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The cost of getting VAT wrong

Stephen Smith and Tony Wilson at a recent UK Training seminarI took the opportunity to attend one of our VAT seminars, The Essential Guide to UK VAT and International Trade, recently. It was good to spend time with the delegates and listen to many complex issues that people have to address when it comes to international trade.

It is quite apparent that many organisations run the risk of incurring substantial penalties because the commercial arrangements they have within an international supply chain becomes very confusing.

Drawing upon many situations that were described during the seminar I constructed the following scenario and ask you to consider what would be the appropriate VAT treatment when the American company invoices the UK company.

The scenario

The American company arranges the supply of goods from a Chinese company to a UK company. The Chinese company ships the goods to either of two of its subsidiaries; one is in the UK and the other in The Netherlands. The UK subsidiary handles the customs clearance in the UK whilst the Dutch subsidiary does the same in The Netherlands. Either of these subsidiaries delivers the goods to the UK company as and when required.

The UK subsidiary raises VAT invoices inclusive of standard rated UK VAT to the American company which has a UK VAT registration. The Dutch subsidiary raises zero rated VAT invoices to the American company leaving it to account for acquisitions tax.

The American company invoices the UK company for the supply of the goods using its UK VAT registration number. At the commencement of the contract the finance people in America instructed its UK sales administration team to zero rate the invoices and over the life of the contract the value of the invoices have so far exceeded 5,000,000.

HMRCA member of the UK sales administration team queries why the invoices are not standard rated and is concerned that there is a significant amount of VAT not accounted for between its UK VAT registration and the UK company which could lead to HMRC levying a penalty charge in excess of 250,000.

What would you have done - would you have zero rated the invoices or applied VAT at the UK standard rate? Go to this page if you want to know the right treatment.


Stephen Smith
Managing Director
UK Training (Worldwide) Limited

 


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