In the UK, you can’t charge VAT on exempt items or services. Exempt goods or services are supplies that you can’t charge VAT on and the “exempt” category relates to a limited number of UK services like health services provided by doctors, insurance, and gambling.
Exempt goods or services.
If you buy or sell an exempt item you should still record the transaction in your general business accounts. A list of goods and services that are VAT exempt can be found on the www.gov.uk website.
Businesses that sell only VAT-exempt goods and services can’t register for VAT. However, if you do then you can register for VAT voluntarily. You must register if the total value of non-exempt goods and services goes over the VAT taxable turnover threshold.
Items you can’t charge VAT on
Some goods and services are outside the VAT tax system so you can’t charge or reclaim the VAT on them. Items such as statutory fees (like the London congestion charge), goods you sell as part of a hobby, donations to a charity, and goods or services you buy and use outside of the EU.
Another example where you can’t charge VAT is on software and hardware sales. Generally, if software and hardware are sold to customers outside the UK, then those sales will be zero-rated. But what happens then depends on whether the customer is based inside the EU (European Union) or outside it.
If the customer is outside the EU (like Australia or the US) then the sales will be zero-rated.
If the customer is inside the EU, (like in France or Germany) then the sale will be zero-rated by the supplier, but the foreign customer is responsible for adding the VAT themselves and accounting for the VAT. This is indicated on the sales invoice by words like:
“Reverse-Charge applies – customer to self-assess VAT.”
Normally VAT can be recovered in full – that is invoiced by one company, reclaimed by the other – except for those customers providing exempt supplies.
So, if you invoice a UK bank or insurance company, then a standard rate VAT of 20% must be added to the invoice. But the bank makes very few standard-rated supplies, most of its services will be exempt. Therefore, the bank will incur the VAT as cost, recovering only a small proportion of the VAT depending on its ratio of standard-rated to exempt supplies. The above is for sales to UK customers.
A similar situation (regarding the amount recoverable) may prevail in other EU countries for services/software/hardware supplied directly to them. Those EU customers cannot avoid this situation.
A few years ago, HM Revenue & Customs challenged a client’s practice of invoicing a German bank in the UK for hardware/software, but treating the sale as export and not charging VAT. This saved that bank 20%, but our client paid a hefty fine and the VAT when found out. The reason that our client treated the German bank invoices in this way was never clear but became irrelevant as it was deemed wrong by HMRC.
So, it is important that all sales invoices to EU customers should include the words “Reverse-Charge applies – customer to self-assess VAT”. Those invoices also show the Customers EU VAT number and are entered into the monthly EU sales declaration, so both countries are aware of what has happened.
To read our checklist for completing a UK VAT return, click here.
For additional information about VAT or for us to assist with your company’s VAT return, please get in touch.