5 ways business models can affect VAT liability

Understanding the impact of business models on VAT obligations can help to minimise tax risks and ensure compliance with tax regulations. Nicholas Hallam, chief executive of Accordance, highlights the key points.

Being aware of VAT obligations – and how a business model may affect them – will enable business owners to make informed decisions and minimise tax risks when determining the business structure that they adopt. Businesses need to evaluate how desired operational structures could impact VAT liabilities and, importantly, whether any unintended consequences could follow if their arrangements are challenged by revenue-hungry tax authorities.

Doing this from the outset of making new supplies should also help senior management teams and investors minimise the number of sleepless nights they endure worrying about unexpected tax bills coming their way. In the current political and regulatory environment, being able to substantiate and justify the commercial and economic realities of your business structure and minimise tax authority challenges is key.

There are many ways that a business model can affect VAT liability. Five key points are highlighted below.

1. Are employees classed as “self-employed” or “employed”?

As Uber found out recently, the employment status of “staff” can significantly affect the party who is ultimately liable to account for VAT. In the case of Uber, a UK employment tribunal recently ruled that their drivers are employees of Uber and not self-employed, as Uber had been maintaining.

VAT implications have arisen from this because, if the outcome of the ruling is upheld (and it is being challenged), Uber’s business structure will fundamentally change. This means that Uber could take on responsibility to account for the VAT instead of the current position which sees the drivers (if VAT registered) do this.

It is therefore crucial to ensure that the VAT implications are considered when setting up a business to ensure that reporting accurately reflects activities. This should help to protect and manage the risk of building up liabilities that the tax authorities might re-visit in the future or reputational damage.

 

2. How does the business hold/manage stock?

Does the business hold consignment stock? Does it operate warehouses in other countries to enable delivery to customers quickly? Does it make local purchases in other EU Member States? Does the supply chain take advantage of triangulation?

When a business holds stock, it should always be determined in advance as on which party the onus will rest to account for the VAT due on the supply of the stock. This is important because some countries apply simplifications which shift the need to account for VAT to the customer whilst others expect the supplier to maintain this position (by registering for VAT in that country). Knowing the specific rules will influence the obligations a business has – such as the need to register – and help inform how it manages these.

 

3. Who is the business supplying?

Having an awareness of who the business’ customers are, where they are established and what countries they operate in is crucial. Determining whether supplies are B2C or B2B in nature and ensuring it is known which country they reside in should be considered as this influences the place of supply (where VAT is due), and hence will minimise the risk of applying the incorrect VAT treatment to supplies.

 

4. Who manages transportation?

If the business makes cross-border supplies of goods, it needs to be determined who takes ownership of the goods during transportation. This is important because the party with responsibility for the transport is often also deemed to be the one making the supply.

This point is critical to confirm when analysing supplies which involve chain transactions. These supplies see one movement of goods take place between locations in two EU Member States.  However, there will be two supplies of that good made during the transportation. Of the two supplies, one will benefit from exemption (that being the cross border one) and one will be subject to local domestic VAT. If the latter applies, the business making that supply might have an obligation to be VAT registered.

Understanding this is critical in order to ensure that all VAT obligations are covered and provision has been made to meet them. In addition, if the obligations have a negative impact (i.e. increased costs, etc.) then knowing that ahead of time can allow for alternative options to be considered.

 

5. Are there mixed or single supplies taking place in the transactions?

A mixed supply is one where a single price is charged but which has two or more component parts, each with its own purpose. VAT liability will become more complex where supplies are mixed and the different elements are subject to different rates of VAT. For instance, if one supply is subject to a reduced rate and the other is subject to the standard rate of VAT, then a fair and reasonable method of apportioning the income received between the two different rates needs to be applied.

A business may want to try and obtain agreement from the relevant tax authority about how it will be accounting for the VAT if mixed supplies are made. This may involve agreeing that a mixed supply does in fact take place (rather than a single supply) in addition to agreeing the method that is going to be applied to apportion the VAT due.  Doing this should help minimise the risk of fines or penalties in the future.

 

Nicholas Hallam is chief executive of Accordance.