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VAT Registration “twist”-beware the reverse charge

Posted: May 4, 2016

Article by Greg Mayne, Director of Indirect Tax Services at Burgess Hodgson

The recent news that Facebook first quarter advertising revenues have soared to over $5bn prompted me to highlight a potential trap for unwary UK businesses.
Any UK operator buying in services from overseas faces a potentially complicated VAT situation, and with the likes of Facebook, Google and LinkedIn currently basing their operations in the Irish Republic and Amazon in Luxembourg the spectre of the ‘reverse charge’ looms large.

In order to ensure fair treatment in relation to other domestic suppliers and users the VAT on the value of the bought-in service from overseas has to be accounted for. When the recipient business is VAT-registered and fully taxable this is relatively straightforward – if the supplier of the service is another EU business then the recipient provides their UK VAT number and accounts for the VAT on their UK VAT return as a ‘reverse charge’, showing the relative UK VAT value as both output tax and input tax on the same return. Likewise a non-EU supplier would not charge VAT, but the recipient would create the domestic VAT element on the value of the supply and reverse charge again.

Where this becomes more complicated is when the recipient business has any non-VATable activity. If they’re VAT-registered then the ability to recover all of the VAT charged may be restricted. If they’re making totally exempt supplies then they wouldn’t have a VAT registration, and therefore no mechanism to account for the VAT.

Here’s the potential trap – the value of bought-in services from outside the UK counts towards the taxable turnover threshold for registration – in other words a fully exempt insurance business buying in advertising worth more than (currently) £83,000 would be liable to register for VAT in the UK.

Effectively the process would require the business to account for the VAT to HMRC without recovering any of it as input tax, thereby putting themselves in the same position as they would be had they bought the same service in the UK, i.e. they would be charged (and pay over) VAT to the supplier that they couldn’t recover.

Any business buying in services (the buying-in of goods would have the same effect) from outside the UK should be aware of the VAT implications, and if necessary take the appropriate steps to register for VAT.