Not VAT registered? – Don’t forget Reverse Charges when checking your VAT threshold
Currently the VAT registration threshold is set at £85,000 of taxable income. Taxable income comes from anything you provide by way of business – goods or services – which are subject to any of the taxable VAT rates here in the UK – Standard, Reduced or Zero.
However, when working out whether you should be VAT registered you also need to take into account, not just income you generate, but also the values of certain services that you buy in. Yes – certain costs get added into your income in order to establish whether you have exceeded the VAT registration threshold.
The type of costs that you need to take account of are referred to as services subject to the “reverse charge”. They are services caught under the B2B General Rule that we use to determine the place of supply for VAT purposes.
They are services that your organisation has bought in from an overseas business – typical examples would be software licences or subscription services – but they could include consultancy services, advice costs, design services and the like. The key is that because they have come from overseas there will be no UK VAT charged on them which, in comparison to a UK based supplier of the same services, puts that UK supplier at a disadvantage.
To address that disparity the UK VAT registered customer should take the value of the services imported and add VAT to that value – declaring that VAT as Output Tax on its own VAT return but equally then looking to recover that VAT “cost” as Input Tax, subject to the normal VAT recovery rules – net effect for a fully taxable VAT registered business is “nil” in VAT terms.
However, if the UK business customer is not VAT registered it needs to add in the value of these reverse charge services to its own taxable income. If it combines to exceed the VAT threshold this will trigger a need to VAT register.
This is an aspect that can arise in any type of organisation but for those who are not currently VAT registered it adds another VAT compliance issue to ensure you address. If it’s an issue that causes you concerns, then do get in touch with your usual Centurion VAT contact or use firstname.lastname@example.org
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