drowning in VAT rules

[Michaeldon]

Hello chaps and chapesses.

I am not an accountant, just a humble business owner active in many jurisdictions so I don't get kept up to date with the latest tax developments. Local managers don't bother informing me about accounting changes if they don't think it matters in other countries.

However I was just browsing yesterday and I see there have been huge changes in VAT in 2010. Perhaps you fellows could clarify a few things I am unsure of?

It seems to me that the new rules are aimed at making VAT payable in the place of consumption. This seems like a good idea but now I am unsure of a few things:

- If I have a business that is based in the EU but only makes sales to other EU member states I never add VAT to my invoices because of reverse charging. This means I collect no VAT. Does that mean when I get incoming invoices I cannot reclaim the VAT on those as I have no output VAT to offset against the input VAT?

- If I get an invoice from a US supplier for sales commissions relating to some of my accommodation he sold as an agent, I now have to add VAT to his invoice even though the US also makes him pay sales tax on the invoice? Since my accommodation sales are at a reduced rate (non UK in this case) I cannot reclaim all this VAT I add, correct?

- If I have a holding company which makes no sales and it receives an invoice for service no VAT can be reclaimed?

-Do all invoices from outside the EU need to have VAT added now? If a service was performed for an EU country but all the work was done outside the EU, how is that treated?

[David Richards]

It seems to me that the new rules are aimed at making VAT payable in the place of consumption.In general, the changes were to B2B supplies of services and in general the 'place of supply' (and hence where VAT is now payable) is deemed to be where the customer belongs - which may be different to where the service is actually supplied. But there are exceptions to this 'general rule'. See VAT Notice 741A (http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ShowContent&id=HMCE_PROD1_029955&propertyType=document) for full details.

If I have a business that is based in the EU but only makes sales to other EU member states I never add VAT to my invoices because of reverse charging. This means I collect no VAT. Does that mean when I get incoming invoices I cannot reclaim the VAT on those as I have no output VAT to offset against the input VAT?If you only make B2B supplies of services and the general rule applies, then that's correct you won't charge VAT. However if your input tax exceeds your output tax, you would normally get a refund.

If I get an invoice from a US supplier for sales commissions relating to some of my accommodation he sold as an agent, I now have to add VAT to his invoice even though the US also makes him pay sales tax on the invoice? Since my accommodation sales are at a reduced rate (non UK in this case) I cannot reclaim all this VAT I add, correct?Supply of property is one of those exceptions to the general rule. You really do need to check VAT Notice 741A to determine which set of rules affect you.

[Michaeldon]

Thanks guys. I tried the number. Too busy - will try again later.

This one interests me, purely as a curiosity:

If you only make B2B supplies of services and the general rule applies, then that's correct you won't charge VAT. However if your input tax exceeds your output tax, you would normally get a refund.

How would I know what my output tax is? I never get to see what VAT rate got applied by my customer to an invoice once the invoice has been posted.

[David Richards]

This one interests me, purely as a curiosity:

If you only make B2B supplies of services and the general rule applies, then that's correct you won't charge VAT. However if your input tax exceeds your output tax, you would normally get a refund.

How would I know what my output tax is? I never get to see what VAT rate got applied by my customer to an invoice once the invoice has been posted.It's nothing to do with VAT charged by your customer. Output tax is what you put in boxes 1, 2 and 3 of a VAT return.

So if your input tax (the amount in box 4) is more than your output tax (the total in box 3), you get a refund from HMRC.

[Michaeldon]

My output tax is zero because all my invoices go out B2B without VAT on them. VAT is added by the customer so I have no idea what VAT was finally paid on my sales.

[E Storey]

My output tax is zero because all my invoices go out B2B without VAT on them. VAT is added by the customer so I have no idea what VAT was finally paid on my sales.

No VAT is paid on your sales. The VAT is paid on the retailers sales.

I think the best advice is to get an accountant to deal with this for you!

[David Richards]

My output tax is zero because all my invoices go out B2B without VAT on them. So if your input tax is more than zero then you get a refund from HMRC.VAT is added by the customer so I have no idea what VAT was finally paid on my sales.What your customer does (or does not do) has no relevance whatsoever.

[Michaeldon]

Originally Posted by Michaeldon
My output tax is zero because all my invoices go out B2B without VAT on them.

So if your input tax is more than zero then you get a refund from HMRC.

Isn't there some limit? Like 17.5% of my VAT rated sales or something?

That sounds odd to me Michaeldon, if you're VAT registered then VAT would surely go on your invoice?

Actually it's not odd Paul. These are international sales. The foreign VAT is added by the customer when he does his VAT return and my invoices only need a VAT number but no VAT added to them.

[David Richards]

Isn't there some limit? Like 17.5% of my VAT rated sales or something?No. In some ways VAT can be very simple... if HMRC owe you more than you owe them, you get a refund.

[Michaeldon]

>> if HMRC owe you more than you owe them, you get a refund.

First time for everything David :)))))

Thanks

[scott14]

quick question..

Telecommunication services. If my supplier is in the UK (so I pay 17.5 in the UK) but my customers is based in the EU is that zero rated ?

[Kevin Hall]

Hi Michaeldon

The answers in VAT always depend on the details. A small change in details can produce a different result.

So yes, it is true that the new 2010 "General Rule" for supplies of services "B2B" (e.g. where your customer is VAT registered) is that the service is supplied in the country where the customer is established and the "Reverse Charge" mechanism applies (i.e. you charge no VAT on your sales invoices, but your customer accounts for VAT as if they had supplied the services to themselves).

However, if your service falls within specific VAT categories ("Particular Provisions") then specific rules will apply instead. For example (but not limited to), travel services, hotel-bookings, supply of hotel accommodation, residential lettings, etc all have separate VAT categories to consider, where the Place of Supply might be different from the new 2010 "General Rule". So it is critical to know precisely what it is you supply.

Furthermore, there are sometimes questions over whether a customer is a "B2B" or a "B2C". Generally (but not always), a supply to someone registered for VAT in another EC Member State is "B2B"; but it is not always the case that an unregistered customer is "B2C".

Finally, although a single set of EC VAT laws apply to all EC countries, there are small but very significant differences in practice between different EC Member States (whether due to choices within EC VAT law itself; or due to differing interpretations of the meaning of words/phrases; or simply because a Member State has a "derogation" or side-agreement with the rest of the EC to do things differently). But let us focus on what EC VAT law states first, before considering whether the rules might be applied differently in each EC country where you are active.

Of course, this all applies in reverse when you buy in services. But as a first step, can you please let us have more detail on what it is you supply exactly, and what type of customers you have (e.g. businesses, or private individuals)?

An indication of turnover in each country might also be helpful.

Hopefully you understand the "Reverse Charge" mechanism already, but if you need a quick example to clarify this, please let me know.

[Michaeldon]

Hi Kevin

Thanks for your input. Usually when I get too specific people here tell me to go and get professional advice so I kept the questions deliberately vague. But since you are asking for specifics I am in the hospitality business with a modest turnover. Here are some examples I have been pondering:

1) A holding company in Cyprus has no sales of its own. It receives an invoice from a non EU corporation for professional services such as accounting or other management. As I understand it now the Cyprus corporation is obliged to add VAT to this invoice even though it would be unable to reclaim it? This would apply only if the Cyprus corporation had registered for VAT I assume? If the Cyprus company had made a few sales carrying VAT but much lower than the incoming invoice, would it be able to reclaim the input VAT?

2) A non EU travel agent finds clients for EU based vacation rentals providers. The travel agent is not using the margin scheme because he doesn't buy in the services, but rather charges a fee for his work. The travel agent invoices the providers for a fee relating to the transaction. Is this a transaction related to property? i.e. requiring the owner to reverse charge VAT at the rate applying to his vacation rental sales? Or should he add the rate applying to a booking service? I assume in all cases VAT of some sort would be paid?

3) An EU based hotelier receives a US invoice from Expedia for commission for clients provided by Expedia. This invoice already carries US sales tax because US rules state the tax must be paid there. The EU hotelier must now add VAT through the reverse charge mechanism and end up paying both EU and US sales tax?

4) A hotel in France makes sales at the reduced VAT rate of 5.5%. It receives invoices for commissions for reservations made from a company in another EU country. As in question 2 above should he add property related VAT to the incoming invoice at 5.5% (because the transaction relates to property) or the higher rate of 19.6% relating to a service provided? I appreciate you are probably not an expert on international VAT. If you could tell me from a theoretical perspective that would be fine.

Well - you asked for it Kevin :)

There are some awkward scenarios....

[Kevin Hall]

Hi Kevin

Thanks for your input. Usually when I get too specific people here tell me to go and get professional advice so I kept the questions deliberately vague. But since you are asking for specifics I am in the hospitality business with a modest turnover.

Professional advice is a very good idea in your industry. There was a court case a few months ago which cost a trader £7 million in assessed VAT, as a result of misunderstanding the new rules. But I realise that your industry also operates on tiny margins. So I also realise that, as a businessman, you must make a personal judgement, based on your own circumstances and with your own understanding of the risk/benefit balance.

Here are some examples I have been pondering:

1) A holding company in Cyprus has no sales of its own. It receives an invoice from a non EU corporation for professional services such as accounting or other management. As I understand it now the Cyprus corporation is obliged to add VAT to this invoice even though it would be unable to reclaim it? This would apply only if the Cyprus corporation had registered for VAT I assume? If the Cyprus company had made a few sales carrying VAT but much lower than the incoming invoice, would it be able to reclaim the input VAT?

There was a worry initially that holding companies would be considered to be receiving Reverse Charged services. But my current understanding is that a pure holding company (i.e. which does nothing) is not a "taxable person" and therefore will not be Reverse Charging services it purchases from abroad.

But some holding companies do have an element of "business activity" or somehow end up VAT registered, and in that case a Reverse Charge might apply. So do check this.

Finally, the law which would determine the exact interpretation is Cypriot VAT law. So local advice is necessary to confirm this (or to uncover some local interpretation which differs from my UK understanding received from HMRC).

2) A non EU travel agent finds clients for EU based vacation rentals providers. The travel agent is not using the margin scheme because he doesn't buy in the services, but rather charges a fee for his work. The travel agent invoices the providers for a fee relating to the transaction. Is this a transaction related to property? i.e. requiring the owner to reverse charge VAT at the rate applying to his vacation rental sales? Or should he add the rate applying to a booking service? I assume in all cases VAT of some sort would be paid?

There are still grey areas in Margin Scheme place of supply rules. As a starting-point, my instinct was that an agent, who finds travellers to rent real estate, would be supplying services related to real estate; and I therefore expected VAT to be applied in the country where the real estate is located.

Had the above instinct been correct, and if the customer of the agent were VAT registered in the country where the VAT must be applied, we would usually have expected to find that a Reverse Charge is applied. Otherwise, if the customer were not registered for VAT in the place of supply country, we would have expected the agent (whether EC or non-EC) to consider registering for VAT in the country where the VAT is due, in order to charge such VAT to its customer.

But this is a grey area and local interpretations in different EC countries might differ. Worse still, a draft EC VAT law, which was supposed to come into force on 1 January 2010 and which was supposed to clarify the use of terms, is still not ready and currently states (in draft still) the text at the end of this post. To my mind, this draft seems to imply that intermediaries connected with the hotel sector, where the Margin Scheme does not override, have a Place of Supply under the Gerneral Rule, so that VAT is accounted for by the EC VAT registered business customer under the Reverse Charge mechanism. But this has yet to be passed into law, let alone put into practice.

On the other hand, if the agent is supplying not just services directly-relating to real estate, but a single supply of a packaged travel service (e.g. airport transfers, tours, etc.), then my instinct is that the General Rule would apply anyway.

3) An EU based hotelier receives a US invoice from Expedia for commission for clients provided by Expedia. This invoice already carries US sales tax because US rules state the tax must be paid there. The EU hotelier must now add VAT through the reverse charge mechanism and end up paying both EU and US sales tax?

It can happen that a transaction is taxed twice, despite the legislation's best attempts to avoid this. But the VAT place of supply rules must be applied regardless. So, as above, the VAT rules depend on what Expedia has actually done and on local interpretation; but the draft legislation quoted below seems to imply that the Reverse Charge could apply.

4) A hotel in France makes sales at the reduced VAT rate of 5.5%. It receives invoices for commissions for reservations made from a company in another EU country. As in question 2 above should he add property related VAT to the incoming invoice at 5.5% (because the transaction relates to property) or the higher rate of 19.6% relating to a service provided? I appreciate you are probably not an expert on international VAT. If you could tell me from a theoretical perspective that would be fine.

As throughout, I have assumed that the Margin Scheme (TOMS) is not applied, even by the supplier.

If the supplier receives services relating to French real estate, we would usually expect French VAT to be applied. Assuming the French have exercised the Reverse Charge option for this Particular Provision, we would usually expect the French hotel business to account for the French VAT on the purchase under the Reverse Charge mechanism.

I do not know how the French law for the reduced rate is worded, but the reduced rate is often applied narrowly so I would not be surpised if the full 19.6% rate applies to the introducer services. Indeed, the EC VAT law permits a reduced rate on hotel (& similar) accommodation, not on "property services". But French VAT law will have its own interpretations, so it is safest to seek local confirmation.

If the 19.6% rate is correct, we would expect the French hotel business to record a notional sale to itself of introduction services at Euro 1000 (say), a charge for French TVA at Euro 196, a purchase of Euro 1000 and then a TVA reclaim of Euro 196 (assuming it makes no supplies which are "exempt without recovery"). So it is "VAT neutral" fo the French hotel business (if it is not "partially exempt").



Well - you asked for it Kevin :)

There are some awkward scenarios....

Yes, but you had to give the details to get the appropriate responses. VAT law is so detailed now that any innocent omission can result in error, in hefty VAT assessments and even in penalties which could double the VAT suddenly payable.

I hope it helps, even if only to know there are grey areas.

_________
[EXTRACT FROM A DRAFT EC VAT LAW]
SUPPLY OF SERVICES BY INTERMEDIARIES
Article 35
Services supplied by intermediaries acting in the name and on behalf of another person which have as their purpose intervention in the provision of accommodation in the hotel sector or in sectors having a similar function shall:
(a) fall within the scope of Article 44 [i.e. the new General Rule] of Directive 2006/112/EC if supplied to a taxable person;
(b) fall within the scope of Article 46 [i.e. supplied where the real estate is located; or possibly where TOMS VAT is charged] of that Directive, if supplied to a non-taxable person.

[Michaeldon]

Yes, amazing advice. Thank so much Kevin.

Just one thing that really confuses me is this partial exemption. Our hotel in Czech republic charges (I think) 10% VAT on its sales (reduced rate for hotels). I had a quick look at HRMC and it looks like reduced rate is nothing to do with partial exemption.

But the manager there tells me he is unable to reclaim all the VAT he would have to add via a reverse charge at 20% to an incoming invoice from Bulgaria for introduction services. He explained it to me that he can only reclaim half the input VAT because he is only able to net off input VAT when there is sufficient output VAT to match it. And since the output VAT is low because of the 10% rate, there will not be enough output VAT to net off against.

Baloney? I am so confused I don't know anymore