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What counts towards VAT threshold?

What counts towards VAT threshold?

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A UK company (UK1) is undertaking software development in Russia for an ultimate customer based in the US via a digital agency based in the UK (UK2). In other words, while 99% of the actual work is being done outside of the UK, the contract for software development is between UK1 and UK2.

1) Would the payments received by UK1 from UK2 count towards the VAT threshold?

2) If UK1 was receiving payments either from the ultimate customer based in the US or the parent company of UK2, which is also based in the US, would these payments count towards the VAT threshold of £85k for UK1?

3) If UK1 was to re-register outside of the UK (e.g. in another EU country) and received payments from the UK2, would this avoid the VAT threshold issue? 

Thank you

Nick

Replies (23)

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By NicoleM
21st Jun 2020 14:24

1. yes, as you are both based in UK.
2. contract is between UK1 & UK 2, so (1) would still apply.
3. outside scope of UK VAT. But you might have to register for VAT the 'other' EU country.

If the contract was between UK1 and the American Company, that would be different.

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Replying to NicoleM:
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By Nick10
21st Jun 2020 17:59

Thank you. To clarify, for question 2, the contract of UK1 would be with the US registered parent company. Would this change your answer? The preference is not to register.

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Psycho
By Wilson Philips
21st Jun 2020 14:37

What exactly is the issue?

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Replying to Wilson Philips:
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By Paul Crowley
21st Jun 2020 18:13

Agree
Is registration wanted or not wanted?

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Replying to Paul Crowley:
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By Nick10
21st Jun 2020 18:01

Thank you. To clarify, registration is not wanted.

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Replying to Nick10:
Psycho
By Wilson Philips
21st Jun 2020 18:12

Why not?

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Replying to Wilson Philips:
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By Nick10
21st Jun 2020 18:59

UK2 and it’s parent sell to a non-UK ultimate customer, so do not charge VAT. UK1 has no or very little inputs that are subject to VAT. An extra 20% added to the invoice of UK1 would just be an extra cost for UK2, simply because the contract is with UK2 rather than with it’s US parent. Let me know if you think I am missing something. Thank you.

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Replying to Nick10:
Psycho
By Wilson Philips
21st Jun 2020 19:20

Why would UK2 not be able to recover VAT charged to it?

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Replying to Wilson Philips:
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By Nick10
21st Jun 2020 20:36

UK2 is not VAT registered and even if it was, a lot of the other start up clients of UK1 in the UK are not VAT registered. They can get the same software development service from say a Russian company with no VAT or pay an extra 20% to a UK company (UK1). The VAT hits the competitiveness of UK1 against international peers very hard.

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Replying to Nick10:
Psycho
By Wilson Philips
21st Jun 2020 20:59

Tell them to register for VAT then.

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Replying to Wilson Philips:
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By Paul Crowley
21st Jun 2020 21:50

Agree
easiest solution, no planning required.
But probably not what OP wants to hear.

Nick, does UK2 understand how VAT works in UK

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Replying to Wilson Philips:
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By Nick10
22nd Jun 2020 06:36

Thank you Wilson. As I mentioned, this is a broader issue for UK1 than simply dealing with UK2, as many of its other UK clients are also not VAT registered. One possible solution, given the impact of VAT on competitiveness, which I have mentioned, is to reregister UK1 in another EU country and sell into the UK. Is this likely to solve the issue?

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Replying to Nick10:
Psycho
By Wilson Philips
22nd Jun 2020 08:39

It might do. The UK companies might have to consider the value of the supplies in deciding their registration obligations. There is also the point that whereas in the UK a supplier only needs evidence that the recipient is a business customer to apply the reverse charge some Member states require a VAT number otherwise domestic VAT needs to be charged.

There are other issues to consider - what about direct taxes? Double tax considerations.

I’d say more trouble than it’s worth. If the other UK customers are concerned about non-recovery of VAT there’s an easy solution...

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Replying to Wilson Philips:
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By Nick10
24th Jun 2020 14:18

Thank you Wilson. This is very helpful. I suppose the only other option is to register in a country outside the EU, but I understand that it may be easier to get the UK clients to register for VAT.

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By WhichTyler
21st Jun 2020 17:29

To answer 1, we need to know: Is UK2 acting as agent or principal in the contract with UK1?

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Replying to WhichTyler:
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By Nick10
21st Jun 2020 18:02

Thank you. UK1 is not acting as agent. It contracts with individual developers in Russia, putting together a team, to develop a project.

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By Paul Crowley
21st Jun 2020 20:55

You have your answer
UK 1 needs to export, not supply to UK2, if UK1 wants to avoid VAT registration.

And by export, I mean not to EU countries. Whole can of brand new wriggling worms

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Replying to Paul Crowley:
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By Nick10
22nd Jun 2020 06:31

Thank you Paul. Just one final question regarding sales within the EU, since you mentioned them. I know that in the Czech Republic a company providing services to a UK company does not need to add VAT to its invoices. Is the reverse position not the same? I appreciate that this is a slightly different question from whether the amounts would could towards VAT threshold, which in the Czech Republic they would.

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Replying to Nick10:
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By tom123
22nd Jun 2020 08:22

Zero rating of intra EU invoices is only possible if the customer is also VAT registered.

These EU sales would count towards the threshold IIRC.

If I was a small business, (not vat registered), I might hope that my window cleaner or office cleaner was not vat registered. Fairly sure, however, I would expect almost all of my suppliers to charge me VAT. A software developer with a turnover under the threshold would be a fairly small affair.

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Replying to tom123:
Psycho
By Wilson Philips
24th Jun 2020 18:09

tom123 wrote:

Zero rating of intra EU invoices is only possible if the customer is also VAT registered.


From a UK perspective that is not so, and applies only to goods. For services the only requirement is that the customer is a business (VAT registration of course being good evidence). As I mentioned elsewhere, though, it seems that other EU countries (or at least the service suppliers in those countries) consider that the recipient (eg UK customer) needs to be registered for Z/R to apply.
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Replying to Wilson Philips:
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By Nick10
24th Jun 2020 21:09

Thank you Wilson. Am I to understand from the above that if the client is a UK business not registered for VAT, a UK VAT registered business can issue that client with a zero rated VAT invoice (i.e. invoice without VAT)?

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Replying to Nick10:
Psycho
By Wilson Philips
24th Jun 2020 21:19

Absolutely not!

What I am talking about is the reverse charge mechanism, which is part of the place of supply rules. (My comment wasn’t strictly correct - a supply by a UK supplier to a business in another Member state is not Z/R but outside the scope, although the distinction is of no practical importance.)

The point is that such reverse charge supplies, like most supplies to business customers, are treated as made where the customer belongs, hence why they’re outside the scope of UK VAT when the customer belongs outside the UK.

A supply by a UK supplier to a UK customer is in most cases treated as made in the UK and so subject to the appropriate rate of VAT.

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Replying to Wilson Philips:
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By Nick10
27th Jun 2020 06:28

Thank you Wilson. To be clear, a payment from a US company to a UK company for software development services provided does not count towards the £85k VAT threshold, correct?

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