January Q&A
VAT on overseas work?
Q. I am VAT registered as a window cleaner. I visit my mother in Dublin for one week every two months and do some work while I am there. Do I need to charge VAT on this work or is it not an issue because I am doing the work outside the UK?
A. The starting point is to consider if your customers in Ireland are VAT registered or not. It will be easier for VAT purposes if they are all registered because Irish VAT rules means that the customer will be liable to pay the VAT by doing the reverse charge on their Irish VAT returns, i.e. accounting for output tax and then claiming input tax on the same return, subject to the normal rules.
JRW ADVICE – This process is known as a reverse charge extension for land services. The UK also applies this rule, meaning that an Irish window cleaner or any other non-UK person working on a UK property, e.g. a builder, would not need to register for and charge UK VAT if the customer is VAT registered in the UK.
If you have customers that are not VAT registered, e.g. private individuals, then you will need to register for an Irish VAT number and charge Irish VAT at 23%.
TRAP – A business trading in an EU country where it is not established, like our window cleaner, making taxable sales in that country where the VAT is not dealt with by the reverse charge, gets a nil registration threshold. The business must therefore register for VAT in that country irrespective of its level of sales, e.g. even for a single window cleaning job charging €10.
What if a customer overpays their invoice?
Q. Your business raised an invoice for £100,000 plus VAT which the customer paid twice by mistake. You submit calendar quarter VAT returns. How should you deal with the VAT on the double payment if you don’t return the money to your customer?
A. Let’s suppose the invoice was raised on 31 March 2019 and the payments were made on 30 June and 31 July. The starting point is to consider if your business uses the cash accounting scheme. If so, then output tax of £20,000 will be payable on your June return, i.e. to coincide with the payment date. But if you adopt normal accounting, then output tax will be declared on the appropriate VAT return, based on the invoice date.
JRW ADVICE – This is one of the two main advantages of the cash accounting scheme, i.e. you don’t account for output tax until payment is made by your customer, a useful cash flow saving. The other advantage is that you get automatic bad debt relief because you never account for VAT on debtors.
Putting aside money laundering issues, you might decide to retain the double payment made by your customer, to use the money to offset against future sales invoices. This sometimes happens if the customer has a history of late payment. You may have to refund the amount if the customer realises their error.
The good news is that you don’t need to account for output tax on the overpayment because the value of the goods or services you supplied to your customer is only £100,000, i.e. VAT of £20,000.
However, if you use the cash accounting scheme, you will need to account for output tax each time that you allocate any of the double payment to other sales invoices.
In terms of accounting entries, the overpayment will be credited to the customer’s sales ledger account and then matched off against other sales invoices. Make sure that you account for output tax when the matching takes place, as this effectively relates to payment of the new invoices.
If the matching date on, say, the first invoices amounting to £25,000 + VAT was delayed until 1 October rather than 30 September, this would delay the output tax payment of £5,000 until the December VAT period, i.e. a three-month cash flow saving. Don’t account for output tax if the invoices being matched off are zero-rated.
If your customer overpays you, then no output tax is payable on the overpayment. The way you deal with the overpayment for VAT purposes will depend on whether you use the cash accounting scheme. Be careful if you allocate the overpayment against future invoices that are zero-rated, i.e. no output tax will be payable.
What’s the VAT position on hire cars with private use?
Q. Your business occasionally needs to hire cars, perhaps if a company car is being repaired or you have a new employee. Is there a VAT problem if you or your employee also use the car for private trips?
A. The first question you need to consider is why your business is hiring a car. If the reason is because the vehicle is replacing a company car that is off the road for any purpose, then the 50% block for leasing cars also applies to the hire car deal, i.e. it applies from day one. The block does not apply if the car is not hired to replace an off the road company car and the hire period is less than ten days and the vehicle is to be used specifically for business purposes.
If the hire period exceeds ten days, then the normal leasing rules will apply, i.e. there will be a 50% input tax block if the hiring is not exclusively relevant to business journeys. HMRC accepts that the hire or purchase of a commercial vehicle, e.g. a van, will be different to a car as far as private use is concerned. As long as private use of a commercial vehicle is merely incidental to the business use, then you can ignore this, and fully claim input tax on leasing, hiring or purchase costs.
Generally speaking, only 50% of the VAT can be reclaimed. However, if the car is hired for no more than ten days and is to be used for business purposes, there is no restriction on the input tax reclaim. If you are leasing a commercial vehicle, e.g. a van, minor private use won’t affect your input tax claim either.
