Many businesses in the financial services sector are unable to recover VAT because they make VAT-exempt supplies. If you have such a business, then with UK VAT at 20%, your costs could be up to 20% more expensive.
Does that mean that if your business purchases services from a non-UK (or non-EU) supplier, it is 20% cheaper than buying the same service from a UK supplier? If you ever thought that, think again!
That’s because where UK businesses receive services from overseas, they need to account for UK VAT under the “reverse charge”.
How does the reverse charge work?
The rules require any UK business (whether registered for VAT or not) which buys services from a foreign supplier to account for the VAT which would have been suffered if the services had been bought from a UK supplier.
Where the value of these services exceeds the VAT registration threshold (currently £85,000 per annum), a non-VAT registered business becomes obliged to register for UK VAT. The result is that whether the business purchased the service from a UK or overseas supplier, the VAT position is exactly the same.
For financial services businesses unable to recover all or most of their VAT, this self-accounted VAT charge becomes an additional cost. Where your business makes a mixture of taxable and exempt supplies, any overhead VAT needs to be apportioned.
Apportioning reverse charge VAT
Logically, one might expect reverse charge VAT to be apportioned in much the same way as if a UK supplier had charged VAT.
In the case of BlackRock Investment Management v HMRC [2018] UKUT 415, the Upper Tribunal (UT) dealt with a single supply from an overseas supplier used by a UK business to make both taxable and exempt supplies. The UT could not reach a conclusion on the question of whether an apportionment of the reverse charge is possible between the taxable and exempt supplies.
BlackRock, a UK fund management business, made use of software supplied by a US entity in its corporate group in order to provide fund management services. While the First-tier Tribunal had noted that the software’s “sophistication and complexity … was difficult to convey in words”, the UT seems to have accepted that the software could qualify for the financial services VAT exemption.
Some of the fund management services were supplied to ‘special investment funds’ – under UK VAT rules these supplies are exempt. BlackRock also used the software to supply other (non-special investment) funds, the supply of which is taxable.
The fund management exemption flows down the supply chain. This makes it possible that the supply of the software could also fall within the exemption, even though the UK entity had outsourced part of its function to the US entity.
Clearly, BlackRock received a single supply of software. The UT now needed to consider what to do with the reverse charge.
As BlackRock was required to determine the VAT liability under the reverse charge, could different VAT rates under the reverse charge apply to the different elements of the single supply? Or, as this was a single supply, was this a case where only one VAT rate applied?
The UT stated that it could it be argued both ways was therefore unable to provide an answer. The UT felt compelled to refer the case to the Court of Justice of the European Union (CJEU) for a ruling.
Situations like BlackRock’s are relatively rare: in most cases, the reverse charge service (e.g. supplies of data, legal services) has one VAT liability. However, it does demonstrate a peculiarity of the operation of the reverse charge.
If you find yourself in such a situation, you may wish to enter into two contracts with your supplier. Otherwise you may find that it takes some time to find out what to do, by the time the CJEU issues its decision. To further complicate matters, it is worth considering whether that decision would hold sway in a post-Brexit VAT world.
If you’d like to know more about the various ways of apportioning reverse charge VAT, or you have any particular reverse charge issues relating to your business, we would be glad to advise you: please get in touch using our enquiry form.