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.
In March 2021, the VAT Reverse Charge for construction services regulations came into effect for those working in the construction industry. The legislation applies to those businesses who are both VAT registered and undertaking Construction Industry Scheme (CIS) works.
Essentially, it means that the customer is now liable to account for the VAT on goods purchased and services received, rather than the supplier.
The change has been introduced in an 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 reverse charge?
The VAT Reverse Charge is a scheme where by the customer accounts for both the input and output VAT on a transaction, and no VAT is paid between the two parties.
Rather than the supplier charging and accounting for the output VAT and the customer reclaiming the input VAT, it is now the customer who accounts for both the input and output VAT on their VAT return, leaving a £Nil VAT position. The customer does not pay over any VAT to the supplier.
It is vital that all invoices issued within the scope of the VAT Reverse Charge have a clear statement declaring that the VAT is subject to the ‘reverse charge’.
Does the VAT reverse charge affect my business?
The charge affects VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). Reverse charge will apply along the supply chain, until the recipient is an end user. An end user is a consumer or final customer that does not make an onward supply of the building or construction works supplied to them.
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 do I need to do to comply with the VAT 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 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.
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 is affected and you would like more guidance on this scheme, please get in touch.