Insights

Where is your business established for VAT?

Name: MHA
Price range: $

Naomi Quant · May 18th 2023 · read

We recently explored the concept of Permanent Establishments for corporation tax in our recent insight “Has your business thought about Permanent Establishments for corporation tax for remote workers?”. But do you know where your business is established for VAT purposes?

When thinking about the place of establishment for VAT, we need to consider whether there is a business establishment or a fixed establishment. This is different from the concept of Permanent Establishments and can mean a business is established for VAT but not for corporation tax or vice versa.

There are no legal definitions of either business or fixed establishments, but broadly we need to understand if either of the following are met:

When would there be a business establishment in the UK for VAT?

If there is a place in the UK where the essential decisions concerning the general management of a company and the functions of its central administration are carried out. HMRC interpret this to be equivalent to a business’ head office or where the directors/partners hold board meetings.

When would there be a fixed establishment in the UK for VAT?

If there is an establishment, other than the business establishment, in the UK where activities of the business are carried out and there is the permanent presence of both the human and technical resources necessary for making or receiving the supplies of services in question.

i.e. if a business has:

employees
in a permanent location in the UK

Then this could mean there is a fixed establishment in the UK.

If there is more than one establishment, then the key is to identify which is most closely connected to the supply. This can be relevant whether a supplier or a customer is established in the UK when making or receiving a supply.

Situation:

Company A specialises in phone app creation and is based in Croatia with no establishment or presence in the UK. It has a UK subsidiary, Company B, but it has no physical presence here and all decisions about Company B’s activities are made by directors in Croatia. Where is the UK subsidiary established for VAT purposes?

Analysis:

So, for corporation tax purposes we have a UK incorporated company which will be subject to UK corporation tax, but for VAT there is no establishment. There is no physical place where business is being operated in the UK, it’s all being run out of Croatia.

Company B may have an obligation to register for VAT in the UK and charge output VAT under special rules for electronically supplied services. However, if Company B receives taxable supplies, for example from accountants or lawyers, the place of supply is Croatia because the place of supply of those services is determined by where Company B is established. Although the UK is the place of incorporation, Company B has no business or fixed establishment here. UK VAT should not be charged on those legal or accountancy services.

Essentially, this company could have an obligation to register for UK VAT and yet should not be charged UK VAT by its suppliers.

Risk:

Suppliers see a UK company with a UK address and immediately charge VAT but in a situation like the above it cannot be claimed back by the recipient as it should not have been charged in the first place.

Key considerations:

Are the directors based overseas or in the UK?
Are there physical premises in the UK?
Are there the human and technical resources to make and receive supplies in the UK?

If you have any doubts around the place of establishment for your business and the corresponding VAT treatment of supplies, please get in touch and we can look at your specific circumstances. For more general UK inbound projects, we offer a cross-specialism approach to ensure the UK tax consequences of your move have been thoroughly reviewed. In terms of outbound expansion, we regularly collaborate with our international Baker Tilly colleagues and, as your point of contact, can offer seamless advisory work to support your move.