In a recent discussion with a couple of fellow Accountants the question of when a trader should register for VAT when they supply services in more than one country came up in the conversation.
Everyone knows the rule of turnover on a rolling 12 months exceeding the current threshold of £85,000. However, if a trader is also trading in Europe, it can be the expenditure rather than the income that creates the need for VAT registration due to the reverse charge VAT rules.
VAT, it would seem, is the simple tax that is anything but simple in reality; the place of supply rules for international services; and input tax claims must be taken into account when calculating when VAT registration needs to be done.
The client scenario is thus:
James is a sole trader IT Consultant, and he also arranges the sale and purchase of
computers and printers as an agent, earning commission for his services.
His annual sales average is £70,000 and is therefore below the compulsory registration threshold of £85,000. He has recently agreed to act as an intermediary in a major hardware deal between a French-based supplier and a UK business that will earn him a considerable commission of £100,000 from the supplier in France. As a separate twist, he will use the services of an IT Consultant based in France to help with the deal, who will charge him £20,000. It’s a great deal for James but what about VAT I hear you ask?
This is where it gets very interesting, it would be understandable if you were to conclude that James must register for VAT because the commission payment will mean that his UK taxable sales will exceed £85,000 in the next 30 days with his turnover of £70,000 plus the £100,000 commission he receives. That is incorrect, James is providing an ‘intermediary service’ for a B2B customer in France. The place of supply for these services follows the general B2B rule which states the place of supply is where the customer is based.
Therefore, French VAT is not a problem for James as his customer will deal with the tax on their French VAT return by doing a reverse charge calculation on Bill’s invoices and in doing so accounting for output tax based on the French rate of VAT for the supply in question, and claiming input tax for the same amount.
Simples, the sales James has made in France will not put him over the VAT threshold as the VAT is accounted for in France and therefore not VATable sales for his UK VAT return.
On the face of it, it looks as if James has been able to dodge VAT registration due to the place of supply of his intermediary services being in France rather than the UK.
The £100,000 commission payment is outside the scope of UK VAT and ignored as far as the £85,000 registration test is concerned.
Before James goes off to the pub to celebrate, however, there is another part to this story.
Remember James has used the services of an IT Consultant provided by the French subcontractor.
In just the same way as James doesn’t have to account for his sales to France, due to the legislation the reverse charge rules mean that conversely expenditure, rather than income, can sometimes create the need to register for VAT. This is because the UK buyer of a service rather than the overseas seller is treated as making the supply in the UK.
James has earned £100,000 of income which we have excluded from the numbers but
incurred £20,000 of expenses that are relevant. The annual taxable turnover for
registration purposes is £90,000 (£70,000 of UK sales plus £20,000 with the reverse
charge on his purchase from France) and he will, therefore, need to register based on this example.
Further Reading:
VAT Notice 741A, s11
