Very confused by VAT

mannaroth

Hi,

I'm the director of a Limited Company that's been trading since October. We're not currently VAT registered but we should reach the threshold by the end of Feb so we'll have to register soon.

At the moment, a large portion of our expenses comes from advertising costs. We use Facebook and Bing adverts.

On our invoices from these companies, VAT is not included or paid.

See this statement on the Bing Invoice:

Microsoft Online, Inc. is a US corporation. No VAT applies to services performed in the United States by Microsoft Online, Inc.


And Facebook:

Customer to account for any VAT arising on this supply in accordance with Article 196, Council Directive 2006/112/EC.


So, my question is simply, do I have to actually pay VAT to HMRC on top of these costs? I'm getting all confused reading up on reverse charge VAT and all sorts.

Same question applies to when we actually become VAT registered.

zaax

VAT is quite complicated and if your going above the VAT threshold you need better advice than given on here. Get an accountant or professional book keeper.

pjclar02

Firstly, the value of the reverse charged supplies from Facebook need to be included within your calculation of turnover when establishing when you breach the VAT registration threshold. So if you have paid £10,000 to Facebook for advertising, you would need to add this on to your turnover to see if you exceed £81,000 in any given 12 month period.


Whilst you can remain not VAT registered because you are below the threshold, you do not need to do anything else in terms of the reverse charge - you do not have to pay VAT to anyone.


Once you have registered for VAT, you have to account for the reverse charge, but it does not cost you anything, as you account for the VAT as output VAT on sales, but then you deduct it again as inout VAT on purchases. So your net position will be VT neutral.


Hope this clarifies...

Carl31

Vat is charged on goods or services that draw a vat charge under hmrc rules. If you are vat registered you have to charge vat on your goods or service supply, and you can recover vat paid to offset the amount you pay to hmrc

where you receive a good or service from abroad, as a measure to protect local business, you may have to pay duty and vat when you receive the benefit of the good in this country.

To be honest, due to the complexity of vat and the specific nature of the charges and how it affects individuals, you really need to consult an accountant or vat expert. The hmrc website does have everything you need, but it's quite difficult to understand if it's not something you are experienced in

TheCyclingProgrammer

pjclar02 has pretty much summed it up. B2B supplies of services from non-UK suppliers to a UK based business are subject to the reverse charge. This should normally be stated on the invoice but whilst I'd expect most EU suppliers to do this its not unusual for non EU suppliers to make no mention of it.

Only VAT registered businesses can operate the reverse charge (which is VAT neutral) but as pjclar02 points out you should have been counting the value of these supplies when calculating your turnover for the purposes of the VAT registration threshold. It's possible that you may have unknowingly breached the threshold already.

Once you are registered, a reverse charged supply is treated as if you both supplied and received the service so you would calculate the UK VAT and add it to your VAT return as both input and output VAT.

I'd be interested to know how many VAT registered businesses are actually aware of the reverse charge mechanism and when it applies and that operate it correctly. For most businesses the whole thing is VAT neutral and largely a reporting exercise so I'm not sure what penalties HMRC could even enforce for failure to apply it. I'm sure some VAT expert could explain why it's even necessary - I think it's something to do with VAT fraud but I'm not entitely sure!

http://www.rossmartin.co.uk/vat/986-reverse-charge-a-place-of-supply

mannaroth

Thanks for all the replies.

So how would it work if you were on a flat rate VAT scheme? Does that change anything?

thenudeone

The flat rate scheme means you charge VAT to your customers as normal, allows you to claim a set percentage of your turnover as if were purchases on which VAT was included (and therefore reclaim it), and avoids the need to keep detailed records of actual purchases which you would normally have to.

Whether that is better or worse for you depends on what your real purchases are. In general, high labour-content self-employed contractors will be better off under the flat rate scheme, but those with a lot of purchases subject to VAT would be worse off.

On a separate subject - the reverse charge mechanism was though to be a better alternative than getting EU sellers to charge VAT on cross-border sales and then attempting to get each of the 28 separate EU states to implement a workable mechanism for firms in their state to reclaim VAT from the other 27 states (all of whom have different rates, allowances, reclaim rules and so on).

TheCyclingProgrammer

mannaroth wrote: »

Thanks for all the replies.

So how would it work if you were on a flat rate VAT scheme? Does that change anything?

No, not for the reverse charge on services. Whilst you cannot usually recover input VAT (except on capital purchases over £2k) on the FRS, the reverse charge is dealt with outside the flat rate scheme so you would handle the reverse charge in the same way as on the standard scheme (the input and output VAT cancel eachother out).

However, if you buy any goods from abroad, these are acquisitions and subject to import VAT. This is not recoverable on the flat rate scheme.

Also, once you're VAT registered, it's important you give any EU based suppliers your VAT number to ensure they don't charge you VAT.

If your VATable expenses are low then the FRS can be beneficial as your flat rate surplus (i.e. the difference between the VAT charged and the percentage you pay to HMRC on your gross turnover, which varies depending on your sector) will often exceed any input VAT (which can't be recovered) and so you will make a small profit from the scheme.

OTOH, if your expenses are high and you pay a lot of input VAT (including on purchases of goods from abroad, but not services) it's possible for the input VAT to exceed your flat rate surplus and so you would make a loss from being on the scheme and would be better off on the standard scheme.

If the majority of your costs are services purchased from overseas suppliers, then due to the way the FRS and reverse charge mechanism interacts, being on the FRS may well be profitable and simpler for you, but it's hard to say for certain without a clear picture of your finances and business.

chrismac1

In my opinion the reverse charge rule is bonkers beyond belief but I doubt you'll ever get HMRC to change it. A minority of businesses - for example opticians, insurance, banks - have exempt outputs. So to them the reverse charge rule is not neutral, it is a hit.

For the sake of that everyone else has to comply with these ridiculous rules which cause endless confusion and produce mistakes and blunders.

The flat rate scheme may or may not be worthwhile, it depends on what sector you are in. In general you need to be a business with a below average level of 20% rate inputs for your sector to make it a good deal.