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Dear tutor
“Karin is a VAT-registered business in the UK that makes exclusively standard-rated supplies. She bought goods valued at £10,000 (excluding VAT) from a supplier based in Serbia. If these goods had been supplied within the UK, they would have been subject to the standard rate of VAT. The standard VAT rate in Serbia is 5%.
What is the net effect on the VAT position of the UK trader?
A £0
B £2,000 to pay to HM Revenue and Customs
C £2,000 to reclaim from HM Revenue and Customs
D £500 to pay to HM Revenue and Customs”I am confused with the explanation for the solution of the above question “Karin accounts for output VAT of £2,000 as the goods would be standard?rated if supplied in the UK. She can claim back input VAT of £2,000 on the same return as the goods are used by a trader that only makes taxable supplies. The net effect on VAT payable is therefore nil.”
As I understand reverse charge is not applied in this situation and she is not the final consumer of the goods; therefore it does not make sense that the net effect on VAT payable is nil. She could sell the goods to final consumers with standard rate VAT, and therefore must pay the output VAT on the goods. Do I miss something?
Imports of goods to UK businesses are accounted for using ‘postponed VAT accounting’ (PVA).
Services supplied from overseas to UK businesses are accounted for using the ‘reverse charge’ method.
The treatment of both is exactly the same. The VAT rate in the overseas country is irrelevant.
The UK business is deemed to supply the goods/services to itself and therefore accounts for both output and input VAT (at the rate applicable in the UK) on the transaction.
As long as the business is making wholly taxable supplies, then the input VAT is recoverable and therefore cancels out the output VAT making the net effect £0 TO THE BUSINESS.
When the goods are sold on, then VAT is charged as normal.
Ah I see. So it means that, if the goods were bought in UK, the net effect on the VAT position of the trader would be “£2,000 to reclaim from HM Revenue and Customs”. But here as the goods is imported abroad, the reverse charge is applied; therefore, the net effect on the position is Nil as long as the goods is in the hand of the trader.
Your explanation is confusing!
When the goods are brought into the UK, the UK importer is deemed to buy them from itself, and so charges both output and input VAT on the same VAT return so the net VAT effect of the import on the trader is NIL.
When the goods are sold on to a customer, output VAT is charged as normal.
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