Non-Established Taxable Persons

A significant aspect of conducting international business operations includes understanding and complying with taxation regulations. This is especially true in the United Kingdom (UK), a major player in global commerce. One area of focus in UK taxation laws is the taxation of non-established taxable persons (NETPs). This article comprehensively discusses NETPs and their taxation in the UK.

Defining Non-Established Taxable Persons

The UK defines a NETP as any business that does not have a fixed establishment or permanent presence or is not normally resident in the UK but supplies goods or services within its borders. This can apply to overseas online retailers, service providers, or other international businesses selling to consumers (B2C) or other businesses (B2B) in the UK.

Understanding UK VAT Laws

Understanding Value Added Tax (VAT) principles in the UK is critical for NETPs. VAT is a consumption tax placed on a product or service at each stage of the supply chain, including production, distribution, and sale. The standard VAT rate in the UK is 20%, with reduced rates (5%) and zero rates on certain goods and services.

Every business, including NETPs, making taxable supplies in the UK over the VAT threshold (as of 2021, £85,000 within 12 months) must register for VAT. They must charge VAT on their taxable supplies, reclaim any VAT they’ve paid on business-related goods or services, and submit VAT Returns to HM Revenue and Customs (HMRC).

Taxation of NETPs

The obligation for VAT registration for NETPs depends on the nature of the supply—goods or services—and whether the supply is B2B or B2C.

Goods

If a NETP sells goods stored in the UK to consumers, the business must register for VAT regardless of the sales value. However, different rules apply if the goods are outside the UK at the point of sale. Distance selling rules come into play when a NETP sells goods from another EU country to UK consumers. In this case, the NETP must only register for VAT if their sales exceed the distance selling threshold (£70,000 as of 2021).

When a NETP sells goods to businesses in the UK, the ‘reverse charge mechanism usually applies. The responsibility for accounting for VAT switches from the seller (NETP) to the buyer (UK business). The UK business reports their purchase (input VAT) and the NETP’s sale (output VAT) on their VAT return, often cancelling each other.

Services

The ‘place of supply rules dictates whether UK VAT is chargeable for services. The general rule for B2B services is that the place of supply is where the recipient belongs, meaning the NETP does not charge UK VAT, and the reverse charge applies. For B2C services, the place of supply is typically where the supplier belongs, meaning the NETP would not charge UK VAT. However, exceptions exist, particularly for digital services, where the place of supply for B2C is where the consumer belongs, and the NETP may need to account for VAT under the ‘Mini One Stop Shop’ (MOSS) scheme.

Compliance Measures and Penalties

NETPs are obliged to maintain accurate records of sales and VAT charged and must submit regular VAT returns to HMRC, usually quarterly. They should also provide a VAT invoice to customers, clearly displaying information such as the VAT rate and the VAT amount. Failure to comply with UK VAT laws can result in penalties. This ranges from surcharges for late VAT return submissions or payments to penalties for inaccurate returns or failing to notify HMRC about the need to register. In serious cases, criminal charges may be brought.

Brexit’s Impact

The UK’s exit from the EU (Brexit) significantly affected VAT rules. Following Brexit, the distance selling rules no longer apply, and NETPs selling goods from outside the UK to UK consumers have to register for VAT, regardless of the value of the sales. Moreover, new rules for consignments not exceeding £135 came into play, where the point of VAT is at the point of sale instead of importation.

Understanding UK’s complex VAT laws can be challenging for NETPs. Nevertheless, fully aware of their VAT obligations is crucial for these businesses to maintain compliance and avoid penalties. Engaging with knowledgeable tax professionals and seeking expert advice can assist NETPs in navigating the intricacies of the UK tax system. As the UK’s economic landscape continues to evolve, particularly in the wake of Brexit, keeping up-to-date with changing tax regulations remains a top priority for NETPs conducting business within the UK.  If you need help with Tax Planning or Tax Compliance; we have tax experts who can help you. Call our office to discuss your circumstances.