15 February 2018

How reverse charges can affect your property and construction business

Many businesses may not realise that the value of services bought from outside the UK will usually contribute towards the UK VAT registration threshold.

You may not be required to register for VAT but may be primarily making exempt supplies, with any ‘VATable’ supplies falling below the VAT registration threshold.

But what if you buy in services from outside the UK?

Many businesses may not realise that the value of services bought from outside the UK will usually contribute towards the UK VAT registration threshold.

A UK-based property rental business may buy in advertising services or some form of advisory services from outside the UK. The value of these services will usually need to be taken into account when considering whether the business passes the VAT registration threshold. If the value of such services together with any VATable supplies exceeds the threshold, the business has an obligation to register for VAT.

The UK business would then have to apply the ‘reverse charge’ to the services bought in. This means charging UK VAT on the value of the services and potentially reclaiming the same amount of VAT on its VAT return. But if the business is making exempt supplies (exempt property rental or sales), it will have to pay the 20% VAT rate on the bought in services, but will not be able to recover any of this cost.

It is also worth noting that if a non-UK VAT registered (overseas) business supplies construction services in the UK (to a UK VAT registered business) the UK VAT registered business receiving the supply will have to account for this purchase under the reverse charge. If the UK business makes wholly VATable supplies the application of the reverse charge will only be a VAT accounting exercise. However if the UK business makes both taxable and/or exempt supplies it will have to block some or all of the VAT it incurs under reverse charge procedure.

The aim of these rules is to create a level playing field between suppliers inside and outside the UK. Without the reverse charge, the market would be distorted and the UK supplier disadvantaged.

The problem is that businesses can easily overlook this aspect of the VAT rules which can create a requirement to register (for VAT) if the business hasn’t already done so, or where the business has made exempt supplies this may result in an over recovery of VAT that has been incurred on expenditure.  This of course would have to be paid back to HMRC along with interest and potential penalties.

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