UK VAT claims by non EU businesses

There are special rules for businesses established outside the EU submitting a claim for VAT incurred on goods or services bought in the UK. The exact rules that determine what VAT is refundable can be complex. There are also a number of conditions which must be met in order for a claim to qualify.

The deadline for the submission of a refund request for expenses incurred in the UK by non-EU businesses during the period 1 July 2018 – 30 June 2019 was 31 December 2019. HMRC has reported that due to the impact of Coronavirus there are some delays in making repayments. HMRC generally aims to process and refund overseas VAT claims within 6 months of the submission deadline of 31 December 2019 i.e. by 30 June 2020. HMRC now expects to pay valid 2018-2019 claims by 30 September 2020. HMRC will contact claimants whose VAT claims will not be paid by 30 September 2020 either because further information is needed or for any other reason.

HMRC is also reminding those concerned that claims for 2019-20 need to be submitted by 31 December 2020. One of the conditions for making a claim is for the claimant to obtain the required certificate of status from their official issuing authorities. This may not be possible due to measures taken by jurisdictions in response to Coronavirus. Claimants who submitted their VAT refund claim without a certificate of status will not have their claim rejected, but it will be put on hold until 31 December 2020. HMRC should be contacted for further case specific advice if obtaining a certificate of status before 31 December 2020 is likely to be problematic.

Reclaiming VAT after deregistration

Businesses can close a VAT registration for two main reasons. For example, the business has stopped making taxable supplies or a voluntary deregistration can be made by businesses that does not expect its taxable turnover to exceed the deregistration limit. The current deregistration limit is £83,000.

A business that deregisters will be required to submit a final VAT Return for the period up to and including the VAT deregistration date.

Regardless of the reason for deregistration, businesses remain eligible to reclaim input tax relating to the time when the business was VAT registered after the final VAT return has been submitted. Such a claim is made using form VAT 427.

The form can be used to:

  • reclaim VAT paid (input tax) on purchases when you were VAT registered
  • reclaim VAT paid (input tax) on certain services you bought after you cancelled your VAT registration
  • get relief on the VAT you paid to HMRC (output tax) on bad debts that you identified after you cancelled your VAT registration.

Time to revisit VAT Flat Rate Scheme?

The VAT Flat Rate scheme is intended to simplify the way a business accounts for VAT and reduce the administration costs of complying with the VAT legislation. There can also be a decent VAT saving for those using the scheme.

The scheme is only open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT. If you have clients whose turnover has reduced to this level as a result of the Coronavirus pandemic, then it may be worth reconsidering the scheme.

Under the Flat Rate scheme, businesses simply pay VAT as a fixed percentage of their VAT inclusive turnover. When using the scheme, the amount of VAT paid on business expenses becomes irrelevant. This is quite different to the normal VAT accounting procedure where simply putting the VAT paid to HMRC is the difference between the VAT charged to customers and the VAT paid on purchases.

The actual percentage used depends on the type of business. There are special rules for those classed as a limited cost business who must use a flat rate of 16.5%. This will negate the benefit of joining the scheme.

In addition to the turnover limit you cannot use the scheme if:

  • You left the scheme in the last 12 months,
  • You committed a VAT offence in the last 12 months,
  • You joined or could have joined a VAT group in the last 24 months,
  • You registered for VAT as a business division in the last 24 months
  • Your business is associated with another business,
  • You have joined a margin or capital goods scheme.

Once you join the scheme you can continue using the scheme once your total business income does not exceed £230,000 in a 12 month period. There are some special rules if the increased turnover is temporary. There is also a first year discount for businesses in their first year of VAT registration of 1%.

Deregistering for VAT

A voluntary VAT deregistration can be made if you do not expect your taxable turnover to exceed the VAT deregistration limit. The current deregistration limit is £83,000.

If you are running a small business that has been adversely affected by the Coronavirus pandemic, this could be an opportune time to consider whether or not to voluntarily deregister. The deregistration cannot be backdated and must be from a current or future date where you expect sales in the next 12 months to be less than £83,000.

A compulsory VAT deregistration is usually required if you:

  • Stop making taxable supplies
  • Sell your business
  • Change legal status
  • Disband a VAT group
  • Join a VAT group
  • Join the agricultural flat rate scheme

You will be required to submit a final VAT Return for the period up to and including the VAT deregistration date.

If you are considering voluntarily cancelling your VAT registration, there are a number of issues that must be considered. Whether or not this is a good idea depends on your specific circumstances. We would be happy to help you consider your options.

If you mainly sell goods or services to individuals who have not been able to reclaim the VAT you charge, deregistration may help you to restore a competitive advantage.

 

VAT changes for the construction sector delayed again

The VAT rule changes for building contractors and sub-contractors that were expected to come into effect on 1 October 2020 have been delayed for a further 5 months until 1 March 2021. The delay is due to the impact of the Coronavirus pandemic.

The new rules will make the supply of construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector. From 1 March 2021, sub-contractors will no longer add VAT to their supplies to most building customers, instead, contractors will be obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. This is known as the Domestic Reverse Charge.

Please note, although contractors will be responsible for paying the deemed output tax, on their VAT return they can usually claim back the same amount as input VAT.

The new rules were originally expected to come into force from 1 October 2019. The initial 12 month delay was announced following intense lobbying by the construction industry who had argued that many businesses in the sector were unprepared for the change.  HMRC have confirmed, that even with this additional delay, they remain committed to the implementation of the Domestic Reverse Charge.

There will also be an amendment to the original legislation, which was laid in April 2019, to make it a requirement that for businesses to be excluded from the reverse charge because they are end users or intermediary suppliers, they must inform their sub-contractors in writing that they are end users or intermediary suppliers. HMRC says that this change is designed to make sure both parties are clear whether the supply is excluded from the reverse charge.

Conditions for claiming Bad Debt Relief

The VAT bad debt relief rules allow businesses to claim bad debt relief and reclaim the VAT they have paid to HMRC. This can happen when an invoice has been issued to a customer and no payment has been received after an extended period of time (usually 6 months after the due date) has elapsed.

Under the normal VAT accounting rules, a business supplying goods or services usually accounts for VAT at the time an invoice is raised irrespective of whether payment has been received or not. There are a number of conditions which must be met in order to claim bad debt relief.

The conditions are set out in HMRC’s Notice 700/18 entitled Relief from VAT on bad debts:

  1. You must already have accounted for the VAT on the supplies and paid it to HMRC.
  2. You must have written off the debt in your day to day VAT accounts and transferred it to a separate bad debt account.
  3. The value of the supply must not be more than the customary selling price.
  4. The debt must not have been paid, sold or factored under a valid legal assignment.
  5. The debt must have remained unpaid for a period of 6 months after the later of the time payment was due and payable and the date of the supply (one year after the date of supply for supplies made from 1 April 1989 to 31 March 1992), and
  6. if the goods were supplied before 19 March 1997, ownership must have passed to your customer, or through the customer to a third party.
  7. For supplies made to a VAT-registered customer between 26 November 1996 and 30 April 1997, you must send a notice to them. A copy of the notice must also be retained.

Businesses that account for VAT under the Cash Accounting Scheme and businesses that use certain retails schemes only pay VAT on the cash amounts they have actually received from customers. This makes bad debt relief claims unnecessary as VAT is only paid when the customer pays what is owed. Small businesses that suffer from a significant amount of bad debts should consider if it would be beneficial to apply to use the Cash Accounting Scheme.

Further support for charities from VAT receipts

It has been revealed by HM Treasury that the VAT collected on donated personal protective equipment (PPE) will be given to charities supporting the NHS and care workers. This measure will apply to all the VAT collected on donations made from 1 March until 30 April – the period between PPE donations starting and when the temporary zero VAT rate on PPE became effective on 1 May 2020.

The government donation will be made to support frontline workers affected by Covid-19 equally through the Care Workers Charity and NHS Charities Together. The donation which will be equivalent to the VAT collected is expected to be worth between £500,000 to £1 million. The Department for Health and Social Care will make the donation of the VAT on the government’s behalf.

Chief Secretary to the Treasury Steve Barclay said:

'Frontline health workers are fighting Coronavirus day in, day out – in our hospitals, care homes and communities. Whilst we will never be able to fully express our gratitude to them, we want these donations to be a small sign of our appreciation. From the Treasury and the whole government, we say thank you for all you are doing.'

No VAT on supply of PPE

The government has introduced a zero-rate of VAT on the sale of personal protective equipment (PPE) for Covid-19. The temporary measure will apply from 1 May 2020 until 31 July 2020 unless any further extensions are announced. This move will save care homes and businesses dealing with the Coronavirus outbreak more than £100 million.

The government is acting under an exceptional basis allowed by EU rules during health emergencies. The European Commission recently indicated support for member states to introduce temporary VAT reliefs to mitigate the impacts of the Covid-19 pandemic. The UK remains bound by EU VAT law until the end of the transition period.

Products covered by the zero rate include:

  • disposable gloves
  • disposable plastic aprons
  • disposable fluid-resistant coveralls or gowns
  • surgical masks – including fluid-resistant type IIR surgical masks
  • filtering face piece respirators
  • eye and face protection – including single or reusable full face visors or goggles

The reduction in VAT will particularly benefit care providers, who are often unable to reclaim the 20% VAT they incur on their purchases.

VAT scrapped on e-publications

It was announced as part of the Spring Budget measures that the zero rate of VAT would apply to all e-books from 1 December 2020. The date of this change has now been brought forward and came into effect on 1 May 2020. This will be a welcome boost to readers and publishers during the coronavirus outbreak.

This change will bring electronic books, magazines, newspapers and other academic journals in line with their printed equivalents which have always been free of VAT (zero-rated). This change could potentially reduce the cost of a £12 e-book by £2 and e-newspapers subscriptions by up to £25 a year. Some of the biggest online retailers in the UK have already confirmed that the standard prices of e-books will be reduced with immediate effect.

The Chancellor of the Exchequer Rishi Sunak said:

'We want to make it as easy as possible for people across the UK to get hold of the books they want whilst they are staying at home and saving lives. That is why we have fast tracked plans to scrap VAT on all e-publications, which will make it cheaper for publishers to sell their books, magazines and newspapers.'

The government also announced plans to spend £35m on newspaper advertising over the next three months as part of its Covid-19 communications campaign. The extra advertising revenue will be split between local, regional and national print media.

Deferral of VAT payments update

It was announced at the end of March that VAT registered businesses have the option to defer any VAT payments due between 20 March 2020 and 30 June 2020.

HMRC’s guidance for the deferral of VAT payments has been updated and states that you can only defer the following:

  • quarterly and monthly VAT returns’ payments for the periods ending in February, March and April
  • payments on account due between 20 March 2020 and 30 June 2020
  • annual accounting advance payments due between 20 March 2020 and 30 June 2020

The deferral does not cover payments for VAT MOSS or import VAT.

There is no application process required to request this deferral as permission is automatic and all VAT-registered UK businesses are eligible. However, businesses can still choose to pay any VAT due as normal. HMRC are continuing to process VAT reclaims and refunds as normal.

It is important to note that this is only a deferral and whilst no interest or penalties will be charged, the full amount of VAT due will still need to be repaid. If you choose to defer your VAT payment as a result of Coronavirus then you must pay the VAT due to HMRC on or before 31 March 2021.

If you are planning to make use of the special deferral period and you pay by direct debit, then you must cancel your direct debit in order to benefit from the VAT deferral. You can cancel your direct debit online using online banking or contact your bank if necessary. Please make sure that you do this as soon as possible to ensure that HMRC do not automatically collect the VAT due. You will also need to remember to set up the direct debit again when your next VAT payment is due (if no further deferrals are announced).