HMRC announced significant changes to VAT on January 15th that take effect on February 1st and have quite a pronounced effect on the way we bill you, and the way you will need to account for it.
By way of background, I had a visit last summer at my home from some inspectors to discuss how we handled VAT fraud. This was a planned routine discussion and I suspect a fact-finding mission. We discussed at length how we apply the already subjective VAT rules to customers in the day and age they were not written. VAT is chargeable based on where the “telecommunications service is enjoyed”.
Where the hell is that for a Delaware company, with servers in France, calling Hong Kong for a customer in Moscow, orchestrated through a Director based in Bolivia with a Serbian bank account? We can answer that, or at least defend our interpretation of the rules as they are entirely based on interpretation. Others clearly can’t and, as we articulated to them, our bigger issue is the UK-based scrote who thinks buying an off-the-shelf company offshore is all he needs to instruct us not to charge VAT. We won’t comply with this request, but I’m confident they will get supply somewhere so there is clearly VAT revenue gone astray. One thing I would say was that the guys I met really knew their stuff at least about the TDM side of things.
So this news comes as little surprise and one presumes is to counter the VAT fraud they were concerned about. I’m not entirely sure how though as I’ll explain in a moment.
Presently, if you prepay for termination and are eligible for UK VAT we will invoice you including the VAT. For example, if you prepay £6,000 you will receive an invoice for £5,000 prepay and £1,000 VAT. Like most other aspects of your business that VAT paid will come out in the wash when you do your VAT return.
This change requires us as a “wholesaler” to reverse charge the VAT, thus in the above example we’ll invoice you £6,000 being £6,000 of prepay. £1,200 of VAT is due and we’ll have to note it on the invoice but you will be liable for it. Rather like EU Reverse Charged VAT you will treat the £1,200 as input VAT but it won’t be offset against your output VAT as you haven’t yet paid it. Make sense?
This assumes you are registered for VAT in the UK. If you are not or we’ve been unable to verify your VAT number, nothing will change.
There’s more guidance from HMRC which we recommend you refer to and you should contact them for further clarification. For our part, we’re awaiting clarification from our accounting software vendor as to what changes we need to make and will try our best to make them in the two weeks given! We will also need your VAT number so please either send it in, or expect a request from us!
To be clear, this doesn’t affect things like DDIs and connectivity which where invoiced separately will be treated as now, but all prepayments will be handled this way. This includes where the prepayment is used to settled invoices as well as for termination. HMRC cater for this kind of mixed supply and favour the new Reverse Charge method being used here.
As to what this achieves, my initial thoughts were not a lot! There are, by definition, far fewer wholesalers than their customers. Thus making the customer liable for the VAT rather than the wholesaler means there are more people to chase for it than before. Further, taking the example of the scrote with an off-the-shelf Delaware corporation but operating from the UK, previously HMRC could go after his wholesaler but now need to know that they don’t know he hasn’t paid VAT and then find him.
Where it is interesting, and I wonder if this is part of the game, is non-UK based carriers supplying into the UK. Some of these guys, particularly the “virtual” ones, buy services throughout Europe, but don’t pay VAT as they’re based outside Europe, but are supplying back into Europe, again without VAT. Is this move paving the way for HMRC determining that a customer of these services, within scope in the UK, can be argued to be “enjoying” telecommunications service in the UK and thus VAT is due? Hey presto, it is due from them and they are now reachable rather than an offshore entity.
Unlike Ofcom, HMRC have always struck me as sensible and unlikely to do something for the sake of it, or make matters worse with no good reason. This latter scenario seems to make sense therefore and is actually welcome news in levelling the playing field if it turns out to be the case. We all pay too much tax so efficiently dealing with those who don’t gets my support. Personally, I’d have brought the whole “enjoyment” criteria into the 21st century to make it absolutely clear where VAT is due.
Finally, this of course makes a cash flow difference to us and our customers. Whilst you will be receiving VAT from your end-users, you will now not be paying that VAT to us in the main, keeping the cash in your account at least until your VAT bill is due. Your VAT liability will be commensurately higher however.