With the news that the UK is now officially out of the EU, there are significant adjustments in play for businesses that use export operations and consideration needed for post-Brexit VAT rules.
The rules for supplying services between Great Britain and EU members states are now the same as the rules for supplying services from the UK to outside the EU.
In considering whether VAT should be charged on exports, two distinct areas are affected, the supply of goods and the supply of services, each with different aspects to take into account.
The supply of services depends on who the supply is being made to as there are different rules for business to business and business to consumer.
For a business supplying to a customer the place of supply (where it is happening) is where the supplier belongs, irrespective of the location of the customer. If you are a business supplying to a business the supply is made where the customer belongs. Supplies of services related to land are generally considered to be made where the land is located.
If the supply is in the UK it is subject to UK VAT, which must be charged and accounted for if due. If the supply is in an EU member state it is outside the scope of UK VAT, meaning you or your customer may be liable to account for any VAT due in the EU member state and in some cases requiring the UK business to register for VAT in the member state.
If you sell, send or transfer goods out of the UK you do not normally need to charge VAT. This is called zero rating. Zero rated goods are still VAT taxable, but the rate VAT businesses must charge to customers is 0pc. Appropriate export documentation must be maintained in order to prove the goods were consumed outside the UK.
Zero rate exporting applies from Great Britain to any destination out of the UK and from Northern Ireland to outside the UK and EU. Care must be taken to account correctly for any supplies of goods that are routed via Northern Ireland.
In addition to the UK VAT rules, businesses and individuals need to take account of relevant import duties levied in the destination country.
The government’s advice is to hire a customs broker, freight forwarder or similar to help with customs relating to importing and exporting, but it helps to have a friendly and reputable accountant to guide you along the way.
SME Brexit Support Fund
The SME Brexit Support Fund is a government grant scheme that opened for applications on the 15 March and will close on 30 June, unless the £20 million set aside has been utilised by then.
The grant is for up to £2,000 to pay for practical support including training or professional advice in the wake of Brexit. This can be used to cover fees associated with getting specialist advice from accountants or business advisors.
The eligibility criteria is pretty broad with businesses qualifying if they have fewer than 500 employees and no more than £100 million annual turnover and export or import with the EU.
Why in the middle of a pandemic would I want to add more chaos to my life?
More mess in the house, sleepless nights, toilet training, boys going berserk with excitement and making as much of a racket as the dog.
Most people settle for a takeaway to bring them cheer.
The Golden Retriever, who is yet nameless, will arrive soon and won’t only be a playmate for the boys, but also for our 11-year-old dog, who is probably in desperate need of another canine in the house after being stuck with us for the best part of a year.
I can almost see the dread on her face when we produce the lead for yet another walk around the village.
Coupled with the new puppy, the other big news is – the 11-year-old has a phone. I’m sure you can’t contain yourself.
He wanted it. We said no. He asked again, we said no. This went on for two years.
Then he was last in the class to get one and as all parents do when their eardrums are about to bleed, we gave in with an old one of ours.
I have little else to report apart from the fact that I have moved on from my obsession with Broadchurch to The Crown.
Away from the monotony of life in lockdown work is thankfully very busy.
There’s a big change coming next month when the new VAT Domestic Reverse Charge for Building and Construction Services is introduced.
It will change the way VAT is collected within the industry and will affect people who supply or receive services reported under the Construction Industry Scheme.
All VAT registered customers receiving the service will have to pay the VAT due to HMRC, instead of paying the supplier. It only applies to individuals or businesses registered for VAT in the UK, but it means people supplying construction services to a VAT registered customer will not have to account for the output VAT.
Due to come into effect on 1 March 2021, the VAT domestic reverse charge for building and construction services will significantly change the way VAT is collected in the building and construction industry. The new legislation will only apply to certain building and construction services. It will mean that the customer will now be liable to account for the VAT on goods and services they receive in purchases, rather than the supplier.
The change will be introduced in a new effort to combat missing trader fraud. Missing trader fraud occurs when individuals set up construction companies, operate as normal, but siphon off VAT as it moves up the supply chain by not declaring their output VAT.
What is the VAT domestic reverse charge?
The new reverse charge taxation system will mean that VAT will no longer be paid over between businesses. For every transaction that is made, the VAT will be registered and clearly stated on the invoice as a reverse charge. Rather than the supplier charging and accounting for the VAT, it is the recipient of those supplies who accounts for the VAT. The contractor then uses its VAT return to account for output VAT on the supplies received, instead of paying output VAT to the supplier. Subject to normal VAT rules, the contractor can then reclaim VAT on the supplies received as input tax. In most cases, this will leave no net tax payable on the transaction.
Will the VAT domestic reverse charge affect my business?
The charge affects VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). It will be used along the supply chain, until the recipient is no longer a VAT-registered business making an onward supply of specified construction services. The rules call this an ‘end user’.
The reverse charge applies only to supplies which would otherwise be subject to VAT at the standard (20%) or reduced rate (5%). It does not, for example, apply to zero-rated supplies or supplies made by someone who is neither registered nor required to be registered for VAT.
Where there is an ‘end user’, they will be expected to provide notification of end user status to its supplier. This signals that its supplier should charge VAT in the usual way.
What will I need to do to comply with the VAT domestic reverse charge?
If you are doing work for a private customer or non-VAT registered business (an ‘end user’), nothing will change, and you will continue using the existing VAT rules.
If you are a VAT registered subcontractor working for a contactor you no longer need to account for VAT on that service, but on your invoice, it must be made clear that the domestic reverse charge applies, and that the customer is required to account for the VAT. For example, the invoice must state as follows: ‘Reverse charge: Customer to pay the VAT to HMRC’.
It must also be clearly stated how much VAT is due under the reverse charge scheme, but that VAT amount should not be included in the amount charged to the customer. These sales are effectively now ‘zero rated’ and should be shown in box 6 with no corresponding VAT liability in box 1.
If you are the contractor receiving reverse charge supplies your supplier will no longer charge you VAT. Instead, you will account for the VAT and recover it simultaneously on the same VAT Return, subject to the normal rules of input tax deduction. You will account for both the ‘sale’ with entries in Box 1 and Box 6, and the purchase with entries in Box 4 and Box 7.
Other considerations for the VAT domestic reverse charge
If the building service that you are providing is under a single payment contract, the tax point is the date that the service is performed or completed. However, if you issue a VAT invoice or receive payment before the service is performed or completed, VAT is due on the date of the invoice or receipt of payment – whichever is earlier.
For invoices issued for supplies spanning 1 March 2021 that become liable to the reverse charge, the VAT treatment for invoices with a tax point:
before 1 March 2021 – the normal VAT rules will apply, and you should charge VAT at the appropriate rate on your supplies.
on or after 1 March 2021 – the domestic reverse charge will apply.
It is worth bearing in mind the implications the reverse charge may have on business cash flow, as VAT will no longer be paid and received between businesses.
Further guidance on the reverse charge is available on the HMRC website
This is a big change to the way VAT is handled in the building and construction industry. If your business will be affected and you would like more guidance on this scheme, please get in touch.