A quick guide to VAT and VAT MOSS for small businesses

Run a small business and not sure how VAT works, and when you should charge, pay and reclaim it? Read our quick guide to VAT (including VAT MOSS).

If you run a business or work as a freelancer or consultant, you can’t escape VAT – whether you’re paying it on goods and services you buy, or whether you earn over the VAT threshold and need to register for it.

To help you learn more about how VAT (and VAT MOSS) works and your obligations, tax experts Kreston Reeves have compiled a quick guide to VAT for small businesses.

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What is VAT?

Value Added Tax (VAT) is a consumption tax assessed on the value added to goods and services. It applies to broadly all goods and services that are bought or sold for use or consumption in the European Union(EU).

VAT is only applicable in the EU, so if you make sales to customers outside the EU then they are not subject to VAT. (There may, however, be other local sales taxes or VAT equivalents in those countries which you may need to consider.)

So as a business in the UK you will likely be charged VAT by many of your suppliers. The standard VAT rate in the UK is 20%, so any of your VAT registered UK suppliers who invoice you will add 20% VAT to their invoices.

If you aren’t a VAT registered business then you can’t reclaim this VAT, so effectively the cost of these supplies increases by 20%. However, if you are VAT registered then you can reclaim the VAT charged to you by suppliers (what is termed “input VAT”) on your VAT return, so this VAT is not a cost to your business.

When do you need to charge VAT?

If you are VAT registered you need to charge VAT to your customers. If they’re in the UK this means you’ll add 20% VAT on your invoices to them. If your customer is VAT registered then this shouldn’t be a problem, as they will be able to claim this back on their VAT return.

However, if your customer is not VAT registered (for example if they’re an end user and not a business) then they will not be able to reclaim this VAT back, and so effectively your goods or services will become 20% more expensive to them.

So when you start out in business you need to think carefully about whether you wish to become VAT registered from the outset.

To make this decision, you need to take into account how much VAT you will be paying suppliers yourself (and can therefore reclaim if you register). You also have to consider who your customers are, and weigh up whether adding an extra 20% to your goods or services will impact your competitiveness against other non-VAT businesses.

When do you need to register for VAT?

At some point, once your business is established, you may not get the choice of whether to register or not. You must register for VAT if:

  • Your business’ VAT turnover is more than £85,000 in a 12-month period.
  • You receive goods in the UK from the EU worth more than £85,000.
  • You expect to go over the £85,000 threshold in a single 30-day period.

If you don’t meet any of these criteria then you don’t have to register for VAT. However, if you want to, you can voluntarily register for VAT.

What if you sell to the EU?

If you sell your goods and services across the EU, particularly online, then there are other rules and regulations that you need to consider.

If you sell business-to-business (B2B), you don’t charge UK VAT on the sale. The sale will be outside the scope of UK VAT and the customer will have the responsibility to self-account for VAT in their own EU country, under what is called the ‘reverse charge’.

Ideally you should obtain and quote your customer’s EU VAT registration number on your sales invoice to demonstrate that the supply is to a business customer. You’ll then need to file EC Sales Lists as well as your usual VAT return declarations.

If you are selling to the general public (or entities not in ‘business’) in EU countries, you’ll need to charge VAT in the country where your customer belongs. This affects anyone providing digital services where the customer is in another EU Member State and is not a business.

So it’s important to establish whether your service falls within this rule. Supplies which will be deemed ‘digital services’ include electronically supplied services, telecommunications services and broadcasting services.

How VAT MOSS works

If your business-to-consumer (B2C) services fall under this rule, you need to register for VAT in each country you supply, whatever your turnover there. Or you can use a simplification option called MOSS (the Mini One Stop Shop). Once you’ve applied for a MOSS registration you can accesses a portal on HMRC’s VAT registration site, and account for any sales to other Member States through it.

The plus side of MOSS is that it saves you having to register for VAT in up to 27 countries. The downside of the rule is that it applies to any qualifying services supplied to non-business customers – including charities, educational establishments and some government departments. So it’s important that you establish the status of your customers.

Post-Brexit things may change, however, and UK suppliers may be obliged to register for MOSS in another EU member state.

What if you sell apps?

One final point to make is that suppliers of some digital services, such as apps, might sell through an intermediary like App Store or Google Play, rather than directly to the customer in another country.

If that’s the case, unless the intermediary makes it absolutely clear that the supplier is making the sale to the customer, the intermediary will be responsible for accounting for the appropriate VAT on the sale.

If you’d like further advice on VAT or tax, contact Kreston Reeves on +44 (0)330 124 1399 or email becca.munt@krestonreeves.com.

Photo by Nicola Fioravanti