A series of insights into financial matters from member firms of the MGI association
VAT - are you reversing the charges?
Are you trading with businesses outside the UK? If so, you may need to operate the "VAT reverse charge procedure". And you need to get it right! Unfortunately, many businesses are falling foul of the requirements.
Do not assume this can be taken care of at the year end. This is not possible because the VAT is a tax on transactions and the reverse charge, where applicable, will apply to individual transactions and, therefore, individual invoices.
So, what does it mean? What’s the problem? And what do you need to do?
What is it?
The principle behind VAT is simple: suppliers of VAT-able goods and services add VAT to their selling prices. For VAT registered businesses, this amount can be reclaimed (thus rendering the process somewhat circular) leaving the ultimate consumer to pick up the tab. (This is of course a vast over-simplification, but you get the gist.)
So, what’s the problem?
Under EC law, if the supply is deemed to take place in the territory where the customer belongs, then it may be the customer, rather than the supplier, who has to declare and pay the VAT. If the customer is VAT registered and using the supply in his or her business for a taxable purpose, then this VAT can be reclaimed in the normal way but this "circularity" does not eliminate the requirement to account.
If the reverse charge applies, then as a customer, you need to be declaring and paying the VAT on your Returns. If you are the supplier, you must remember not to charge VAT on your invoices and comply with statistical declaration requirements.
What do you need to do?
You need to understand the rules and when they apply.
The basic rule has always been that VAT is chargeable in the territory where the supplier belongs. Confusingly, however, the basic rule has exceptions. For example, the supply of property services has always been deemed to have taken place in the territory of the property rather than of the supplier.
This has become even more of an issue recently because, since 1 January 2010, very many more types of service will be deemed to be supplied where the customer belongs. Indeed this is to become the default position for business to business transactions.
Will this affect you?
This will be particularly relevant if you export goods and services (where you may not only be relieved of the obligation to charge UK VAT but may have to register in another territory), or acquire goods or services from another country where you may have to apply the reverse charge procedure outlined above.
If, as Benjamin Franklin so famously put it, nothing can be said to be certain, except death and taxes, he may have added "and nothing can be said to be so complicated as VAT!" VAT is extremely complex and professional advice should always be sought.
Carter Backer Winter LLP
Part of the MGI association