It Pays to Get the VAT Basics Right 1 - The Reverse Charge or How Using Search Engines Can Make you
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12th December 2013
HMRC have just released Revenue & Customs Brief
36/2013 VAT: Reverse charge for mobile telephones, computer chips and
emissions allowances announcing that the reverse charge mechanism that
applies to specified goods will continue to 2018. Whilst this is not
earth shattering news for most businesses it does give a timely
opportunity to remind accountants and their clients that getting the
basic's right can avoid unexpected VAT costs for businesses. Reverse
charges apply in a number of circumstances, namely:
• The reverse charge for specified goods such as mobile
telephones, computer chips and emissions allowances, and
• The reverse charge for services purchased from outside the
In both cases the mechanism is relatively straight forward,
output VAT is declared by the business that acquires the specified
goods or acquires services from suppliers based outside the UK and the
same amount of VAT is recovered as input VAT to the extent that the
business uses the supplies for VATable purposes. The value of services
purchased by UK businesses from non UK suppliers also adds to the total
VATable turnover for VAT registration purposes.
Given the rise of trading over the internet and the heavy
reliance on search engines such as google (non UK based) to optimise
websites more and more businesses are becoming liable to account for
VAT on a reverse charge. This can be a particular problem where
organisations that make predominantly VAT exempt supplies such as
insurers or non business supplies such as charities purchase high
levels of services from outside the UK as:
1. The organisation may become liable to register for VAT
purely due to buying in services from providers such as Google who are
based outside the UK, and then have to deduct VAT from any VATable
income streams they have and 2. Output VAT will be due on the reverse
charge supplies and the organisation might not be able to recover input
VAT on the same reverse charge if it the services are used to for VAT
exempt or non business purposes.
In the case of the reverse charge for specified goods this was
introduced as a measure to try and stop carousel frauds and in the case
of the reverse charge for services purchased from outside the UK the
mechanism ensures that UK businesses that do not have full VAT recovery
cannot benefit by purchasing services VAT free from non UK suppliers.
This supposedly simple measure to prevent VAT fraud or to block
businesses from gaining a VAT advantage from purchasing from outside
the UK does however seem to create unexpected instances of VAT being
under-declared. Here at The VAT People we have recently assisted a
number of clients who have experienced problems due to a lack of
understanding of how and when the reverse charge applies. The problems
broadly fall into the following categories:
• Businesses being unaware that they have a liability to
register for VAT due to the level of services that they have purchased
from outside the UK. This can lead to a backdated registration and loss
of income previously treated as VAT free.
• Over claims of VAT due to a failure to declare output VAT
although recovering input VAT on the same transaction.
• Input VAT claimed in full on reverse charges for services
used by businesses that are entitled to significantly less than full
VAT recovery such as insurers and financial service clients.
• Omitting to account for the reverse charge at all.
All of the above can result in the client experiencing an
assessment for VAT and an exposure to penalties of up to 100% of the
VAT due. We have a track record in success in agreeing corrective
action with HMRC that has resulted in no penalties being applied where
a reverse charge has been incorrectly accounted for. If you or your
clients purchase specified goods or purchase services from outside the
UK it is well worth your contacting our free VAT helpline for an
initial discussion with one of our consultants, it may be that we
simply put your mind at rest and confirm that there is no issue.
However, taking advice now could identify if there is an issue that can
be addressed to ensure that the risk of an assessment for VAT and
penalties is mitigated.
About the Author
VAT People are leading VAT and Customs Duty
consultants based in the
North West of England. We work with a wide range of businesses
throughout the UK as well as assisting our accountancy colleagues to
unravel the thorny VAT issues for their clients. We are one of the UK's
largest and most comprehensive sources of VAT and Customs advice, our
consultancy team having over 140
years of experience in VAT and Customs
gained in either HMRC or a Big 4 accountancy practice environment.
Call us on our VAT helpline 0800 077 4604 to discuss. All initial discussions are free with no-obligation.
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Article Published/Sorted/Amended on Scopulus 2014-01-02 15:22:50 in Tax Articles