VAT to the local jurisdiction (rather than HMRC). The threshold depends on the country and is either €35,000 or €100,000 (see full list there). Setting up the right infrastructure for distance selling requires that you are able to identify the location of your foreign clients and bill them appropriately. It is not always an easy task especially if you sell virtual goods or if you rely on a third party distribution platform such as the ones provided by mobile app vendors. Especially since each platform behaves differently. Here is a quick summary of what you need to know:

Apple AppStore

You supply your products to Apple, who then market and supply them to consumers. Apple charges VAT to the consumers based on their location. Apple’s commission is a markup to the price, which they then add VAT to. Because of this, under HMRC rules this isn’t deemed to be a supply of “agency services” from Apple to you. So you can account for VAT on your supply to Apple as normal. Because you are supplying software to Apple’s EU subsidiary, and because the subsidiary is based in Luxembourg, you can zero rate the VAT. You will have to report the sales onto an EC Sales list however. As with many things Apple, this model is very slick!

VAT and Car Expenses

While owning a car in a company can be quite expensive for a director, there are instances where it makes sense to do so. The director will then be charged for a benefit in kind which depends on the CO2 consumption, benefit for both the use of the car and the corresponding fuel paid by the company.

The company will then be able to expense all related costs for the car. But it will not be able to recover all the VAT. If the car is purchased outright, then the VAT will not be recoverable if there is any private use. And if the car is leased only 50% of the purchase VAT can be recovered.

Know your overseas shopping limits

If you are going abroad to do Christmas shopping, or buying goods online from non-EU countries, you need to know how much you can buy before you have to pay import duty or VAT. Rules can be complex and easy to overlook. Here is a quick summary to ensure that you stay on the right side of the law:

Arriving in the UK by commercial sea or air transport from a non-EU country, you can bring in up to £390 worth of goods for personal use without paying customs duty or VAT (excluding tobacco and alcohol, which have separate allowances, and fuel). Arriving by other means, including by private plane or boat for pleasure purposes, you can bring in goods up to the value of £270. Above these allowances and up to £630, there is a duty flat rate of 2.5 per cent.

Is the VAT Flat Rate Scheme worth it?

In the UK there are basically 3 ways you can collect and pay VAT. The standard scheme that everyone know about: you collect VAT on your sales and recover VAT on your purchases then pay the difference to HMRC every 3 months. The principle is quite simple (practice is lot more complex however!).

There is a second method which is a slight variation on the first one: it's available to businesses with an expected turnover of less than £1.35m and it's called the cash accounting scheme. Using standard VAT accounting, you pay VAT on your sales whether or not your customer has paid you. Using cash accounting, you do not need to pay VAT until your customer has paid you. It can improve cash-flows for businesses with less favourable terms for suppliers than for clients.

Then there is the flat rate scheme. It was designed to help the small business but you need to understand all the implications before you jump. It's only available to businesses with a turnover of £150k or less and once you have joined you can only stay in the scheme for as long as your turnover remains under £230k.

Selling abroad and VAT

VAT rules can be extremely complex. On top of that they are changing all the time, and will continue to do so for at least the next few years. To make matters worse, rules are filled with exceptions based on the type of activity or business. Information is plentiful but not always crystal clear.

Here is quick summary of what to put on your invoice and your VAT return depending on the type of client you deal with. Keep in mind that it's just a summary and as I said there will be many exceptions.

But it's a good start and it should help you get started if you sell overseas. If you want to understand more about the subtleties of reverse charging, place of supply and so on, please feel free to head to the HMRC website. But beware if you are prone to migraines...