Can a charity save VAT by using suppliers of services located outside the UK?

The technological developments that have enabled UK employees to work from home during the COVID-19 pandemic have also contributed to the use of suppliers of services located outside the UK. Many services can be supplied efficiently and cost effectively from anywhere in the world. As the example below illustrates, using a supplier located outside the UK does not necessarily result in a VAT saving.

Illustrative example

A charity that is registered for VAT incurs significant costs on IT support services. VAT recovery is restricted to reflect the use of the services to support the taxable, exempt, and non-business activities of the charity. Can the charity improve its VAT position by using a supplier located outside the UK? Although a supplier of IT support services located outside the UK should not charge the charity VAT, the charity is required to report the transaction on its VAT Returns as if it was both the supplier and the recipient of the services. The VAT Return entries are:

Box 1 Include the UK output VAT due on the supply.
Box 4 Include the amount that the charity is entitled claim as input VAT.
Box 6 Include the value of the invoice from the supplier, which is the value of the deemed supply.
Box 7 Include the value of the invoice from the supplier.

 

If the services are used exclusively to support the exempt and/or non-business activities of the charity, there will be no entitlement to claim input VAT in relation to the services.

What if a charity is not registered for VAT?

A charity that is not registered for VAT may be able to save VAT if it uses suppliers located outside the UK. A point to be aware of, however, is that the value of any taxable services received from suppliers located outside the UK needs to be included when monitoring the level of taxable turnover for VAT registration purposes. This could result in a charity being required to register for VAT even if the taxable income it generates is below the VAT registration threshold.

To find out how Garbutt & Elliott LLP can help you comply with the complexities of VAT please contact Alex Millar or Naveen Sahney at support@garbutt-elliott.co.uk