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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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.
Agree
easiest solution, no planning required.
But probably not what OP wants to hear.
Nick, does UK2 understand how VAT works in UK
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...
To answer 1, we need to know: Is UK2 acting as agent or principal in the contract with UK1?
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
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.
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.
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.