Transcript

Esther Wood (EW): My name is Esther Wood. I’m a partner here at Goodman Jones. I also head up our international group. And today I have Rob Skilton with me, who is part of our GJ VAT team. We’re going to be covering a few questions in relation to international aspects of VAT registration requirements.

Rob Skilton (RS): I think, probably, given it’s my specialist area, I’m actually going to ask the first question, if I may. Given that you tend to have the first contact and interaction with the clients, what questions you normally get thrown at you when a new international overseas client gets in touch?

EW: Well, generally it’s something super basic, such as, do I need to register for VAT? Simple as that.

RS: A classic quick question that, unfortunately, as a VAT advisor, the first answer tends to be, well, it depends. Whilst that might be our initial reaction, trying to give something more than that and understand. But very often it’s dependent on what the supply chain looks like. So there can be a quick answer, but there can also be a bit more digging that we need to do before we can give that Yes or no.

EW: Yeah, yeah, that makes total sense. So you’ve got a couple of examples?

RS: So I, I think for a business, an overseas business that’s buying goods in the UK and then selling them on in the uk, that’s a pretty straightforward. You’re buying and selling goods in the UK – there’s a registration requirement over here as a result of that.  Where it potentially gets a little bit more complicated is if we were to take an online retailer, for example, if they’re making sales of goods into the UK below £135, there’s a registration requirement arising from that. If they’re making sales above £135, then it really starts to depend on what their terms of trade are, where ownership transfers to their customer and who’s bringing the goods into the uk, and where that risk and reward hands over as to whether our overseas client has the registration requirement or not.

EW: Wow. Okay. £135 – quite low.

RS: Certainly is. Certainly is.

EW: So now we’re going to talk a little bit about group registrations. Some of the clients I work with have an overseas holding company with a number of UK subsidiaries. Is there any specific issues or things to bear in mind that we should be talking to our clients about?

RS: I don’t think there’s anything specific to the fact that it’s an Overseas holding company with UK subsidiaries, but there are various transactions that go through that would be require a bit of thought even where there’s a UK holding company. So things like management charges, interest on loans, all that sort of thing, even just supplies of services and goods between all of the members all have potentially different VAT treatments and we wouldn’t want to end up having a VAT charge that we can’t fully recover.

EW: No, no, for sure. Okay, so what about VAT groups? Can you tell us a little bit about those?

RS: Yeah, so by bringing a VAT group into place for the UK members of the corporate group, any transactions between those corporate members can be disregarded for VAT purposes. So where you’ve got an overseas finance team, they don’t have to worry about what the VAT treatment is. If we’ve got things like loan interest, which could be exempt from VAT and give us VAT recovery issues, all of that can be put to one side. So it can be quite attractive from that perspective.

EW: Okay, so what about if there’s just a branch in the uk?

RS: When there’s a branch in the UK, it can get quite interesting from a VAT perspective. So a lot of the VAT work that we do where we’ve got a UK branch and an overseas parent is often just trying to -a gain, it comes back to identifying that supply chain and understanding who’s making the supply, where the transaction sits. And we’ve got a couple of clients that we work on together where you’ve got the overseas parent is making a supply to certain UK customers. You’ve got a UK branch which is also making supplies. So it’s really just identifying who’s making which supply, whether there’s UK VAT due on that or not, and making sure that we’re getting the right things on the VAT return when we’re helping prepare and submit that.

EW: Okay, so just moving on to compliance issues, you and your team do some great work for my overseas clients. What are the kind of common queries or issues that have been arising since you’ve been working on those for the past year or so?

RS: I think probably the common issues we come across is just we get the invoices where there’s a purchase that’s got UK VAT charge that they want to get the VAT back on. We get a list of the sales that they’ve made because that’s sort of the obvious information that we’re looking for. Yeah, I guess the bits that tend to drop that slip between the cracks where we’ve got the transactions that are subject to a bit of a reverse charge type procedure. So where there’s a purchase from an overseas supplier, where there’s some postponed import VAT, where goods have been brought into the country and for most clients, where they’ve got sort of fully taxable businesses and can recover the VAT in full, the transaction, you’ve sort of got an output tax charge that they’re paying to HMRC on behalf of the supplier, you’ve got full VAT recovery against that going through the return. So it’s a bit of a nil net position that comes to nothing but needs to go on the return for statistical purposes. And they’re very often the ones that sort of slip between the cracks.

EW: Yeah, I’m sure because they think there’s no net effect, they kind of probably think, well, what’s the point of disclosing that? But yeah, it’s still important to disclose everything and not to miss those in case of any investigation, I guess.

RS: Yeah, absolutely, yeah. It’s when HMRC come looking at things, if you’ve missed things like that off the return, it just starts to trigger a few good questions and doubts in HMRC’s mind about, well, what else isn’t on the return that perhaps ought to be.

EW: So are you able to kind of translate some of the kind of intricacies of the terminology that often gets used and confuses clients and colleagues?

RS: So I guess the sort of obvious one is around the VAT treatment of supplies because we being VAT people have loads of terminology which I love and hold dear to my heart and clients perhaps less so. Thinking of an example, we have transactions that are outside the scope of UK VAT because the customer’s based overseas. For charities we have outside the scope because it’s a non business activity, such as grant funding. We have exempt transactions such as loan interest and then we have zero rated transactions as well which are subject to vat. But at zero percent and from a client’s perspective there’s no VAT charged on any of this income or accounted for on it.  So it’s a little bit of, well, what’s the difference? It sounds like we’re just being a little bit pedantic with technical people, but actually from a VAT recovery perspective there’s all slightly different outcomes with those. Potentially some of those transactions you do get VAT recovery on costs, some of them you don’t. So that’s why perhaps at times we do come across as a little bit, as I said, a little bit pedantic, perhaps, trying to get the terminology right, because the impact of that is there, even if the client doesn’t necessarily always see it.

EW: So coming on to non compliance, I mean, it’s quite difficult setting up a business in the UK and we would never advocate a non compliance. What are the issues around that, really?

RS: I think probably the biggest one with the VAT registration point is where if you’re VAT registered and you make a mistake on the VAT return and you need to sort of tidy up a transaction and put something right, there’s a four year time limit for you to adjust or for HMRC to assess. That time limit doesn’t exist when it comes to a VAT registration requirement, there isn’t a time limit. So a business that should be VAT registered in the UK now and doesn’t do anything about it, technically in 15, 20 years time, that could come back to haunt them if HMRC come across it and they’ll raise an assessment for 15, 20 years worth of VAT due on sale. So, yeah, that’s the reason we don’t advocate for not doing anything about it. Because you can’t get away from it. No, but how does that fit in with the length of time you should keep books and records? Because that’s not 15 years, right? No, no, it’s not. And that would be part of the challenge as well, because if you’ve only hung onto your books and records for a six year period, if HMRC come in and identify that you should have been registered 15 years ago, you can be fairly sure that they’re going to take a view and extrapolate and make best estimates of what the VAT liability would have been. And it’s pretty unlikely that they’re going to undercook those estimates. Exactly. And you wouldn’t be able to defend it because you haven’t got any books and record to show.

ES: Wow, okay, that’s interesting. So coming on to a time frame, we know HMRC are super busy, super understaffed since COVID we hear, we hear a lot about that. But let’s just say we finally, the client said, yes, I need to register, we’ve identified, they need to register. How long is that taking at the moment with the best will in the world?

RS: I mean, we’re generally talking four weeks is pretty quick from HMRC on that one. And we’re doing our best to preempt the questions that they’re likely to ask. Because we do a few of these registrations, we sort of know where the pinch point and what HMRC are going to want to see. But because of the process of how you have to apply for an application online so you can’t do paper copies particularly easily anymore, it’s really difficult what information you can provide at the outset to try and get ahead of where the questions are coming from. So there’s every chance that you submit it and two or three weeks later HMRC are going to come back and ask for more information because they’re quite twitchy about some of these businesses being overseas. And if something does go wrong, particularly if they’re issuing repayments, it can be quite difficult to get in touch and ask for the questions or try and get claw money back, if that’s the requirement.

EW: Yeah, sure. And obviously we’ve seen in our clients that they ask more questions if the director is not a UK resident, is that right?

RS: Yeah, absolutely, yeah. And even if it’s a UK company with non resident directors, they’re asked in a lot of questions, which I guess as a UK resident and taxpayer is kind of what I want. But as a VAT advisor acting for clients who are just trying to get registered and do the right thing, it can be a bit of a challenge

EW: Okay, so tell us a little bit about how penalties would work if there was a cause of non compliance.

RS: So, yeah, I mean, penalties are broadly driven by behaviours. So there’s a range from 0% where genuinely the business has taken reasonable care and errors have arisen anyway, perhaps, as you can imagine, HMRC don’t really think that errors arise if you’ve taken reasonable care a lot of the time. So they tend to work in a bracket of 0% to 30% for a careless error, but they can go up to 100% where there’s a deliberate and concealed errors, effectively fraud. Most of the time it tends to sit in that 0 to 30% category. So again, it’s not just the fact that you’re a bit late, you might get assessed for some arrears and some VAT that you haven’t collected. The fact that you might get a 30% penalty on top of that as well can be quite expensive.

EW: So what books and records should the company be maintaining in the meantime while they’re waiting for that VAT number to be issued?

RS: Yeah, and that’s quite challenging for a business because, I mean, the exact answer is from a sales invoice perspective, they’re not allowed to issue an invoice showing VAT until they’ve got their VAT registration.

EW: Really, they can’t put like VAT number coming or anything like that?

RS: Well, not on an invoice that shows the VAT. So unfortunately this is where the VAT world is a little bit out of step with commerciality. So the only option we can really offer is that the business ought to be issuing some sort of request for payment or pro forma invoice where they send out something that shows the gross amount, including the VAT due and requests payment of that because they don’t want to have to sit and, and basically give themselves cash flow issues and not be invoicing customers. And then as and when the VAT number finally arrives, then issue VAT invoices to all of those customers showing that split between the net amount, the VAT amount and the gross amount, which will then give their business customers the evidence they need to recover the VATS that’s been charged. But yeah, that four plus week delay in getting the VAT number can be quite a headache. So there’s a lot of advantages that if VAT is on the checklist of things to do when they’re getting starting and thinking about trading with the UK, getting in there early is really helpful.

EW: Yeah, for sure. And what about we often get asked for an EORI number.

RS: So again, it’s much easier to get the EORI number as part of the registration process. And that number is really just for businesses that are moving goods in and out of the UK. It just makes things a lot more seamless at the border if it’s a requirement to have that on the documentation at the border. And that all fits in with when the import tax, import VAT is payable, making sure that where it’s physically paid, the client’s got the evidence they need to recover that. Or they can move into the postponed VAT system so that they’re not even having to physically pay out the import VAT and recover it at a later date. So again, it’s something that should, should be part of the registration process just to make sure that there aren’t problems a few weeks down the line when you finally start getting the goods into the UK.

EW: Okay, so thank you, Rob, that’s been super helpful. If you have any questions on any of the topics that we’ve covered or want to discuss your VAT requirements or issues further, please contact myself, Esther Wood or Rob Skilton or goodmanjones.com for further details. Thank you.