The hidden VAT cost on services from overseas

Most housing associations are surprised when I tell them they are probably buying goods and services from overseas, particularly from the Republic of Ireland. Even those organisations that are aware that they are purchasing some items from suppliers based outside of the UK tend to be underestimating the true extent of this. However, HMRC has access to this information from other tax authorities, and has begun using this to issue assessments on housing associations.

Why is this the problem of housing associations?

For international services, there are complex rules determining in which country the VAT is charged. For nearly all services that a UK housing association would receive, these rules mean that the services are subject to VAT in the UK.

To avoid the need for overseas suppliers to be registered for VAT in the UK, where a UK customer is VAT-registered, it is responsible for dealing with this VAT. An association would do this by including the VAT due on a service in ‘Box 1’ of its VAT return, as if it had made a sale, increasing the net VAT due to HMRC. This is known as the ‘reverse charge mechanism.

Similarly (at least until the UK leaves the European Union) if a housing association acquires goods from a supplier based in another EU member state, it has to account for the VAT on ‘Box 2’ of its VAT return. Again, this leads to an increase in the net VAT due to HMRC on the VAT return.

Those housing associations which are not VAT-registered cannot completely ignore these rules. These overseas purchases count towards the VAT registration threshold. Consequently, many organisations have had to become VAT-registered purely as a result of obtaining services from abroad.

How can HMRC have a more accurate list of suppliers than we do?

Suppliers based in other EU member states will have had to submit lists to their tax authorities explaining why they are selling goods and services but not charging local VAT. In doing so, they will be quoting your UK VAT registration number. These lists are shared among the tax authorities, so it is very easy for HMRC to extract a list of suppliers to each VAT registration.

What are the common areas where housing associations are incurring these costs?

The most common area is IT-related services. Many IT companies have set-up their European headquarters in the Republic of Ireland. Examples we have seen recently at Crowe include:

design and hosting of the association’s website providing parts ordering systems for the mobile repairs team photocopier rental placing job adverts on social media platforms management software for the human resources team buying equipment from a small supplier through a fulfilment website based in Luxembourg.

A particular issue seems to be where the IT department is able to order items with a corporate credit card, rather than going through the Accounts Payable system. Even if the finance team runs a quarterly report on non-UK suppliers, these costs may not be picked up.

What should I do if I identify such items?

Not all purchases from abroad are subject to VAT and some services received from overseas may be zero-rated as advertising services to a charity. Where VAT is due, it may be recoverable, at least in part, in the same way as VAT charged by UK-based suppliers.

If VAT has been underpaid, an error correction should be notified to HMRC using ‘Form VAT 652’ for VAT underpaid in the last four years, and procedures should be changed to enable this VAT to be identified going forward. A proactive approach, and evidence of efforts made to avoid the risk of this oversight happening again, means HMRC is unlikely to issue any penalties. Additionally, if there is any confusion or uncertainty, housing associations should seek specialist advice.

This article first appeared in Social Housing Magazine in December 2018.