This is a question we are regularly asked.
Any entity with a taxable turnover that is above the VAT registration threshold on 1 April 2019 must follow the Making Tax Digital (MTD) rules, so essentially the question here is what is included within “taxable turnover”?
Taxable turnover for MTD is the same as taxable turnover for VAT registration purposes. HMRC’s VAT Notice on MTD (700/22) rather ambiguously states that “VAT taxable turnover is the total value of everything you sell that is not exempt from VAT”. It refers readers to VAT Notice 700/1: Should I be registered for VAT, which provides details in section 2, but this is not simple to understand, so we have provided some general clarification below.
The following supplies are included in taxable turnover:-
- The net value of standard-rated, reduced rated and zero-rated supplies of goods and services made within the UK (**see the explanatory notes below).
- Reverse charge services received from overseas businesses that would be standard rated, reduced rated or zero-rated if made in the UK. (***see the explanatory notes below).
- Reverse charges required to be made on the receipt of specified goods or services subject to the domestic reverse charge in the UK. This includes mobile phones, computer chips and wholesale supplies of gas and electricity.
- Self-supplies of construction services as per VAT Notice 708: Building and construction, section 25. This is where a business uses its own labour to carry out building works for its own use, and the value is £100,000 or more.
The following supplies are not included in taxable turnover:-
- Exempt supplies of goods or services made in the UK
- Reverse charge services received from overseas businesses that would be exempt if made in the UK
- Income outside the scope of VAT because it is not a consideration for a supply such as farm subsidies, power generation subsidies and some grant income
- Supplies of services where, under the place of supply rules, the place of supply is outside the UK; these supplies are outside the scope of UK VAT
Explanatory Notes; Place of supply of goods and services
** The place of supply for goods is where they are physically located when they are sold; sales of goods from stock held in the UK is UK turnover even if the sale is a zero-rated export or zero-rated supply to a VAT registered business in another member state.
***VAT Notice 741A provides detailed guidance around the place of supply of services.
Although there are some exceptions, the general rule for business to business (B-B) supplies of services is that the supply takes place where the recipient belongs. This means that those services received by a UK business from an overseas supplier will count to the recipient’s turnover. Conversely, services supplied by a UK supplier to an overseas business customer will not.
Different place of supply rules applies to B-B services relating to land, catering, transport, and admissions, and to business to consumer (B-C) supplies. If you have any queries around the place of supplies of services please call the VAT Helpline.
As your client is providing services to both UK and overseas businesses, any turnover generated from services for which the place of supply is outside the UK will not count as taxable turner for the purposes of Making Tax Digital.
The rules will apply from the first VAT period for the entity that starts on or after 1 April 2019. If the entity’s turnover drops below the registration threshold after they have started to follow the MTD rules then they will need to continue to follow the rules unless they deregister or meet one of the exemption criteria.
Please note that businesses that need to follow the MTD rules need to sign up for the specific MTD online Portal. In their recent webinar on 20th September 2018, HMRC confirmed that the Government Gateway Portal currently used to submit VAT returns online will remain open and will continue to be used by those entities that are VAT registered but not required to follow the MTD rules. Once a business has signed up for MTD, however, they will no longer have access to the portal with respect to completing their VAT return.
Please share this article with your clients
If you have a VAT query why not contact the VAT Advice Line on 0844 892 2470 to discuss the implications. Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates.