08 February 2010

UK VAT - minor change with major consequences

Adam Dolder
Senior associate | UK

It has long been the case for some specific categories of VATable service that the place of ‘supply’ has been deemed to be where the recipient belongs.
As of 1 January of this year this will also be the case in many situations where previously the point of supply was treated as the place where the supplier belongs.

Why does it matter?

The new rules mean that VATable supplies may now occur where payments are made by UK charities to entities outside the UK, which would include making payments to ‘parent’ charities that are based overseas.

Whereas historically there was usually no VAT attributable to a supply because the supplier belonged outside the UK, a VAT charge may now be incurred in the UK. This could be a costly difference to a UK charity, especially if the supply originates outside the EU or in an EU country with lower VAT rates than the UK’s.

Who will it affect?

No business – no problem

The rules only apply to those organisations that are engaged in a ‘business’. Charities which are not registered for VAT and which do not engage in business of any kind eg a charity whose sole activity is to give grants will not be affected by this change. However, if a charity is in fact registered for VAT then this new rule will apply whether or not a particular service relates to the business part of the charity’s overall activities.

No cross-border supplies – no change

Charities which are not making or receiving cross-border supplies also should have no cause for concern as their VAT status is unlikely to be affected.

Overseas suppliers/recipients – watch out

Charities that do receive supplies from outside the UK (and particularly from outside the EU) may, however, be affected.

Where a charity in this situation is already registered for VAT it should have been given plenty of warning about this change via its existing VAT compliance activities but such charities should ensure that, after 1 January 2010, they are not still being charged any non-UK VAT by an EU supplier.

Clearly, this change is more of a concern to charities which do make or receive cross-border supplies but which are not currently registered for VAT as they are below the UK VAT threshold. This change in the rules may mean that a charity is inadvertently pushed over the threshold for VAT because of the change in status of its foreign-source supplies.

For more information, please contact Adam Dolder

Adam Dolder Senior associate | London

Category: Article