The government occasionally changes the tax rules with little warning to counter tax evasion, and 1 February 2016 is one of those occasions, writes Rebecca Cave.
From 1 February wholesalers of telecoms services will have to apply VAT as a reverse charge to the telecoms services they purchase within the UK. This could impact relatively small companies.
What is a reverse charge?
Businesses who buy services from other businesses (B2B supplies) across international borders are familiar with the system of reverse charge for VAT. The supplier doesn’t charge VAT on the service, but the customer adds VAT at their local rate, and includes that amount of VAT in their VAT return as part of sales (output VAT) and with purchases (input VAT).
This system of reverse charge is to be extended to wholesale telecom services supplied within the UK on and after 1 February 2016, as set out in Revenue & Customs Brief 01/2016. The services covered by the new regulation (SI 2016/12) will include: routing telephone calls and associated data (including text and images) over landlines, mobile networks or the internet (e.g. VOIP calls). The product exchanged is essentially airtime minutes.
Who is affected?
The wholesale buyer of the telecoms services, who sells on the service with little or no consumption, will have to apply standard rate VAT to their purchases and to their sales. These buyers are sometimes referred to as ‘carrier hotels’. The large telecoms providers will not add VAT to the telecoms services provided to those wholesales.
This change in the VAT treatment is expected to apply to hundreds of businesses that buy and sell wholesale telecoms services, but some of those businesses will be quite small companies. You don’t need much more than a powerful set of computer servers, technical knowledge and marketing skills to set up as a carrier hotel.
This is where the tax fraud has emerged. The traders may exchange packages of airtime minutes through chains of wholesales, some of which do not exist, or the value of the sales are exaggerated. Such chains of wholesalers can appear and disappear very quickly. At the top of the chain VAT is reclaimed, but that VAT is not passed on in full to the final customer, and the wholesalers near the bottom of the chain disappear. A clue to missing VAT is that the retail value of the services is unusually low.
Penalties will apply for non-compliance with the new reverse charge rule. However, HMRC has said they will apply a light touch in charging penalties for the first six months as it realises businesses have had very little warning to implement these changes.
About Rebecca Cave
Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.