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VAT Changes 2013: Will You Be Affected?

Ravi Raval of small business specialist Taxclaim Accountants explains the ins and outs.

There have been significant changes made by Her Majesty’s Revenue and Custom (HMRC) to the value added tax (VAT) rule for non-established UK businesses effective 1 December 2012. Previously, non-established businesses earning under £77,000 per annum, had not been required to register for VAT – this threshold is, however, no longer in place and businesses will be forced to review their VAT position through the products and services that they provide, in order to avoid penalties.

Let us start with the basics: a non-established business is one that is not resident in the UK. This means the business does not have any physical existence within the UK and all centralised management decisions are made outside the country, so if you are a UK-based business, the good news is that you don’t have much to worry about – in fact, in theory, these VAT changes may make it harder for competitors to make it into your market. As of 1 December 2012, non-established businesses which make – or intend to make – taxable supplies in the UK must notify the HMRC and are required to register for VAT before the date they make the taxable supply – usually 30 days. Businesses can register for VAT either online or by completing the VAT1 form found on the HMRC website.

Unfortunately, this means that non-established businesses which used to supply ‘VAT-able’ goods or services to the UK under the old threshold will now be required to register for VAT by default and will most likely be forced to raise prices to cover the extra cost. In addition, new VAT laws will increase the bureaucracy cost of expanding a business to the UK – these include not only VAT registration itself, but, in many cases, businesses will want to hire an outside tax accounting firm to ensure that their initial VAT registration in done properly. There is, of course, the risk that this added cost could make businesses reconsider selling their goods in the UK and, given the current economic climate, this would in turn slow down the economic recovery process.

Why the change? This decision was brought about after the European Court of Justice confirmed that only established EU member states (those which trade in the UK under the ‘Distance Selling’ rule) are eligible for the domestic VAT registration threshold in the EU. The UK has decided to align its VAT rules with those of the EU, and thus limit the VAT legislation advantages rule for Europe only. 

In a nutshell, the £70,000 threshold for EU member states is still in effect; however, with the £77,000 cap removed, non-established businesses can no longer benefit from VAT-free status. Additionally, non-EU businesses, whose UK customers are responsible for paying custom duty taxes in the UK, will also remain unaffected, as will small businesses under the VAT threshold within the UK.

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