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The VAT Package and 2010

It seems that many charities are not only unaware of major new VAT provisions that came into force on 1 January 2010 but even those that are have not necessarily realised the implications for charities.

Prior to 1 January, where a UK VAT registered charity buys in services from another EU country, then local VAT (at the country of origin) is charged and, to the extent that the charity receiving the services is able to recover input VAT, it can apply for a refund from the country of origin using the refund mechanism. Services bought in from non EU countries such as the United States are not subject to VAT.

However from 1 January, the UK charity will need to apply a ‘reverse charge’ on all services bought overseas regardless of whether or not they are supplied by an EU on non EU supplier. The ‘reverse charge’ entails the UK charity charging itself VAT and paying this over to HMRC as output tax and then, subject to any partial exemption etc. restrictions, recovering that VAT as input tax. What are the implications?

• For services originating outside of the EU, VAT will now be charged at 17½% where there was no VAT charge in the past. If that supply is attributable to an exempt or non-business supply by the UK charity, their cost base will increase by 17½% overnight. Unless they are able to recover VAT in full because the input VAT is wholly attributable to a taxable supply, there will be a cost to them.
• For services originating from within the EU, the rate charged will now be 17½% (as a reverse charge) rather than the rate applicable in the jurisdiction of origin. The overseas supplier will zero rate their supply if the UK charity notifies them of the UK VAT number. Whether or not there is additional cost to the UK charity will depend largely on the differential between the current VAT rate charged by the overseas supplier and the UK VAT rate to be charged from 1 January.
• If the UK charity makes supplies of services overseas, supplies to EU countries will now need to be zero rated. BUT, the value of the supplies made will need to be declared on a quarterly ESL (European Sales List) return.
• The time of supply of a reverse charge service is not the invoice date but the date of performance of the service or payment date (if sooner). Application of this in practice will be very difficult.

At the very least, this means accounting etc. system changes to identify relevant supplies that the reverse charge needs to be applied to as well as making sure that EU suppliers are notified of the charity’s UK VAT number and ensuring that they no longer charge VAT on their supply.

Further information: http://www.hmrc.gov.uk/vat/cross-border-changes-2010.htm

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