As a financial services business, you may well not need to register for VAT. You may be primarily making exempt supplies, with any 'VATable' supplies falling below the VAT registration threshold.
But what if you buy in services from outside the UK?
Many businesses may not realise that the value of services bought from outside the UK will usually contribute towards the UK VAT registration threshold. “A UK-based broker may buy in advertising services or some form of advisory services from outside the UK,” says Moore Stephens VAT expert Robert Facer. “The value of these services will usually need to be taken into account when considering whether the business passes the VAT registration threshold. If the value of such services together with any VATable supplies exceeds the threshold, the business has an obligation to register for VAT.”
The UK business would then have to apply the ‘reverse charge’ to the services bought in. “This means charging UK VAT on the value of the services and potentially reclaiming the same amount of VAT on its VAT return,” Robert says. “But if the business is making exempt supplies, it will have to pay the 20% VAT rate on the bought in services, but will not be able to recover any of this cost.”
Why these rules? “The aim is to create a level playing field between suppliers inside and outside the UK,” Robert explains. “Without the reverse charge, the market would be distorted and the UK supplier disadvantaged.”
The problem is that businesses can easily overlook this aspect of the VAT rules. “There is no time limit in terms of how far back HMRC can go to recover VAT that should have been charged,” Robert warns. “If a business should have registered for VAT 10 years ago, it could face a nasty shock in the size of its VAT bill.”