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Risk of LTD company being switched to a NETP?

Is there a chance that HMRC will convert this LTD company to a NETP?

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We are primarily based in the U.S. with a Limited company setup using a small satellite office in the UK for the registered address. We are about to VAT register but after some due diligence we are hesitant to do so as a UK entity. An acquaintance suggested to me that because we are in the U.S. we will not be considered UK established even with our UK location listed as the registered office. We called the HMRC VAT hotline and they suggested the same thing saying that HMRC might investigate and switch us to NETP status and slap a 35% penalty on the VAT owed before the threshold.

However, we know of over 100 other similar foriegn businesses (online traders) that have the UK LTD company setup similar to ours. We have reached out to other accounting firms and they all said they have never heard of HMRC investigating a UK Limited company and switching them to a NETP in this situation. 

My question is would it be risky to proceed with VAT registration as a Limited company or should we proactively convert to a NETP to avoid the 35% penalty? 

Thanks for your help in advance!



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02nd Jan 2017 18:33

How did they come to you? If they are new and asking you to bend/push the rules at the first asking, it might be worth backing out and referring them to one of the other accountants to whom they 'reached out'. Your office (home?) might be their registered office, but is it really their PPOB?

OTOH can they benefit from the distance selling exemption?

Thanks (1)
02nd Jan 2017 22:46

Thanks for the reply. They've been a client with us for 7 months and we setup the LTD company for them not thinking it would be a problem. I'm just very cautious now that I've recently heard from two credible sources that HMRC would likely investigate this and switch them to a NETP. We asked the client to help us find any advice on the subject and that's why they reached out to other accountants who all said it would not be a problem at all. We just really want to avoid getting stuck with the NETP back pay + 35% penalty so I'm trying to gauge the actual risk of HMRC not accepting their status as UK established. If they do successfully VAT register as an LTD company they will obviously save quite a bit.

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By skhan
02nd Jan 2017 23:07

What is NETP ? Never heard about this.

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02nd Jan 2017 23:19

A NETP is a Non Established Taxable Person. Basically it's a person or business that HMRC does not consider to have UK establishment.

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04th Jan 2017 10:09

You may find the comments in VAT Notice 700/1 ( helpful.

This includes sections on NETP's and makes the comment that:

"We would normally consider a company which is incorporated in the UK to have an establishment in the UK as long as it’s able to receive business supplies at its registered office."

This could be read to indicate that HMRC would normally consider UK companies with a UK registered office to have an establishment in the UK and so be outside the NETP rules in normal circumstances.

In the current climate HMRC may not take their own guidance if it is being blatantly used to avoid NETP status for overseas traders, so caution will be needed where the US company is only using your address for a registered office, without the ability to receive supplies there.

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04th Jan 2017 15:28

Thank you very much for the info. I was interpreting that phrasing exactly the way you are so that's why I felt it was originally ok to setup the LTD company for the client. I guess it might be the current climate that has made my sources skeptical of this setup.

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