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Many countries have VAT-type systems. From this we might expect that that because such tax systems have common features – and in the case of EU countries, a common basis in EU law – it should be easy to explain the UK VAT system to foreign businesses trading in, or intending to trade in the UK. But this is frequently not the case. Often businesses which do not have a UK establishment are taken by surprise when they learn that their business model can result in their having to register for VAT, and to make returns and payments.
A business can have only one business establishment. A company will have its business establishment in the UK if its headquarters of head office are in the UK, or if its central management and control takes place in the UK. In addition to a business establishment, a business may have fixed establishments. These are physical locations where the business has enough “human and technical infrastructure” available to it to make and receive supplies in the UK. If a business has neither of these in the UK, it is not established in the UK.
In this note I would like to deal with some points which are particularly relevant to non-established taxable persons (“NETPs”), that is to say, businesses which do not have a business establishment or other fixed establishment in the UK, but which make taxable supplies, or intend to make taxable supplies in the UK within the next thirty days. The most significant difference between a business which has a UK establishment and an NETP is that there is no registration limit applicable to an NETP (subject to what I have to say about distance selling below). This means that an NETP is obliged to register for VAT if either: (a) it intends to make taxable supplies in the UK within the next thirty days, or (b) it actually does so. An NETP has to register for VAT regardless of the level of its taxable supplies. Thus an NETP making taxable supplies below the £85,000 applicable to UK registered businesses must still register.
There are some exceptions to this. An NETP will not be required to register on the basis of supplies of services to UK businesses which account for the VAT using the “reverse charge” mechanism. This means that most B2B supplies of services will not result in a requirement to register. Another exception is distance selling, i.e. sales of goods by businesses registered for VAT in an EU member state other than the UK, to UK buyers who are not taxable person in the UK (mainly private individuals, but this can in many circumstances include charities and public bodies). In such cases, the NETP charges the VAT of the country from which it is sending the goods, until it exceeds the distance selling limit in the UK (currently £70,000), at which time it must register in the UK.
If an NETP sources goods and sells goods in the UK, it will in most cases have to register thirty days before its first sale. The position is the same in regard to sales out of a stock of goods moved to the UK. Indeed, if the business has moved goods into the UK to build up the stock, it may trigger a duty to register, even before it makes, or intends to make, its first UK sale, under separate rules on registration.
At present we are acting for a number of NETPs trading on Amazon and EBay. In such cases, HMRC can treat the marketplace as jointly and severally liable with the NETP. HMRC have become very active and effective in this area. If they find that an online trader is obliged to register but has not done so, they will serve a notice on the online marketplace holding them jointly and severally liable with the NETP. In practice this will result in the NETP’s online account being closed until it registers for VAT.
The rules on registration of NETPs are relevant to property investments in the UK. This is because supplies in relation to land are always regarded as being supplied where the land is located. For instance, an NETP buying tenanted commercial property from a seller which is registered for VAT, and is charging VAT on the rents, may wish to opt to tax the property and to register for VAT, in order to come within the rules on transfer of going concern (“TOGC”), which allow such sales to be VAT-free, with a resultant saving in SDLT. When the registration rules for NETPs were first introduced there was some doubt as to whether the TOGC rules could apply to NETPs not registered for VAT. It is now accepted that these rules can apply.
The rules on the VAT registration of NETPs are quirky, in part because HMRC seem not to have considered all the implications when they were introduced. This notes mentions some general points but professional advice should be sought to ensure that you fully take into account all the procedural rules backing up the general rules. More importantly, businesses which have to consider the possibility of registering for VAT outside their home country should take a strategic view of their supply chain management because, with careful planning, the proliferation of VAT registrations can often be reduced.