Making Tax Digital for VAT – are UK branches of overseas businesses ready?
16 February 2022
The UK’s small businesses are busy preparing for the next phase of Making Tax Digital for VAT (MTD) which, as HMRC and accounting software providers keep reminding us, will bring all remaining VAT registered businesses into its scope from their first VAT return period beginning on or after 1 April 2022.
Traders with a turnover below the VAT threshold of £85,000 who have registered for VAT on a voluntary basis will need to file their VAT returns using MTD compatible software and keep digital records with full digital links spanning the entire VAT return process, linking the original digital recording of a transaction through to the digital submission of the final VAT return numbers.
While this may present an administrative burden that many small businesses could do without, there is one group at higher risk of overlooking their new MTD obligations. These may find it particularly difficult to comply.
It is common for organisations based overseas to set up a small branch or subsidiary in the UK to handle aspects of their business here, such as providing marketing support, a repair service or a contact point for UK customers. Ultimately funded by their parent company, these local entities often register for VAT to recover the VAT they pay on UK costs, such as taxable rent on their business premises. While they may have little or no VATable turnover in the UK, many are entitled to register for VAT because they supply services to their parent company or another overseas customer. This means that while their supplies are not subject to UK VAT, they may still be eligible to recover VAT on their costs.
Once registered, it is easy for these small UK presences to go into ‘auto pilot’ for VAT, completing and submitting periodic VAT returns to claim input tax on their regular costs. This can make it equally easy to overlook some of the other obligations of a UK registration, such as MTD. This problem can be compounded when the UK branch is using accounting software provided by the parent company, which is configured for use in their own country and may not be compatible with the UK’s MTD system.
Now is the time for UK VAT registered branches and subsidiaries to review their systems to ensure they too are capable and ready to comply with Making Tax Digital for VAT.
Traders with a turnover below the VAT threshold of £85,000 who have registered for VAT on a voluntary basis will need to file their VAT returns using MTD compatible software and keep digital records with full digital links spanning the entire VAT return process, linking the original digital recording of a transaction through to the digital submission of the final VAT return numbers.
While this may present an administrative burden that many small businesses could do without, there is one group at higher risk of overlooking their new MTD obligations. These may find it particularly difficult to comply.
It is common for organisations based overseas to set up a small branch or subsidiary in the UK to handle aspects of their business here, such as providing marketing support, a repair service or a contact point for UK customers. Ultimately funded by their parent company, these local entities often register for VAT to recover the VAT they pay on UK costs, such as taxable rent on their business premises. While they may have little or no VATable turnover in the UK, many are entitled to register for VAT because they supply services to their parent company or another overseas customer. This means that while their supplies are not subject to UK VAT, they may still be eligible to recover VAT on their costs.
Once registered, it is easy for these small UK presences to go into ‘auto pilot’ for VAT, completing and submitting periodic VAT returns to claim input tax on their regular costs. This can make it equally easy to overlook some of the other obligations of a UK registration, such as MTD. This problem can be compounded when the UK branch is using accounting software provided by the parent company, which is configured for use in their own country and may not be compatible with the UK’s MTD system.
Now is the time for UK VAT registered branches and subsidiaries to review their systems to ensure they too are capable and ready to comply with Making Tax Digital for VAT.
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