Return journey

KEY POINTS

• The reverse charge and buying goods and services from abroad.
• Selling goods and services abroad.
• The differences between EU and non-EU supplies.
• Box 2 and buying goods from abroad.
• The importance of reconciling the VAT return entries

How confident are you that if you took an exam on accurately completing the nine boxes of a VAT return, you would get 100% and pass with flying colours? Or do you have a few doubts about some of the numbers we enter in those magical boxes and take the view that it is not a problem as long as the ‘VAT payable’ box is correct?

In this article, I am going to consider some practical situations in relation to completing VAT returns, the end result being that you will then get a 100% accuracy rate on every return you submit in the next 20 years.

Buying services from abroad

Let’s go straight away to the dreaded ‘reverse charge’ calculation that applies when you buy services from abroad. As a starting point, you must be clear that the reverse charge applies to services bought from both EU and non-EU suppliers, not just from those based in the EU.

So if any of you good people use an India-based bookkeeping business to do some of your accounts preparation work, then it is a reverse charge job in exactly the same way as if you were using a firm based in Poland.

The basic principle of the reverse charge is that the customer deals with the VAT rather than the supplier (see my article Reversing the charge). So here’s an opening question: which boxes of the VAT return will be completed by a UK business that buys in a service (no overseas VAT charged) from abroad? See Overseas Services.

Following on from the Overseas Services example, here is a challenge for you. Can you think of a practical situation when the figures in Box 1/Box 4 would not be the same?

Let me give a real-life example. Every three months, I disappear into the depths of the Bedfordshire countryside, complete with passport, visa and at least two minders, and do the VAT return for a partly-exempt members’ golf club (i.e. one where the subscription income paid by golfers is exempt from VAT), but output tax is due on green fees paid by non-members.

About a year ago, the club paid a consultant based in Italy to give some advice on the chemicals and grass seeds that are used on the course and paid him a fee of £10,000.

Now, as I have mentioned before, I can never quite understand the fuss that goes into golf course issues; my commonsense solution with golf is to make the holes bigger so that all the golfers get a bit more enjoyment out of their game, and they will also get to the 19th hole that bit quicker.

The key point for the transaction above is that the Italian consultant did not charge Italian VAT (correctly, under the place of supply rules), so we had to deal with the VAT on the club’s return using the reverse charge.

And because the Box 4 input tax figure relates to an expense used for both exempt and taxable activities (under the rules of partial exemption, the technical term is ‘residual input tax’) we could only get one-quarter of the VAT back on the expense in question with our method of calculation.

So our reverse charge entry declared output tax of £2,000 in Box 1, but only claimed input tax of £500. How many of these types of transactions do you think your clients are missing?

Selling services abroad

So if John, our accountant from Overseas Services, did some accountancy work for a German business customer (or an Australian business customer as the rules are the same for EU and non-EU customers), which boxes of the VAT return will he fill in here?

Note first that John will not charge UK VAT in either case under the place of supply rules because the service is outside the scope of UK VAT.

The answer is ‘only Box 6’ (outputs). This answer can sometimes cause confusion – there is a view that if a service is outside the scope of VAT (i.e. the place of supply is outside the UK), then no entry is made on the VAT return. This statement is only correct in one situation and that is when the business uses the flat rate scheme.

Boxes 8 and 9 warning

Here is my ‘tip of the day’ to save you unnecessary hassle – don’t forget that the bottom two boxes of the VAT return (Boxes 8 and 9) only apply if you either buy ‘goods’ from a VAT-registered business in another EU country, or sell ‘goods’ to a VAT-registered business in another EU country. The boxes do not relate to services.

In fact, Boxes 8 and 9 and services are as far apart as the views of Nick Clegg and David Cameron on the best voting system in future general elections.

So if your client only buys or sells services from abroad, then the figures in Box 8 and Box 9 will be the same as the number of goals usually scored by Arsenal when they play Manchester United: nil!

Buying goods from abroad

The rules on buying goods from abroad are very different according to whether we are buying from an EU or non-EU country. In the latter case, VAT is paid at the point when the goods enter the UK (assuming they are standard-rated goods (i.e. not zero-rated items such as children’s clothes and books)), creating a source of input tax for the importer when he acquires the C79 VAT certificate issued by HMRC.

But no VAT is charged by the supplier (or HMRC) in relation to an EU purchase from outside the UK, with the buyer accounting for ‘acquisition tax’ in Box 2 of his relevant VAT return. See the examples, French Goods and Hong Kong Goods.

The key issues from both examples are as follows.

• The VAT payable on goods bought from an EU supplier finds its way into Box 2 of the return rather than Box 1 for services.
• There is no Box 6 (outputs) entry for goods bought from an EU supplier. This is because the buyer in the UK does not need to treat the payment for goods as his own income as he does for services.
• We have used Box 9 in the case of goods bought from an EU supplier. As explained above, we never use Box 8 or 9 for services.

Selling goods abroad

To complete the loop, let’s assume that John is now selling two computers abroad, one to a VAT-registered customer in France (EU) and one to a business in America (non-EU). Both sales are zero rated.

In the case of the EU sale, the proceeds will be recorded in both Box 6 (outputs) and Box 8 (sales of goods to VAT-registered businesses in EU countries outside UK), but only in Box 6 for the sale to America. This is another important point.

Don’t think that just because an entry has been made in Box 8 for a sale that the same sale is not included in Box 6 as well; it is! In effect, Box 6 reflects worldwide sales made by a business.

Box 7 (inputs)

When I was a visiting officer in HM Customs & Excise, I paid about as much interest to Box 7 as a High Street bank pays to me on my current account. I always saw Box 7 as a bit of a red herring – it doesn’t affect the amount of VAT paid by a business, and no-one was really sure what was included or excluded anyway.

But here is a true story going back to my Customs officer days in the 1980s, a time when computer bookkeeping systems were as rare as an all-male birthday party for the Italian prime minister.

I visited a building business in Leicester, which had been chosen by the Customs computer for a ‘verification’ visit because the VAT return entries for one particular quarter looked strange. Indeed, they were!

The builder’s accountant, a very jovial character who reminded me of Archie the undertaker in Coronation Street, had reversed the ‘net’ and ‘VAT’ columns in the purchase day book for an entire month. Needless to say, the end result was an imbalance between the ‘inputs’ and ‘input tax’ boxes on the VAT return, and a big overclaim of input tax.

Now let’s fast forward that story from my visit in about 1984 (I was a very young officer!) to 2011. The chances are that HMRC would no longer make a visit to the taxpayer to verify the dodgy return, but would instead write to him (or telephone him) to ask for confirmation that the VAT return is accurate.

A bit of checking by the taxpayer should reveal the problem, and he (or Archie) will ‘disclose’ the error to HMRC, complete with a grovelling apology, and the return will be adjusted by HMRC to show the correct figures.

But hang on! the letter or call from HMRC means that the disclosure by the taxpayer is now ‘prompted’ and this means a minimum penalty of 15% if the error is classed as careless. Sorry, Archie: reversing the ‘net’ and ‘VAT’ columns is definitely careless and there is a penalty here.

So it is important to check the accuracy of the relationship between both Box 4 (input tax) and Box 7 (inputs) as well as Box 1 (output tax) and Box 6 (outputs). As a final reference to Box 7, I have shown a separate box of what expenses should be excluded from the return. See Box 7 Exclusions.

Big Brother is watching

In my articles I often give tips on how to deal with particular issues on routine HMRC visits. At times, I feel that I would be better off giving tips on how to avoid being eaten by a dinosaur because the likelihood of a business getting a ‘routine’ visit in this cost-cutting climate seems as remote as the risk of bumping into a tyrannosaurus rex doing its weekly shopping at Tesco.

However, HMRC compliance officers are still there in the background, and one check that is being carried out with far greater frequency is to check that the ‘outputs’ figure on a VAT returns is compatible with the turnover figure declared by a taxpayer on either his self-assessment tax return, partnership return or CT600 corporation tax return.

This is an opportunity made much easier by the merged tax department. One tale about this process relates to a client in my private practice who runs five butchers’ shops.

He received a telephone call from HMRC querying why the ‘outputs’ figures on his monthly VAT returns were much lower than the total sales shown on his partnership tax return covering the same period.

The query had a happy ending because my client confirmed that the reason for the difference was because he had forgotten to include the meat sales on his VAT returns; not a problem because meat is zero rated anyway.

My personal confusion was that if he had forgotten to include his meat sales – and he is a butcher – what income had he included on the returns? I’ll ask him when I do his year-end accounts in June.

So my tip in this section is to carry out a reconciliation between outputs and turnover when you complete year-end accounts – but don’t forget the following points:

• The reverse charge entries explained above will not be included as turnover on the year end accounts.
• Adjustments will need to be made for opening and closing work in progress, i.e. reflecting timing issues.
• If the business uses the cash accounting scheme for VAT, then debtors adjustments will be necessary as well.

Conclusion

I have just reviewed this article to make sure I have given a mention to all nine boxes on the VAT return (to ensure I have not upset any of them by missing them out) and the only one that I have been silent on is Box 3, which is the total of Box 1 plus Box 2 (i.e. the same figure as Box 1 in most cases).

Box 3 is the total output tax payable before input tax is deducted in Box 4 to reveal the all-important VAT payable figure in Box 5.

So, as a final question, can we do anything else to make sure our VAT returns are accurate?

The answer is ‘yes’. I suggest that you make sure that the VAT payable (or repayable) figure in Box 5 reconciles to the VAT creditor or debtor balance in your nominal ledger as at the same date.

Although you would expect this to be automatic, it is not necessarily the case. Just think of the fun and games you have if someone forgets to reconcile the VAT return system on Sage after it has been completed.

And how many computer systems exclude VAT journals from the VAT report? I even know one system that includes the previous quarter’s VAT payment in the input tax figure for the following period. What an excellent idea that sounds.

Neil Warren was the Taxation Awards tax writer of the year in 2008 and is an independent VAT speaker, consultant and author. He worked for HM Customs and Excise and is the author of Tolley’s VAT Planning 2010/11.

Issue: 4297 / Categories: Comment & Analysis , VAT