[Trevor S]

If their purchasers are intending to put the property to residential use, your friend is unlikely to need to charge VAT. The evidence required depends on the exact circumstances – for example, the buyer may need to complete a certificate. It’s worth reading sections 3.1 to 3.4 of HMRC’s notice 742A to work out what they need to do and keep: https://www.gov.uk/guidance/opting-to-tax-land-and-buildings-notice-742a#sect3

Having established that the sale is not subject to VAT, they need to determine whether it is zero rated or exempt – as this impacts on their ability to recover VAT on related expenses. If the sale is zero rated, they are entitled to reclaim VAT on any related costs – whereas if it’s exempt, they can’t. Probably their best chance of getting zero rated treatment would be if it was regarded as a “non-residential conversion” – see section 5 of notice 708: https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708#section5

If they’re unable to get zero rating and the sale ends up having to be VAT exempt, they’ll need to consider whether there will be any “clawback” of VAT that they’ve reclaimed from HMRC in the past. The logic behind clawbacks is that VAT may have been recovered on expenditure on the assumption that it fully related to the “VATable” holiday lets – when in fact some of it would now relate to a VAT exempt sale. Details on the clawback are in sections 13.7 and 13.8 of notice 706: https://www.gov.uk/guidance/partial-exemption-vat-notice-706#section13. There are also separate rules called the “capital goods scheme” (notice 706/2) which may also require some adjustments to be made if any works valued at more than £250,000 have been carried out on the building in the past 10 years. But all of this only applies if the sale is VAT exempt. If it is zero rated, there is no potential risk of these clawbacks or adjustments.

Obviously a lot is dependent on the specific detail – but hopefully this gives you / them somewhere to start!

[Trevor S]

Hi. UK VAT is due on goods or services supplied in the UK. So if the turnover of the company exceeds the registration threshold, you will be required to register for VAT in the UK and complete UK VAT returns – regardless of where you actually live.

Do you already have any employees? If not, remember that you’ll also need to start a payroll and do the income tax / national insurance calculations and deductions.

Probably worth getting an accountant or bookkeeper, if you haven’t already got one…

[Trevor S]

I don’t think you are entitled to claim bad debt relief. Bad debt relief can normally only be claimed by the person that made the supply and declared the original output tax. In your circumstances, the original supplier has received some payment for their supply (the amount that they received from you) – and you won’t have made any supply / output declaration to claim relief on.

The following extracts from HMRC’s manuals may help:
https://www.gov.uk/hmrc-internal-manuals/vat-bad-debt-relief/vbdr1800
https://www.gov.uk/hmrc-internal-manuals/vat-bad-debt-relief/vbdr1900

[Trevor S]

Are you just supplying the engineers, in the way that an employment agency might? Or are you supplying the services / works that are being undertaken by the engineers? If you were only supplying staff, the place of supply would be in the US. But I’m assuming that you are actually supplying the services / works…

Although it’s not made clear in HMRC guidance, EU law (on which current UK law is based) includes the following within the scope of the rules for land related services:
“Article 31a(2)(l) the maintenance, renovation and repair of permanent
structures such as pipeline systems for gas, water, sewerage and the like;”

Section 2.4.13 of an explanatory note (link below) states that this would include the “maintenance, renovation or repair of telecommunication infrastructures (e.g.
the replacement of a cable network installed underground)”
https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/how_vat_works/explanatory_notes_new_en.pdf

So if the underground networks are in the UK, that would be the place of supply, and UK VAT would be chargeable, regardless of where the customer is based.

[Trevor S]

There are two tests that determine when a business must register for VAT. The one most commonly affecting businesses is called the “backward look”, where you have to register once your taxable turnover for the past 12 calendar months exceeds the £85k registration threshold. But there’s also one called a “forward look”, where you must register for VAT as soon as you expect your taxable turnover for the next 30 days alone to exceed the £85k.

Exceptions to the requirement to register for VAT due to having either low or no anticipated future turnover can only be granted by HMRC on cases based on the “backward look” test. This is because any registrations under this test would not impact on the income already received, and the business would be entitled to deregister again straight away. However, your registration would be based on the “forward look” test – in that there will be a point in time at which you’ll know that you’re going to receive more than £85k within the following 30 days.

Unfortunately the fact that this payment covers work that you’ve undertaken over the course of 4 years isn’t taken into account. You’ve been making what would be regarded as a “continuous supply of services”, and the “time of supply” (which is the important date for VAT purposes) is the earlier of the issue of an invoice or receipt of payment. So you could only have spread it over a number of years if you’d billed in instalments – which clearly wouldn’t have been possible in this case.

The only possibility that I can think of, which may be worth exploring, is whether this arrangement might not actually be regarded as “business”. Strictly, VAT only applies to activities undertaken in the course of business. So if:
– you weren’t previously doing this type of work,
– you don’t intend to continue doing it,
– you haven’t advertised for other “clients”, and
– you only doing this to help a friend,
you might be able to argue that it isn’t really a business arrangement. Although percentage-based “no-win-no-fee” arrangements might be quite common, they’re only really viable from a service provider’s perspective where they have many clients – in that fees from the cases they win will cover the costs of any cases they lose.

HMRC provide some guidance in their internal manuals on arrangements that may or may not be regarded as business, see https://www.gov.uk/hmrc-internal-manuals/vat-business-non-business/vbnb22000. This is based largely on tribunal/court rulings in earlier cases – although none of those cases are similar to your circumstances. It may be worth contacting HMRC with details of your circumstances, to see whether they will accept that the income would not be in the course of business? However, if they deem that it will be business income, you’ll need to register based on the “forward look” rules as soon as you know that you’ll be paid within the following 30 days.

If the arrangement is deemed to be business, there is something referred to as a “Flat Rate Scheme”, which would allow for VAT to be accounted for at a lower rate than the standard 20% (in return for you not being able to reclaim VAT on costs incurred). To be eligible for the scheme, there is a turnover limit of £150k (excluding VAT), so this would only be available to you if the final settlement is slightly less than you’re currently anticipating.

[Trevor S]

You should use the same VAT rate on the refund as you did on the income. This is because you’re effectively cancelling the original transaction, rather than entering into a new transaction.

[Trevor S]

That’s right, for businesses that are able to claim VAT, there’s no overall cost.  The calculated VAT amounts are recorded in both box 1 and box 4 of the VAT return.  I’ve never used Sage but I’m guessing that perhaps that tax code calculates and records the amounts.

For businesses that aren’t able to reclaim VAT, there will be a cost – although they would have had the same cost if they had been able to buy the service from a UK based supplier.

[Trevor S]

Unfortunately it’s not straight forward, there are some factors that need to be considered. First, it’s necessary to establish whether the government department has a “business establishment” or “fixed establishment” which is closely connected to the supply, within the foreign country – see sections 3 and 4 of HMRC’s notice 741A https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a. Although much of this is worded more to allow foreign organisations to determine whether they have an establishment in the UK, the same principles apply. If they don’t have an “establishment” that is closely connected to the supply in the foreign country, your supply is being made to their UK base and you will have to charge UK VAT.

If they do have an establishment there, you need to know whether your supply is “business to business” (B2B) or “business to consumer” (B2C). This could be difficult for you to determine yourself and it would be best to ask them. Provided that they tell you that they’re in business and:

• if it’s an EU member state, they provide their VAT registration number in that country, which you can verify on VIES https://ec.europa.eu/taxation_customs/vies/
• if it’s any other country,they provide a copy of any relevant paperwork showing that they’re established as a business there,

then you can treat your supply as B2B. Otherwise, it will be B2C.

Then you need to determine the place of supply. There is a “general rule” that B2C supplies are considered to take place where the supplier belongs, whereas B2B supplies take place where the customer belongs. However there are a number of types of supply that are exceptions to this general rule, so worth having a quick check through sections 7 to 14 of notice 741A linked to above. Once you’ve determined the place of supply:

• If it’s in the UK, you will have to charge UK VAT.
• If it’s abroad, you should not charge UK VAT. Your customer may be liable to account for foreign taxes there. If it’s in the EU, it is good practice to include your customer’s VAT registration number and a reference to the “Reverse Charge” on your invoice.

[Trevor S]

Hi Kate,

About reverse charges…
Normally when you buy services from a UK supplier, your supplier is required to charge you VAT and they pay it over to HMRC. But when a business buys services from a supplier based abroad, and the “place of supply” is deemed to be the UK, the obligation to account for the VAT generally falls on the customer. The supplier raises their invoice without VAT and the customer pays the VAT-exclusive amount to the supplier. The customer must then calculate the VAT due, and pay it over to HMRC. As this arrangement for paying VAT to HMRC is effectively the other way round from normal, it’s called a “Reverse Charge”.

The amount that a customer has calculated and paid to HMRC as a reverse charge is still VAT incurred their expenditure. So if they would have been able to reclaim the VAT charged by a UK supplier (because the service is being used in the course of their “VATable” business), they can reclaim the reverse charge VAT in the same way.

Cross border services is the type of reverse charge that probably affects most businesses – and a “logic” for having it is to save foreign suppliers having to register for VAT in every country that they have customers in. There are other reverse charges though, that can apply to transactions that are wholly in the UK. One that came into force from the start of March applies to many construction works. Generally, the reason given for introducing domestic reverse charges is to combat perceived areas of fraud. If the VAT on both sides of a transaction (the supplier’s sale and the customer’s purchase) is accounted for by the same person, there’s no risk to HMRC of a customer reclaiming VAT which their supplier never actually paid over.

Going back to your original question about Google…
You do still need to apply the reverse charge process to this transaction. EU VAT laws require suppliers to put a note on their invoices to EU customers reminding them when a reverse charge is necessary. The fact that we’re no longer in the EU means that suppliers might no longer need to include that note. But the “place of supply” rules in the UK haven’t changed, so we’re still required to do the reverse charge. I’m assuming that your accounting software does the VAT calculations if you pick the “Purchase of Services Under Reverse Charge” option?

Hope this helps!
Trevor

[Trevor S]

Since 1/1/21, the treatment depends on whether you’re selling to EU customers from the UK, or from any stocks that you’re keeping in the EU.

From your question, I’m assuming that the sale is being made in the UK. The transaction can be zero-rated (for UK VAT purposes) because you’re immediately exporting the goods. Import VAT/duty would normally be charged to the importer (your customer), although through DDP you’re bearing the cost of this in order to avoid the customer incurring unexpected charges. You can’t reclaim this import VAT because it’s the VAT on your customer’s purchase.

But, in these circumstances, I can’t see why you would be required to charge VAT in the foreign country. Your supply has been made in the UK and VAT has been accounted on the import. So it may be that you’re currently overpaying VAT through your foreign VAT registrations?

Alternatively, if you held stocks of goods in the EU, you could make the sales from there. It would then be correct to charge foreign VAT to the customers. You would be the importer of the goods if you bought them into your EU stocks from the UK – so you could recover the import VAT on your foreign VAT return, as it would be the VAT on your purchase.

But there are further rule changes planned from 1/7/21 which may impact on you.

[Trevor S]

Thanks, that’s good to hear. There are so many potential issues to consider (for example, what about foreign based customers using the services for their UK branches?) that it would be impossible to cover everything in detail in a forum post!

[Trevor S]

Hi,

You are correct about the registration threshold – bear in mind that it relates to a rolling 12 months (rather than your normal financial/tax year), and you will need to register immediately at any point when you believe that your turnover in the next 30 days alone will exceed the threshold. There may be benefits to registering voluntarily – for example if a significant proportion of your customers are VAT registered businesses that can reclaim the VAT on their costs.

Turnover from your UK based customers will count towards the £85k, turnover from your customers based abroad will not. But what does also count towards the £85k is the value of services that you buy from outside the UK (where the place of supply is deemed to be the UK) – this is because you would be required to account for the VAT on these if you were registered. For example, are you using your own data centres/servers based in the UK or buying-in from overseas?

Technically an alternative to the non-union MOSS is to register for VAT in each member state where you have customers … but the non-union MOSS would likely be the easier option if you’re dealing with customers in multiple countries.

The following HMRC guidance relating to digital services may be useful, if you haven’t already found it: https://www.gov.uk/guidance/the-vat-rules-if-you-supply-digital-services-to-private-consumers#the-place-of-supply-of-digital-services

Remember that this all only covers UK/EU customers – many other countries have VAT or similar taxes which you may have obligations under once you have customers there.

Particularly given that you’re only just starting this business, I would suggest that it’s worth going through your plans in detail with a VAT advisor. They will be able to ensure that you have processes in place which are both compliant and efficient. Going forward, they will also be able to keep you informed of any future changes that may affect you.

Hope this helps!

[Trevor S]

Hi,

There isn’t a straight-forward answer – but hope this helps!

First point to consider is whether you are/will be the sole owner of this property. This will determine whether the property is potentially considered to be part of your existing sole-trader VAT registration or not. If you are not the sole owner, the property will not be covered by your existing VAT registration, so you cannot reclaim any VAT on the works through it. Although if the income generated from it is significant, you may need to consider whether you and the other owner(s) are required to register for VAT jointly.

If you are the sole owner and will be putting it to some business use, the property is likely to be considered part of your business. The contractor will charge you VAT which you can claim to the extent that you are putting it to taxable business use. HMRC guidance on the need for apportionment between business and private use is here: https://www.gov.uk/hmrc-internal-manuals/vat-input-tax/vit25000.

Bear in mind that the lettings would also be an activity of your business. Some lettings (e.g. holiday lets or similar) are subject to VAT, which would make you liable to account for VAT on that income – whilst other lettings are VAT exempt. HMRC’s notices 709/3 (holiday accommodation) and 742 (land and property) should help in determining the VAT treatment of the letting income. If the income is subject to VAT, you can include the letting as taxable business use when calculating the proportion of VAT that you can reclaim on costs. If the letting income is exempt, you can only reclaim VAT on the proportion relating to lettings if the value falls below the partial exemption limit (£7.5k per year, but see HMRC’s notice 706 for more details).

In any event, no VAT would be recoverable in respect of your own private use of the property.

It may be worth seeking further advice based on the specific details once they are known, but hopefully this gives you an initial idea of what may be possible.

[Trevor S]

Hi,

As these purchases won’t be imported, they are completely outside the scope of the UK VAT system.

I don’t use Sage, but have found a list of standard codes here: https://gb-kb.sage.com/portal/app/portlets/results/viewsolution.jsp?solutionid=200427112155761&hypermediatext=null. T9 seems to be the most appropriate, you would then need to record the full amount (including the Irish VAT) in a net column. I think that T1 might wrongly imply that you had received the supply of goods in the UK.

The Irish Revenue has guidance on reclaiming VAT here: https://www.revenue.ie/en/vat/repayments-to-unregistered-persons/foreign-traders-and-vat/foreign-traders-established-outside-the-eu-paying-irish-vat.aspx , but the list of items where VAT is not recoverable (as shown in the notes to the claim form) probably covers most of what you’ve bought!

[Trevor S]

I’m not involved in importing/exporting, but my understanding is as follows:

Pre-Brexit, the treatment did depend on whether the customer was a VAT registered business. Where they were, no VAT was charged by the EU supplier and acquisition tax was declared by the UK customer on their VAT return. Where they weren’t, the EU supplier had to charge VAT in their country. Either way, no UK import VAT or duty applied to the movement of goods between the two EU member states.

Since the end of the Brexit transition period, I wouldn’t expect French suppliers to be charging French VAT on goods that they were exporting to the UK – regardless of whether the UK customer was VAT registered. I don’t have any references to French guidance, but if the transaction had been the other way around, HMRC’s notice 703 implies that a VAT registered UK supplier wouldn’t charge UK VAT on goods exported to a French customer, regardless of their VAT status.

What a UK customer is liable for is UK import VAT and duty – and the method of accounting for that can vary. VAT registered businesses may be able to arrange with HMRC to have it charged to a deferral account, or account for the VAT element via their VAT return. But an unregistered customer would have to pay the VAT at the border. In practice the VAT/duty may be paid by the carrier and the cost recharged. If shipping had been arranged by the French supplier, I suppose you might find that the cost of the UK import VAT and duty is indirectly recharged to you via them – but that wouldn’t make it French VAT.

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