In Part 1 we looked at the selling of goods and services between businesses and consumers within the EU – how VAT must be charged and the effect on the VAT Registration and VAT Returns. There are proposed changes to the legislation which will hopefully simplify the way we deal with this.
This article looks at the effect of a VAT registered business based in the UK who sells to a VAT registered business in another EU country (and vice versa) which is known as Business to Business selling or B2B selling.
In its simplest form, B2B selling does not appear to charge VAT and no VAT appears on the VAT return of the seller if all requirements for B2B selling are met. Most of us think of the selling of goods to a VAT Registered customer in another EU country as being zero rated for VAT purposes but it is actually considered to be exempt in the country of origin by the EU VAT office.
Current situation – consider the following three cases
1 Selling from the UK - Peter runs a VAT registered business based in the UK and he sells to a number of customers in other EU countries, all of whom are VAT registered in their own country. Peter exchanges VAT numbers with his customers and issues his invoices with zero VAT added. As part of the proof that this is an EU B2B sale, the VAT number of the customer is shown on the invoice (as well as Peter’s own VAT number) and the Peter must retain proof that the goods were actually transferred to the customer in the other country.
Peter then enters the invoice into his software package as a sale and provided that he selects the correct VAT code for the transaction the software should deal with it correctly for VAT return purposes.
Basically the following happens:
a) No VAT is shown in any of the boxes in the top half of the VAT return
b) The value of the sale is shown in box 6 as part of the total sales for the period
c) The value of the sale is also shown in box 8 as an EU sale
d) The value of the sale must be declared as part of an EU sales list (ESL)
If the sale is for £15,000 then the VAT return will show the following amounts (for this sale only):
Box 1 0.00
Box 2 0.00
Box 4 0.00
Box 6 15,000
Box 8 15,000
No actual amount for VAT has appeared anywhere above – any amount shown is purely the value of the sale(s) to an EU based business customer. This includes the values shown on the ESL.
However, VAT that would normally be charged on this sale, (had it been a domestic sale), must under EU law appear in a VAT return somewhere and it will normally appear in the VAT return of the customer in their own country. The case below shows how this works.
2 Buying into the UK - Now consider what happens when a sale is made from another EU country to a business based in the UK. The UK business is buying from another EU country.
Jerome runs a VAT registered business based in France. He sells machinery to Congreve Farms, a VAT registered business based in the UK. When a sale is agreed the two businesses exchange VAT numbers and an invoice is issued as above along with proof of delivery to the UK at the relevant time. No VAT is charged by Jerome and in Jerome’s books this will be entered as an EU sale with no VAT displayed in the software system. Again, as above, the software that Jerome uses should be able to deal with the sale correctly as per French VAT law and the French authorities should be able to determine the value of the sale and also that this is an EU sale. No VAT would appear in his VAT Return and the ESL would be completed as above.
At the UK end, Congreve receives the invoice and enters it into their software package. Because they are buying the machinery which is being delivered from France to the UK this is termed an EU Acquisition. No VAT has been charged on the invoice (under the B2B selling rules), Congreve selects the correct VAT code for the acquisition and the software should deal with the VAT accordingly to ensure a correct VAT return.
We said in 1 above that VAT must be shown at some stage within a B2B transition and that it appears in the VAT Return of the customer.
Once Congreve has entered the correct VAT code into the software, it will recognise this as a B2B transaction and will register the amount of VAT that would have been charged if the supply had been provided by a business within the UK – i.e. the VAT will be shown in the VAT return at 20% (the VAT rate correct for the UK and not for France). The amount of VAT will be shown in Box 2 of the VAT return and will be added to any VAT from Box 1 which is due to be sent to HMRC.
However, the VAT that is showing as due can be reclaimed as input VAT (to avoid any actual VAT being paid) and to enable this to happen the same amount is also added into Box 4 which will cancel out the VAT from Box 2.
So the amount of VAT on an EU acquisition (at the rate it would have been charged in the UK) is shown on the VAT Return in the following boxes:
a) Box 2 as the EU acquisition
b) Box 4 as a reclaim of input VAT
c) Box 7 as part of the total inputs
d) Box 9 as part of the total inputs from other EU countries
So if the acquisition is for £20,000 then the following will be shown in the VAT return (for this transaction only):
Box 1 0.00
Box 2 4,000.00
Box 4 4,000.00
Box 7 20,000
Box 9 20,000
There is no requirement to produce an EU Purchases list (as you do for EU sales) but if the value of purchases from an individual EU country goes above a certain level you may have to register under Intrastat and record details in that system. At no point in the transaction is VAT calculated at the French rate.
Now look again at case 1 above – the sale from the UK to France becomes an acquisition in France. VAT is added to the equivalent of the UK boxes 2 and 4 in customer’s French VAT return but at the French rate of VAT! Nowhere in this transaction is VAT shown at the rate currently in force in the UK.
And it gets worse!
3 Selling and buying a service - Reverse charges
If, in the two cases above, the B2B transaction covered the provision of a service rather than goods then this transaction is considered to be a reverse charge rather than a sale or an acquisition. A reverse charge is also applicable in the provision of certain goods. VAT numbers are exchanged and shown on the invoice as normal and the invoice must state that the case is being treated as a reverse charge. The supplier of the service again shows no VAT in their system but will show the value of the supply.
Those of us who are old enough to remember the red telephone boxes, where you actually inserted coins to make a call, might have at some stage asked the operator to treat the call as a reverse charge - this meant that the operator rang the person at the other end, asked if they would pay for the call on their telephone bill and if accepted, the caller got the call for free – useful if you were a young teenager who was late home and had to ring to explain why and had run out of money to make the call!! The person at the end of the call paid the charge.
Well - this is sort of the same thing. In a reverse charge for VAT the theoretical VAT charge is placed on the receiver of the service (or call) who ‘pays’ the VAT (by declaring it as a sale) but, as this is VAT they can then also claim the value of the VAT back as a cost, thus reducing the actual payment to zero.
A perfect example of this is one of the online accommodation booking companies which is based in another EU country. Let us suppose that Congreve Farms lets out some of its cottages as holiday lets. The online booking company advertises the cottages, takes the bookings and charges a commission for the service provided. It takes the commission from the letting charge and passes the balance to Congreve. However the commission is chargeable for VAT but as both businesses are VAT registered they can exchange VAT numbers (as above) and no actual VAT is paid.
For example, if the letting fee is £380 and the commission charged is 15% then the amount of commission would be £57.00. The invoice must show a note in the form “This invoice is subject to a reverse charge for VAT”. The online company would pay Congreve Farms £323 (the balance after commission has been deducted) and Congreve would post the commission as a reverse charge to the accounts.
However the complication with a reverse charge is that in this situation the receiver of the service (or relevant goods) has to treat the supply in his or her accounts for VAT purposes as if he were both the supplier and the receiver!
Basically the difference for the VAT return is that an amount of VAT to the value of 20% of the invoice (i.e. treating the reverse charge as if it was a domestic sale) appears in Box 1 of the return instead of in box 2 (hence not as an acquisition).
To counteract this same amount of VAT is entered into box 4 (i.e. treating it as a domestic supply at 20%).
This cancels out the VAT in the same way as the supply of goods above. The value of the service appears in box 7 of the VAT return (as a purchase).
The important thing to notice, however, is that the value of the supply does not appear in either box 8 or box 9 – the EU sale and acquisitions boxes (which is another difference to that of the treatment of goods).
So this particular transaction would appear as follows in the VAT return with the VAT being calculated on the commission amount of £57:
Box 1 11.40
Box 2 0.00
Box 4 11.40
Box 6 0
Box 7 57
Box 8 0
Box 9 0
However, any reverse charge must also appear in the EC sales list.
To summarise the above, the present system, which has been in place since 1993 and was supposed to be transitional, splits every cross-border transaction into an exempted cross-border supply (case study 1) and a taxable cross-border acquisition (case study 2) and with the supply of services (and some goods) being treated differently as reverse charges (case study 3).
It is important to know how your software deals with the various VAT codes – get the input right at the data entry stage and the VAT Return should fall out automatically.
The systems as described for recording VAT for B2C and B2B are counted as separate and distinct. However the current system lacks equivalent controls and therefore has the ability to be the root of cross-border fraud and the EU VAT office is considering changes to the system.
The future developments currently being planned to amend the charging of VAT on cross-border transactions is covered in Part 3 of this series of articles.