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Banking and VAT - Explore how VAT applies to products and services in Banking and the the different VAT allocation and recovery models used. Introduction The world of banking can cover a broad spectrum of areas that can typically operate under a banking institutions umbrella. Traditionally banking was represented by retail and commercial banking where the main businesses was to provide a sanctuary for individual and commercial savings and at the same time provide loans and finance to individuals and businesses. However nowadays, many banks also offer Investment Banking and Private Banking services. Listed below are a number of services provided by the different areas of banking. (The list is not exhaustive) Investment Banking Inv estment Banking services are mainly provided to Large Public and Private Companies, Pension Funds, Governments, other Banks and Private Equity etc. Services Provided: Mergers and Acquisition Advisory - Advising on strategic transactions such as Acquisitions, Mergers, Joint Ventures, Leveraged Buyouts, Business Restructures Trading Platforms - That Facilitate the trading of Bonds (debt), Equities, Swaps, Options, Futures, Debt Financing - Bond issuance, Securitisation (Asset & Mortgage Backed securities), Loans, Liability Management Equities (stock)Lending - Acting as intermediary for a company that lends shares for a fee and a company that pays a fee to borrow the shares possibly for shorting. Initial Public Share Offerings - Advising and raising finance for the issue of shares to the general public Debt Underwriting - Arranging and underwriting the issuance of debt Share Underwriting - Underwriting shares during Initial public offerings (basically a guarantee to buy a portion of unsold shares) Risk Management - Providing clients with management solutions to better manage interest rate and foreign exchange risks and exposures Research - Carrying out general market, micro and macro economic research or specific sector research for clients for a fee Commodities Trading - Trading in physical commodities such as Oil, GAS, Electricity, Metals and Precious Metals such as Iron, Nickel, Gold, Silver, Palladium Private Equity - The pooling of funds to use to make acquisitions for investment purposes Market Data - The provision of real-time electronic data to companies, markets etc, to enable and assist decision making Wealth Management and Private Banking Wealth Management and Private Banking is mainly provided to private Individuals and smaller companies. Services Will include: Portfolio Management - Discretionary and Non Discretionary management of client assets Private Banking - A package of banking services for affluent individuals with levels of bespoke services for different grades of affluence. E.g. £100K to 500K, £1M to £10M, £10M to £50M etc. International Banking - A package of banking services offered to Expats etc Fund Management - The Management of pooled funds in Unit Trusts, OIEC's or through a fund supermarket owned by the bank or externally Model Portfolios - Bespoke portfolios that are designed specifically to achieve the investment goals of a group of clients Financial Advisory and Planning - Retirement Planning, Estate Planning, Executor and Estate Administration, Trustee Services, Pensions, Tax Advisory Financing - Trade, Real Estate, Boats. Yachts, Private Jets Execution Only - Retail share investing Credit Cards - Providing credit card services to clients Corporate Banking Corporate Banking is mainly provided to larger commercial enterprises where turnover exceeds between £5M - £10M. Some of these services are listed below. Business Banking - Providing business bank accounts to corporate clients International and Trade Finance - Providing international import and export financing, letters of credit Asset Financing - Providing financing solutions for acquiring cars, boats, planes, property Debt Factoring and Invoice Discounting - Proving working capital solutions by taking over a client's debtors for a fee to provide clients with smother cash flow. Inventory Finance - Providing finance to intermediary distributors of trucks, Tractors, Construction Equipment, Cars Cash Management - Finding the best return on client cash balances by moving the funds around to get the best rates Foreign Exchange - FX Trading Corporate Credit Cards - Providing corporate credit cards to firms Business Development loans - Loans to help businesses grow Retail Banking Retail Banking is mainly provided to individuals (general public) and small and medium sized businesses. Services include: Traditional Banking - The provision of bank accounts (current and savings) Cheque Clearing - The clearing and processing of cheques with other banks Mortgages - The provision of residential mortgages Personal Loans - Loans to consumers to buy cars, domestic appliances, Business Loans - Loans to businesses to fund growth and acquisitions Debit and Credit Cards - Provision of personal Debit and Credit Cards Insurances - Travel insurance, Residential Insurance Banking Income Most of the income generated by banks will either be: Fees Received Interest Received Commission Received VAT Liability of Services Supplied by Banks The VAT liability of banking income will depend on: Type of Service being provided to clients and customers The Place of Supply of those Services The Type of Client (business or non business) services are being provided to The Specific VAT rules governing the services being supplied Whether the Service is to a Branch, a VAT Group member or not The VAT liability will either be: Standard Rated (20%) Zero Rated Exempt Outside the Scope Type of Service Being Provided Financial Services are largely Exempt from VAT under the Financial Services VAT Exemption (VAT Act, Schedule 9, Group 5, 1-9). As such, many services offered by Banks will be Exempt when supplied in the UK. Services that are not covered under the Finance Exemption will be taxable at the Standard Rate (20%) when supplied in the UK by banks and other financial institutions . The Place of Supply of Services and the Type of Client The place of supply of services as mentioned under the place of supply tab, is determined largely by whether the supply is to a customer or client in business or whether the supply is to a non business customer . Business Customer Supplies to customers in business (VAT Registration is normally sufficient evidence) Supplies to customers that have both business and non-business activities such as charities, local authorities and government departments Non Business Customer A customer who is not in business Private individual Charity, Government Department or other body which has no business activities Services Supplied to Customers in Business Supplies to clients in business will be covered under the B2B (Business to Business) General Rule and thus the place of supply will be where the customer or client belongs . (Clients Country of Operation). Services Supplied to Non Busin ess Customers Normally supplies to Non business customers under the place of supply rules will be covered under the B2C (Business to Customer) General Rule and thus the place of supply will be where the supplier belongs. However there are special rules in place for particular B2C services (including Financial Services) that treat the place of supply of those services that would normally be taxable in the UK as being supplied where the customer or client belongs. List of Services Supplied by Banks and their VAT Liability As mentioned above, banks provide a broad spectrum of services and below is a list of B2B and B2C services both within and covered by the Financial Services VAT Exemption and those that are not covered. Note: The services listed below that are Exempt when provided to clients in the UK are within the scope of the Finance Exemption and the services that are Standard Rated are not. Below we have listed the main types of services offered by banks and the VAT liability for each service which depends largely on the type of client B2B or B2C and the service being offered. Retail "Day to Day Banking The Traditional service offered by banks to the retail sector (general public) of accepting cash deposits and providing advances and loans, cheque processing and clearing to customers where interest in earned by the banks as income is: Exempt when supplied to a B2B and B2C customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B or B2C customers. Insurance Services Many banks will offer insurance products such as home insurance, contents insurance, motor breakdown insurance to its customers. These services will be: Exempt when supplied to a B2B and B2C customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B or B2C customers. Corporate Finance (Mergers and Acquisitions) This service is mainly offered by Investment Banks and will involve providing Advisory Services in relation to potential acquisitions or mergers between companies. These services are: Standard Rated when provided to B2B and B2C customers in the UK Outside the scope of VAT (with recovery) when provided to B2B and B2C non UK Customers Corporate Loans (Including Mortgages) Corp orate Loans can be offered by retail banks to smaller businesses or by banks providing corporate banking services to larger businesses that turnover millions of pounds a year. The granting and advancing of credit falls within the Financial Services Exemption and is: Exempt when supplied to a B2B and B2C customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B or B2C customers. Execution Only Share Transactions Many banks will offer online trading platforms that facilitate execution only trading in securities such as equities whereby members of the public or companies can buy and sell shares. Execution only trading means the bank will act on the clients instruction to either buy or sell shares (with no advisory or recommendations involved) and the VAT liability is as follows: Exempt when supplied to a B2B and B2C customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B or B2C customers. Arranging the Issue or Placement of Securities Banks (Investment) involved in the arrangement or placement of shares, rights issues, coordination of an issue of shares where there are a number of participants, this service will be: Exempt when supplied to a B2B customer in the UK Outside the Scope of VAT (with recovery) when provided to a B2B customer Safe Custody Some banks offer safe custody services whereby clients can store documents such as share certificates, Gold, Silver, titles etc for a fee. This Fee is: Standard Rated (20%) for B2B and B2C when supplied to customers in the UK Outside the Scope of VAT (with recovery) when provided to a B2B or B2C customer Global Custody Global Custody may contain safe custody but will include a package of additional services such as the collection of dividends, interest etc. Where the service contains additional activities as described above along with safe custody, then the VAT liability will be: Exempt when supplied to a B2B and B2C customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B or B2C customers. Nominee Services Nominee Services whereby client shares will be held in the name of the bank on behalf of them. These services are: Exempt when supplied to a B2B and B2C customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B or B2C customers. Stock Lending Stock lending describes a situation where one person, the ‘lender’, transfers to a second person, the ‘borrower’, the legal title, along with all the dividends and rights, to securities. The borrower agrees to return to the lender, at a later date, an equivalent number of the same securities as those received. Stock lending is : Exempt when supplied to a B2B and B2C customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B or B2C customers. Share Underwriting Share underwriting where a bank will receive a commission or fee for guaranteeing to buy unsold shares during an Initial Public Offering (IPO) is : Exempt when supplied to a B2B customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B customers. Note: Any shares onward sold by the Bank will also follow the same VAT liability as above. Tax, Legal, Accountancy Adhoc services that may be provided by some banks or financial institutions are not covered by the Finance Exemption and are thus: Standard Rated 20% (taxable) when supplied to a B2B and B2C customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B or B2C customers. Portfolio Management Portfolio Management services normally offered by the Private Banking or Wealth Management arms of banks for individual clients can be split into discretionary or non discretionary. These services can be offered either internally or via third party Investment Managers. (Portfolio Management does not fall within the Financial Exemption like the management of funds such as AUT's of OEIC's as the service is not a collective investment where large numbers of clients funds are pooled together and invested) Discretionary Portfolio Management is where the Manager will make investments on behalf of the client based on their goals and risk appetite Non Discretionary Portfolio Management is where the client makes their own investment decisions and may take recommendations or advice from the manager but will ultimately decide on the investments the manager should make on their behalf. Normally the Portfolio Manager (the bank) or the external Portfolio Manager will charge an Annual Management Fee which will be: Standard Rated 20% (taxable) when supplied to a B2B and B2C customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B or B2C customers. The Investment manager as part of the contract may apply a transaction charge (commission) for executing trades or buying and selling securities on behalf of the client. If these charges as part of the contract are a separate supply of dealing charges, then the VAT liability is as follows: Exempt when supplied to a B2B customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B customers. If these charges as part of the contract are bundled together as a single fee for Investment Management, then the VAT liability is as follows: Standard Rated 20% (taxable) when supplied to a B2B and B2C customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B or B2C customers. Model Portfolios A Model Portfolio Service is a tailor made service designed by an Investment Manager(s) for a group of investors with the same investment aims. Funds are invested in a diverse range of assets and asset classes with the aim of reducing risk for clients. This service has traditionally been treated in the same way as normal portfolio Management by applying VAT on fees charged. However many portfolio managers are removing VAT from their fees charged to UK clients on the basis of a recent case (Tatton) where HMRC refunded a substantial amount of VAT on fees charged for their model portfolio service on the basis that the funds were pooled similar to collective investments. Futures Contracts - (Financial) Financial Futures are standardised derivatives contracts offered by and traded by Investment banks (as Futures Exchange Members) and allow investors to: Speculate on the price movement of an underlying financial instrument (Stocks, Interest Rates, Currencies, Indexes). Hedge against the movement of the price of a financial instrument. ( mainly companies that use the future contact as a hedge against to protect their own financial instruments ) Financial Futures can either be cash or non cash settled . Cash settled means there is no actual delivery of the financial instrument at expiry whereas Non Cash Settled means there is actual delivery of the instrument. Futures contracts are highly liquid and can be traded on Futures Exchanges prior to the expiration date. Income generated by banks from Futures contracts (commission earned by banks) is: Exempt from VAT when sold or traded with counterparties in the UK Outside the scope with recovery when sold to a non UK counterparty Financial Forward Contracts Financial Forwards Contracts (forwards) are similar in nature to Futures Contracts in that they both require the buyer and seller to set the quantity of a financial instrument and the date of delivery or expiry. However the major difference between the two is that whilst the Futures Contract is normally a standardised contract traded on a futures exchange , a Forward is a non standardised private agreement between a buyer and seller OTC. Note both futures and forward can be traded privately off exchange Over The Counter (OTC). Income /commissions generated by banks as broker to investors in Forward Contracts is: Exempt from VAT when sold or traded with counterparties in the UK Outside the scope with recovery when sold to a non UK purchaser Financial Options Options are Financial derivatives that are based on the value of underlying securities such as stocks, bonds, currencies and give the buyer the right to buy (call option) or sell (put option) the underlying asset on a specific date and and specific price. Unlike futures or forwards there is no obligation to actually buy the underlying asset. As such a premium is paid for the right to buy the options. Most options are equity options and are traded on exchanges and if exercised, settled via centralised clearing houses. Income generated by banks trading or facilitating the trading of options is: Exempt from VAT when sold or traded with counterparties in the UK Outside the scope with recovery when sold to a non UK counterparty Foreign Exchange Trading (FX) (Spots) Banks often act as brokers offering FX currency trading (Spots) to clients and charge commission. The Income generated will be: Exempt from VAT when sold or traded with counterparties in the UK Outside the scope with recovery when sold to a non UK counterparty Research Banks (investment) often have research departments that compile and sell investment research normally to companies to assist with their investment decisions. This research is: Standard Rated 20% (taxable) when supplied to a B2B and B2C customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B or B2C customers. Trading Platforms Many larger banks may offer trading platforms "dealer systems" to their clients which allows them to buy and trade securities or provides live market data such as share prices or foreign exchange rates. Systems that purely provide market data services to users are taxable as follows: Standard Rated 20% (taxable) when supplied to a B2B and B2C customer in the UK Outside the scope of VAT (with recovery) when provided to Non UK B2B or B2C customers. Systems that allow users to insert bits and offers for securities and Match the parties anonymously and finalise the deal will be be covered under the Intemediary Exemption and Exempt from VAT. If the system does not match the parties on an undisclosed anonymous basis then the service will be vatable at the standard rate 20% Hire Purchase Banks may offer their customers Hire Purchase which allows them to pay installments over a set period for goods such a motor vehicles or washing machines with the option to make a final payment for the goods at the end of the payment term. Where the goods and finance are provided by the bank, then there will be two supplies one of goods and one of credit. For the supply of goods, the customer will be charged standard rated VAT at 20% immediately for the supply of the goods and the ongoing supply of credit repayable in installments will be Exempt. Factoring & Invoice Discounting Some banks may offer Factoring and or Invoice Discounting to clients. Factoring is where a factoring company (bank) purchases the outstanding debtor balances from a client for a charge and can either be recourse or non-recourse. Recourse is where the client maintains the responsibility and bears all the risks of debtor non payment. If the debtor goes bankrupt or the bank can't collect the funds from the debtor, then the client will have to buy back the debt from the bank. Non Recourse factoring means that the factoring company bears greater risk if a debtor defaults on its debt. Another feature of factoring is that it means the bank or factor can maintain a credit control facility for the debts and collect the debts directly from the debtors. Invoice discounting is where the bank provides a loan against the clients outstanding debtor balance for which the client can draw down against. The Debtor will be unaware that the client is using this facility. There can be many charges levied by the factor (bank) some of which may be Standard Rated 20% and others Exempt. Below is a list of the possible charge types and their VAT liability. Arrangement and or Activation Fee - Standard Rated 20% VAT if provided to UK Businesses and Zero Rated if provided to Non-UK business Discount Fee or Charge for Credit - Exempt if provided to UK Businesses and Zero Rated if provided to Non-UK business Service Charge - Standard Rated 20% VAT if provided to UK Businesses and Zero Rated if provided to Non-UK business Non Utilisation of Loan Facility Fee - Exempt if provided to UK Businesses and Zero Rated if provided to Non-UK business Early Termination Fee - Standard Rated 20% VAT if provided to UK Businesses and Zero Rated if provided to Non-UK business Funds Transfer Charges - Exempt if provided to UK Businesses and Zero Rated if provided to Non-UK business Legal and other Admin Fees - Standard Rated 20% VAT if provided to UK Businesses and Zero Rated if provided to Non-UK business Private Equity / Strategic Investments Banks can also as part of their business use its own funds along with other corporate clients or individuals to invest (or build up stakes) in external businesses with the aim of holding those businesses for investment purposes. I.e. Capital growth. Income generated from those investments can be dividends which are outside the scope of VAT or in the case where the bank is actively managing those investments and charging a fee to the other participant, this will be Standard Rated. BANK COSTS AND VAT Banks by their nature are not actively trading in physical goods and as such most of their costs will be professional or resource (staffing) related. Costs - Plus VAT For Banks, VAT will typically be incurred on professional service and IT related costs such as Information Technology Software and Software Development Virus and Anti Malware Protection Hardware such as Computers, Servers, Screens, Keyboards, Mouses Telecommunications and Equipment Market Data Brokerage Consultancy Services Legal Services Electricity Administration Furniture and Fittings Security Property Rental (opted properties) Other Asset Purchases for Hire Purchase or Inventory Finance Office Supplies Exchange Membership Licence Fees Exchange Admin Fees Exchange Access Fees Gate way / Terminal Connectivity Swift Messaging Advertising Sponsorship Research Costs - No VAT Banks will have significant Non Vatable Costs due to the large numbers of staff they employ. Wages and Salaries Income Tax and National Insurance Bonuses Property Rental (non opted) Pension Contribution Clearing Systems and VAT Banks may have a variety of systems (especially the larger banks) to record Income and cost and the associated output and input VAT respectively. Most of the time the number of different systems will be dictated by the number of acquisitions the banks have made over the years where they inherit different systems from each acquisition. However many will have core well established market leading systems (Accounts Payable and Accounts Receivable) such as SAP to record and account for VAT on the bulk of their sales and purchases and which can easily be integrated into into Tax Engines to churn out VAT Returns. From a VAT perspective, the most important and critical aspect for systems in today's digitalized world is their ability to apply the correct VAT code to specific transactions and their flexibility for full end to end automation of the VAT Accounting, Reporting and Recovery process. Sales and VAT Reporting Services provided by Banks to their customers (both internal and external) will need to be treated and categorised correctly for VAT to ensure: The correct amount of Output VAT is included on their VAT Returns and paid to HMRC The correct amount of VAT is included on sales invoices Their Partial Exemption VAT Recovery Rates and Actual VAT Recovery is accurate The best way to ensure the accuracy of above is to: Have a highly automated billing system with links to the static data system that stores clients name, type and location / country of operation details Have a digitalised VAT process that auto allocates income to the correct Partial Exemption sectors Have well trained front office billing staff who understand VAT and the differences created by billing to UK vs Non UK customers Have robust controls around the review and authorisation of invoices Have a Team of Tax or VAT specialist to monitor, advise and carry out regular reviews of the VAT billing Process Have multiple level VAT return reviews and investigate and seek explanations for any quarter on quarter exceptional variances Costs and VAT Reporting VAT incurred by banks on costs is often very significant and as such it will be high on management's radar to ensure: VAT allocation is aligned to cost allocation VAT recovery from HMRC is optimised VAT is recovered in accordance with the Partial Exemption Method agreed with HMRC VAT Recovered is allocated back to the correct business area (Equities, Corporate Finance, Corporate banking, Private Banking etc) VAT incurred on costs can be split into: Front Office VAT - VAT that is directly incurred and attributable to specific business areas such as Corporate Banking, Mergers and Acquisitions, Fixed Income Bond Trading, Corporate Loans, Foreign Exchange Back Office or Infrastructure VAT - General VAT incurred for all business areas such as IT, Consultancy, Electricity, Security, Administration. Partial Exemption Methods and VAT Allocation Most banks will be partially exempt in that they provide taxable and exempt services to their clients and as such will have agreed methods with HMRC for allocating and recovering VAT incurred on their costs. Note: Partially exempt means that not all of the VAT incurred on costs will be recoverable from HMRC, only a portion. These agreements are known as Partial Exemption Special Methods (PESM) and will be different for each bank. They contain precise details of how VAT will be allocated to the different agreed sectors (Equities, Investment Banking, Retail Banking, Derivatives etc) and also how VAT recovery should be calculated. So the agreements will stipulate how VAT will be allocated. For example based on the: Firms internal Cost Allocation Methodology Business Area Activity Business Area Front Office Headcount Others VAT Recovery The recovery of VAT in banks will be based on specific formulas as stipulated in the Partial Exemption Special Method. Most will be in the following format: VAT Pool X Taxable Sales (Standard Rated + Reduced Rate + Zero Rated / Total Sales (Taxable + Zero Rated + Exempt) = VAT Recoverable % Note: The amounts in the above categories can be in the form of sales values , no of transactions , no of sales credits etc and will depend on what is agreed in the PESM Looking at the above formula, it can be seen that the level of VAT recovery will be dependent on the ratio of taxable sales to total sales. The more exempt sales a bank has the lower the VAT recovery The greater the taxable sales a bank has the greater the VAT recovery will be. VAT Recovery Methods Due to the complex operational nature of banks and their varied products, most will have agreed Partial Exemption Special Methods (PESM) with HMRC. These agreements prescribe in detail how input VAT will be allocated and the methods to be used in the various areas of the bank to recover VAT. Standard Method - is simply a values method as shown below but may have special rules depending on the products supplied : VAT Pool X Value of Taxable Sales / Total Value of Sales = VAT Recoverable % Partial Exemption Special Methods (PESM) - Can include Values, Transaction Counts, Sales Credits etc as agreed with HMRC for the different business areas or sectors within a bank. There are a number of typical Partial Exemp tion S pecial Methods (agreed method with HMRC for the allocation and recovery of input VAT) in use by Banks namely: Values Based Method Transaction Count Method Sales Credits Method Mixture of Above The method used will depend on the complexity of the banking business. A purely Retail or Corporate banking business will be able to use the standard values method which uses revenue values to calculate the VAT recovery rate (RR) to be applied to the pools of input VAT to determine the level of VAT the bank can recover from HMRC. The Recovery Rate Calculation is: Values Based Method (Std Rated + Reduced Rate + Zero Rated) (Std Rated+ Reduced Rate+ Zero Rate + Exempt ) = RR Note the method can be used in conjunction with the other methods Pros Data usually easy to extract from Accounting System Easy to review, audit and verify source data Uncomplicated or time consuming Cons Assumes larger Loan book areas use higher input VAT (not always the case so input VAT allocation needs to be accurately based on use) Not alwa ys suitable for more complex operations like Investment Management, Wealth Management and Investment Banking Transaction Count Method This method uses transactions instead of values by tallying up each transaction for example each receipt of a fee or commission (less any refunds) in each business area . For example equities, credit, FX, Bonds or Fixed income etc. As this method measures each business transaction, it can be more accurate in terms of calculating the correct VAT recovery rate for more complex business areas. The Recovery Rate Calculation is: No of Trans (Std Rated + Reduced Rate + Zero Rated) No of Trans (SR+ R Rate + Zero Rate + Exempt ) = RR Pros More suitable for complex banking operations Transactions are more reflective of use than values Likely to produce a more accurate VAT recovery rate than the values method Cons Extracting the data and maintaining the reports and systems that support this can be time consuming and tedious. Annual reviews of data sources and IT sign-offs will be required to ensure accuracy of the transaction count data Takes much longer to compile and review the data to be able to calculate the annual adjustment Sales Credit Method This is a more modern method which uses the internal Sales Team reward and incentive system which is based on the level of sal es each team generate. Basically noti onal sales credits (values) are allocated to each product sales team based on the level of sales generated for each product. It is a values based system albeit not actual sales values. The ke y here is tha t the notional values allocated are reflective of the level of sales in each team and credits allocated are reviewed at multiple levels to ensure the rewards to the product teams Credit, Equities, FX, FI are reflective of performance . The Recovery Rate Calculation is: Sales Credits Non UK (Zero Rated) Sales Credits (Non UK (Zero Rated) ) + Exempt (UK)) = RR Note: This method will mainly be used for calculating the partial exemption recovery calculation for exempt type services such as equities, bonds, derivatives trading etc as the sales credit data can be split into UK / Non UK notional values and thus exempt / zero rated. Using it for banking would be tricky as the sales credits allocated to the UK would be for a mixture of taxable and exempt products and a further split at this level may not be readily available or reliable enough for the PESM calculation. Pros Data collection is much easier than the traditional values and transaction count method as it's usually readily available because the data is used internally for annual reward. Don't have to source data from multiple sources compared to other methods. Potentially quicker PESM calculation Values directly linked to activity Cons Reliance on non finance area to provide data which can increase bottle neck risks . Queries have to be referred back to different teams HMRC VAT Notice 706 ( Extract on Special Methods) 6. Special methods 6.1 The definition of a ‘special method’ A sp ecial method is any calculation, other than the standard method, that enables you to calculate how much of your input tax you may recover. It must only allow you to recover the input tax on your purchases to the extent that you use these purchases to make taxable rather than exempt supplies now or in the future. Supplies that are made outside the UK that would be taxable if in the UK and certain exempt supplies to non-UK customers also gives the right to recover input tax, but there are special rules (see section 9). A special method is unique to your business, and you can develop it to deal with your particular business circumstances. However, you must not use a special method, nor change a special method that you are already using, without our written approval. With effect from 1 January 2011 you may apply for a special method (known as a ‘combined method’) which combines your business or non-business (other than private use) and partial exemption calculations. See paragraph 7.1 for more information. 6.2 Get approval for a special method You cannot change your method without our prior approval. You must continue to use your current method, whether that is the standard method or a special method, until we approve or direct the use of another method or direct termination of its use. You can get approval for a special method by using one of these options: the online service in writing to the VAT Written Enquiries team at BT VAT, HM Revenue and Customs, BX9 1WR, United Kingdom by email to: PESM@hmrc.gov.uk From 1 August 2022, you will no longer be able to send a special method request to the PESM@hmrc.gov.uk email address. Only write to the Written Enquiries team if you are unable to use the online service. You must explain clearly how your proposed method will work, you should see Appendix 2 in this guide. When you propose a special method you must include a declaration that the method is fair from its effective date of application, and for the foreseeable future so that from its effective date a fair amount of input tax is recovered. If we subsequently find your declaration to be incorrect we may serve a special method override notice (see section 8 for more information about the special method override notice) to override the method so that from its effective date input tax would be recovered according to the use of purchases in making taxable supplies. A declaration is incorrect if 2 conditions are not met, the: method does not produce a fair and reasonable attribution of input tax to taxable supplies resulting in an unfair over-recovery of input tax person signing the declaration knew or ought reasonably to have known this at the time they made the declaration If you apply to change your existing special method this is an application for a new method and you will also have to provide a declaration. The declaration can be made using the template at Appendix 1. All approvals and directions of special methods must be given in writing by HMRC. If we decide to approve your method, we will set it out in a format which includes standard terms and conditions. A covering letter will be sent to you with the method asking you to check that it accurately reflects your proposal. Unless you raise concerns within 30 days we will assume that you’re content with the approved method. If we decide not to approve your method we will write to you explaining the reasons why, and where appropriate, invite you to make further or modified proposals. If you make a further or modified proposal you will need to make a new declaration. If there are specific aspects of the method that you need to discuss, you may do so before making a firm proposal, saving the need for an additional declaration. You will usually be allowed to use the new method from the start of the tax year in which the declaration to the written application (being the approved application) is received. See section 8 about the special method override notice. 6.3 What a special method can contain A special method is unique to your business and can contain any calculations or stages that are needed to make sure it is fair and reasonable. All special methods should: reflect all your business activities provide for direct attribution of input tax to taxable supplies provide for direct attribution of input tax to exempt supplies identify residual input tax calculate the element of residual input tax that relates to taxable supplies calculate the element of residual input tax that relates to exempt supplies allow you to determine the total input tax that you can recover 6.4 Dealing with different parts of your business separately in your special method If a method calculates a separate recovery rate for each sector it is commonly referred to as a ‘sectorised’ method. Partial exemption sectors might arise naturally from the way your business organises itself, for example, if your business has discrete areas, activities, or even accounting centres, in which you use your input tax differently. This is most likely where your business is large and complex, or where your business consists of a VAT group of separate businesses. Very often, the best way to get an accurate partial exemption recovery method in the least burdensome way is to base it on your internal cost accounting system used for management reporting purposes. However, there are circumstances where this is inappropriate, for example, where costs are reported on a marginal basis. If you propose a method based on internal cost accounting, you will need to explain the kind of system being operated and what controls are in place to make sure that it’s accurate. 6.5 How to determine the recovery rate for residual input tax When you use the standard method the percentage recovery rate for residual input tax is calculated using the values of supplies made by your business. When you use a special method you can determine your percentage recovery rate using other allocations and apportionments. You can even use a different type of calculation for each sector if you have a ‘sectorised’ method. 6.6 Examples of allocations and apportionments Some examples are: output values numbers of transactions staff time or numbers inputs or input tax floor area costs allocations management accounts This list is not exhaustive and if you use any of the above you must make sure that the resulting calculation produces a result that is a true reflection of the use to which your input tax is put. The most common apportionment methods are output values and number of transactions, although some of the others can work in some circumstances. However they are more common as allocation methods between business sectors. More information can be found in PE30000 — VAT partial exemption guidance . 6.7 Rounding in special methods You must calculate the percentage recovery rate produced in your special method to 2 decimal places. 6.8 Changes in your circumstances If you operate a special method and there’s any change in your business circumstances, or if you’re a VAT group and there’s any change in the group membership that may have a significant impact on the amount of input tax you can claim, it’s important that you tell us immediately. If your method is no longer suitable for your business, you should propose an alternative method. If you fail to propose a suitable method, we may direct you to use a specified method. In some circumstances a special method override notice (see section 8) may need to be served. 6.9 HMRC imposing a method We have the power to direct a business to use a particular method or to stop using an existing special method. These powers are only used in circumstances where we are unable to identify a mutually satisfactory method, or where the VAT system is being abused. Directions are made in writing and apply from the date they’re given, or from a specified future date. If you disagree with the issue of a direction you can ask for either of the following: a review of our decision an appeal to be heard by an independent tribunal There’s more information about what you can do if you disagree with our decision in a HMRC factsheet and customer guidance which can be found at in HMRC1: HM Revenue and Customs decisions — what to do if you disagree . 6.10 Annual adjustments when using special methods You have to follow a similar procedure to the standard method to calculate the annual adjustment for a special method (see section 12). 6.11 Gaps in special methods A special method is said to have a ‘gap’ whenever it fails to specify how to deal with an amount of residual input tax. Gaps most commonly arise when business circumstances change after methods have been approved. Residual input tax falling into a ‘gap’ is to be recovered to the extent that the purchases on which the input tax is incurred are used in making taxable supplies. Where the treatment of input tax on purchases is only partly covered by the method, that is, part of the input tax falls into the ‘gap’, only that part of the input tax not covered by the method comes under these rules. This does not mean that we think that methods with ‘gaps’ are acceptable but merely sets out how to cope with gaps if they arise in future. Once a gap has arisen, we expect that you will make suitable proposals for a new method that takes account of the gap and any other known faults in your current method. VAT and Inter- Company Recharges VAT Group Members - If a bank operates within a VAT Group structure, then most of the Internal inter entity recharges between VAT Group members will be outside the scope of VAT and thus VAT will not feature on any invoicing between the entities. However problems can arise where non UK entities recharge into the UK where the Non UK entity is not within the UK VAT Group (by way of being a branch of a VAT group member) and thus significant Reverse Charges can become applicable on cost recharges to UK entities for: Staff Consultancy Intangible Assets (Goodwill) IT Costs If the Reverse charge VAT has not been budgeted for locally, then businesses can end up having significant irrecoverable VAT costs hitting their P&L where they are not able to fully recover the reverse charge VAT from HMRC. International Banks and Sourcing Banks that have global operations will tend to want to ensure that where supplies of IT and other services are purchased: Services are provided by local suppliers where possible to the entities using the services Services are billed and delivered to the entities using the services The contracts state who is purchasing the service, consuming the service, ultimately paying for the service This can avoid situations where the services are billed to the UK and incur UK Reverse Charge VAT but actual consumption and use of the services occurs in non UK locations. Although full recovery of the VAT is possible, it can often mean lots of administration to achieve. Recharging of Professional Costs to Clients As part of providing services to clients, banks will often incur legal and other professional fees which they will then recharge on to their clients. The VAT element of the cost will also often be recharged depending on whether the banks can recover the costs from HMRC. The recovery of the VAT incurred on these cost by the bank will depend on the services being supplied to the associated client and the location of the client. See below table for illustration. Vendor Location UK VAT Service Type VAT Recovery By Bank Location of the client UK UK 20% Taxable (advisory) Full VAT Recovery UK / Non UK Non UK 20% RC VAT Exempt Irrecoverable VAT UK Non UK 20% RC VAT Exempt Full VAT Recovery Non UK Where the bank can achieve full recovery of VAT as in the above examples, it can then bill the clients for the net value of the professional services invoice. Where the VAT is irrecoverable by the bank from HMRC in the above examples, it may then seek to recover this VAT from the clients by billing the client the net value of the invoice plus the VAT incurred or reverse charged ( VAT self accounted for to HMRC). Risk Management and Controls One of the main areas of focus in Banks and more specifically Finance and Tax will be around having an adequate and robust control environment to ensure the accuracy of internal and external reporting and to prevent errors. A large part of this will be to create and maintain a strong control environment from the top downwards and ensure this is embedded within the culture of the bank. In Terms of VAT , the following list of activities and controls will all help to minimise the risk of errors. Up to date VAT Coding within front office billing systems Up to date VAT coding within the accounts payable system Up to date and thorough procedure notes for VAT return preparation Multiple reviews of all manual VAT related Journals Multi-level review of all VAT Returns and Annual Adjustments Automating manual processes to eliminate human error Elimination of spreadsheet based VAT reporting (MTD VAT Compliant) Annual or bi-annual E2E Integrity Review of VAT reporting process and systems Regular multilevel reviews of VAT accounts Service Level Agreements between VAT Team and Finance / OPS Regular training of VAT staff supported by decision trees and diagrams Ensuring regular engagement with Finance to ensure VAT is considered and built into new systems Regular review of Partial Exemption Methods and Partial Exemption calculations Adequate New Product and Trade sign-off procedures Impact Assessments for all changes to systems Automated VAT Return Production including VAT allocation and input VAT recovery Error Correction Notifications to HMRC followed up with remedial actions and controls to prevent error repitition Risk reporting process that highlights impact of errors on P&L and the required action to remediate Maintaining good relationships and ensuring transparency with HMRC Key Current VAT Related Issues In Banking Electronic Invoicing Making Tax Digital (MTD) HMRC Review - Establishment and Branches ( Fixed Establishment or Brass Plate) European Commission - Review of Financial Services & insurance Model Portfolios - wealth and Investment Managers Skandia and Danskie Bank (reverse skandia) CJEU rulings Sub - Participation vs Syndication The VAT Act 1994 - Schedule 9, Group 5 (Finance VAT Exemptions) Item number 1. The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money. 2. The making of any advance or the granting of any credit. 2A. The management of credit by the person granting it. 3. The provision of the facility of instalment credit finance in a hire-purchase, conditional sale or credit sale agreement for which facility a separate charge is made and disclosed to the recipient of the supply of goods. 4. The provision of administrative arrangements and documentation and the transfer of title to the goods in connection with the supply described in item 3 if the total consideration thereof [sic] is specified in the agreement and does not exceed £10. 5. The provision of intermediary services in relation to any transaction comprised in item 1, 2, 3, 4 or 6 (whether or not any such transaction is finally concluded) by a person acting in an intermediary capacity. 5A. The underwriting of an issue within item 1 or any transaction within item 6. 6. The issue, transfer or receipt of, or any dealing with, any security or secondary security being - (a) shares, stocks, bonds, notes (other than promissory notes), debentures, debenture stock or shares in an oil royalty, or (b) any document relating to money, in any currency, which has been deposited with the issuer or some other person, being a document which recognises an obligation to pay a stated amount to bearer or to order, with or without interest, and being a document by the delivery of which, with or without endorsement, the right to receive that stated amount, with or without interest, is transferable, or (c) any bill, note or other obligation of the Treasury or of a Government in any part of the world, being a document by the delivery of which, with or without endorsement, title is transferable, and not being an obligation which is or has been legal tender in any part of the world, or (d) any letter of allotment or rights, any warrant conferring an option to acquire a security included in this item, any renounceable or scrip certificates, rights coupons, coupons representing dividends or interest on such a security, bond mandates or other documents conferring or containing evidence of title to or rights in respect of such a security, or (e) units or other documents conferring rights under any trust established for the purpose, or having the effect of providing, for persons having funds available for investment, facilities for the participation by them as beneficiaries under the trust, in any profits or income arising from the acquisition, holding, management or disposal of any property whatsoever. 7. [Omitted by SI 1999/594, article 4] 8. The operation of any current, deposit or savings account. 9. The management of an authorised unit trust scheme or of a trust based scheme. 10. The management of the scheme property of an open-ended investment company. Banking and VAT-Guide on How VAT Applies in Banking

VAT on Catering - Comprehensive guide on how VAT is applied to food and catering, including whether the standard rate or zero rate of VAT applies to hot vs cold Food. Introduction Most food products are zero rated but food supplied in the course of catering is normally Standard Rated. Catering - Standard Rated Food and drink served in a Restaurant Supplies of food and drink at events such as conferences, parties, weddings and similar gatherings Cooked and ready to eat meals delivered Supply of cooking at a customers home for parties, post wedding meals etc Supply of catering under a catering contract Packed Lunches supplied for trips or other events Meals that form part of a package for hotel or bed and breakfast accommodation Service charges added to bills in restaurants Supplies of food, confectionery, drinks from vending machines in a restaurant Supplies of food and drink on a train, coach, plane, ship for journeys within the UK Supplies of food and drink to staff and visitors at clinics, hospitals and other care facilities Hot takeaway food that has been heated to enable consumption such as fish and chips, Chinese takeaways, Indian takeaways, kebabs, Pizzas, pies, rolls, sausage rolls, pasties, hamburgers, hot dogs, baked potatoes with hot or cold filling, soup, tea, coffee, hot chocolate and other hot drinks. Hot takeaway food that's been heated to order such as toasted bread, sandwiches, panini, teacakes Hot takeaway food kept hot after cooking such as freshly baked croissants, pretzels, patties, pasties, hamburgers, Kebabs, hot dogs etc Catering - Zero Rated Supply of food that customers have to prepare for themselves Sandwiches and other food and drink (that is normally zero rated) taken to buildings for sale where the seller has no contract of supply with the firms. Food and drink provided on trains, planes and ships where the destination is outside the UK Cold takeaway (consumed off premises) food (not crisp, confectionery etc that is ordinarily standard rated Catering - Exempt Supply of food and drinks by an educational institution in the canteen to it students Supply of food and drinks in a school tuck shop Supply of food and drinks by a hospital, clinic, care home to its patients Catering - Outside the Scope of VAT Tips in restaurants Who Must Account to HMRC For Output VAT Charged The Owner of the catering facilities must account for VAT on sales of food and drink in its restaurants and on supplies of hot food The catering contractor operating on the owners premises as principal should account for VAT on any food and drink sold in the catering facility and also any fee invoices issued to the owner of the facility and on any subsidies provided. The owner of a catering facility where they have an agent that operates the canteen or restaurant on their behalf should account for VAT on food and drinks and any hot takeaway food sold within its facility. Under this arrangement a supplier can either invoice the principal directly for goods supplied to the agent for sale in the canteen allowing them to recover the VAT or issue the invoice to the agent who can then recharge these on to the principal with VAT and account for it on their return. Contractors who sell goods to both the catering establishment owner and also supply goods in the restaurant. In this case standard rated VAT will be payable by the agent on food and drink sold to the owner and on the fees charged by the agent for running the canteen. -Contains public sector information licensed under the Open Government Licence v3.0. Food and Catering - Guide for Food & Catering VAT

Chile VAT Guide - VAT rates, VAT on goods and services, digital services, e invoicing, reverse charges and more. CHILE-VAT The Chilean Tax Authority is known as the (SII). The standard VAT rate in Chile is 19% and applies to most goods and services and there is no VAT registration threshold so VAT becomes due once taxable goods or services are supplied. Some goods and services are exempt from VAT, such as exports, sporting and cultural events, real estate, freight services, used cars and lorries, international passenger transport, and education. E Invoicing Chile requires all invoicing to be electronic and E Invoicing is mandatory for all businesses through its central electronic invoicing system. Non Resident Digital Service Providers Since June 2020, four types of services provided by taxpayers without a domicile or residence in Chile pay Value Added Tax (VAT). Meanwhile, from November 2024, all other taxed services (not expressly exempt) provided by this type of taxpayers must pay VAT. This tax obligation is only for foreign taxpayers, without domicile or residence in Chile, who provide taxed services remotely to be used in national territory by non-VAT payers. Non resident providers are required to register for VAT via the Digital VAT Portal - Servicio Impuestos Internos Services that require VAT Registration and declaration include: Intermediaries of services provided in Chile, whatever their nature, or of sales made in Chile or abroad, provided that the latter give rise to an import. Those who supply or deliver digital entertainment content, such as videos, music, games or other similar content, through download, streaming or other technology, including for these purposes, texts, magazines, newspapers and books. Those who provide software, storage, platforms or computing infrastructure. Those who carry out advertising, regardless of the support or medium through which it is delivered, materialized or executed. Other Services Reverse Charges Applicable to foreign purchases that are taxable where the vendor is not registered in Chile. (Purchaser is responsible for accounting for VAT)

VAT Digital.Com - Recruitment Consultants - Find our List of Key UK & Global Specialist Recruitment Consultants for VAT and TAX Roles along with Links to Their Websites. "Take the heavy lifting out of your role search!" Recruitment Consultants "Take the heavy lifting out of your role search!" Andrew Vinell Recruitment Consultants Andrew Vinell Brewer Morris Carnegie Consulting Creative Tax Recruitment Eximius Goodman Masson Hays Morgan McKinley Michael Page Pure Robert Walters Job Listings efinancialcareers totaljobs VAT Digital. Com The links on this page do not convey any endorsement, authorship or ownership by VATDIGITAL.Com of any of the sites visited. "Take the heavy lifting out of your role search!" Recruitment Consultants - Key Recruitment Consultants for VAT & Tax Roles "Take the heavy lifting out of your role search!" Ambition Andrew Vinell VAT Digital. Com Brewer Morris Carnegie Consulting Creative Tax Recruitment Eximius Goodman Masson Hays Marks Sattin Morgan McKinley Michael Page Pure Robert Walters Tenet Search The Consultancy Group Twenty AI The links on this page do not convey any endorsement, authorship or ownership by VATDIGITAL.COM of any of the sites visited. etaxjobs

Read our guide on intercompany recharging and the implications and UK rules around the application of VAT and the inherent VAT risks and potential impact on P&L. Introduction Inter-company recharges are charges between companies within a corporate group to ensure that costs incurred by one entity on behalf of another entity or shared cost such as IT, Tax, Marketing, HR, Property, etc are allocated to the correct entity. The intercompany recharging process is critical from a : Financial Reporting perspective to ensure that costs sit under the correct Legal Entity to determine its profitability accurately. Corporate Tax Reporting perspective to ensure entities are taxed correctly against their reported profits Transfer Pricing perspective to ensure that the correct transfer pricing adjustments are made to reflect arms length pricing between entities as required by HMRC and outlined under OECD guidelines. Transfer pricing: Methodologies: OECD Guidelines: Overview VAT Allocation perspective to ensure VAT directly applicable to an entity is allocated fair and reasonably to ensure the appropriate VAT recovery rate is applied. Also to ensure that VAT incurred on costs by service companies such as hardware, software, marketing, consulting, HR, etc is allocated to to other corporate and VAT group entity members in line with the Groups VAT Partial Exemption Method. Intercompany Recharges & VAT Issues There maybe VAT implications associated with Inter-company recharges depending on the status of the entities recharging and receiving the recharged costs and the countries they are established in. UK to UK Entity Recharges From a UK perspective, local head-office entities and their local and international branches and visa versa are considered to be the same entity so inter-company recharges between them are disregarded for VAT and thus VAT is not added to the recharged costs. On the other hand, recharges between companies established in the UK where they are not branches of head office subsidiaries or members of a VAT group will incur VAT on recharged costs. Non UK to UK Entity Recharges Most recharged costs for shared services such as IT, Consultancy, HR, Finance etc from a non UK entity to another corporate UK entity will attract UK reverse charge VAT, which means the receiving entity will be required to self account for output VAT at 20% payable to HMRC. The receiving entity will be able to recover some or all of this VAT from HMRC on the same VAT return depending on its Partial Exemption Recovery Rate. So if the receiving entity has a VAT recovery rate of 80% then £80 of every £100 VAT payable to HMRC will be recoverable. UK VAT Groups and Recharges Where UK established companies and their branches are within a VAT Group (see VAT Groups page), recharges between the UK members of the VAT group are disregarded for UK VAT and as such VAT does not need to be added to intercompany recharged costs. This is also the case for non UK established branches and head offices that are members of a UK VAT Group by way of being the same taxable person or entity as their UK established branch or head office entity. For example if UK company A Ltd has a branch A Ltd in India which recharges cost to UK company B Ltd which is in a UK VAT Group with UK company A Ltd, then 20% UK reverse charge VAT will not be applicable. The underlying principle behind this is the whole establishment rule where VAT grouping is not restricted to entities that are located in the UK. Note there is UK anti avoidance legislation in place Sec 432(a) of the VAT Act to prevent overseas branches of UK established VAT Grouped entities "buying in" services from overseas suppliers then recharging them to other UK VAT Group members. Where this occurs, 20% reverse charge VAT is applicable. See below link and the VAT Groups page on this site for more information. VGROUPS01300 - General principles of VAT group treatment Intercompany Recharges - What can go wrong for VAT Due to the complex VAT rules around intercompany recharges and the need for VAT specialist oversight, this can present various risks and result in the incorrect application of VAT. There are a number of scenarios below that illustrate when the correct application of VAT can be wrong. Inter-company recharged costs from overseas entities that are not part of a UK VAT group and the receiving business does not budget for the reverse charge VAT applicable can lead to unforeseen VAT costs where the reverse charge VAT is not fully recoverable and thus results in irrecoverable VAT adjustments in the P&L. This can also lead to the under declaration of VAT to Tax Authority if reverse charge VAT is not applied. Accounts Payable teams that are not fully trained on VAT grouping rules and are unsure as to whether reverse charge VAT codes need to be applied or not within the system, can lead to the under declaration of VAT to Tax Authorities. Intercompany recharges from overseas branches to other UK VAT group members where the underlying supplies have been purchased locally by the overseas branch and it is assumed by the UK company receiving the recharged costs that UK reverse charge VAT is not applicable because the supply is inter-group. Under these circumstances, the anti avoidance rules under Sec 43(2)a as mentioned above will kick in and reverse charge VAT will become applicable. A lack of understanding here, will result in the under declaration of VAT and potential HMRC assessments. Under the VAT grouping rules, companies must have a fixed establishment in the UK to be eligible to be part of a UK VAT group. There are various rules and conditions around what constitutes a fixed establishment and where these are not adhered to, HMRC may opt to de-group or remove UK entities from a UK VAT group where it considers they have not met the conditions for having a UK fixed establishment. Where this happens, HMRC can raise assessments for VAT on any inter-company transactions previously disregarded for VAT. This can lead to significant VAT costs suddenly hitting the P&L. See VAT Groups page for more information and the recent HMRC vs Barclays Bank Plc tribunal case on the VAT news page. Where UK entities recharge cost to overseas entities, UK VAT is not applicable but it is highly likely that the receiving entity may be required to self account for reverse charge VAT locally. Failure of the receiving entity to understand local VAT rules can result in unexpected VAT costs to the overall corporate group. For More information on VAT risks and how to mitigate against them, please see our VAT Risk Page . Situations Where VAT on Inter-company Recharges may not be Applicable Paymaster Services - can involve one company paying salaries and other expenses such as National Insurance and pension contributions. They commonly occur between associated companies in 2 situations where: employees are jointly employed by 2 or more companies and one company undertakes to pay salaries and the other expenses which it then recovers from the other joint employers each of a number of associated companies employs its own staff, but one company (the paymaster) pays salaries and other expenses on behalf of the others who then pay their share of the costs to the paymaster Recovery of money paid out by the paymaster in either of these situations is not subject to VAT as it’s a pay out. Joint Employment - Where staff are jointly employed there is no supply for VAT purposes between the joint employers. Staff are jointly employed if their contracts of employment or letters of appointment make it clear that they have more than one employer. The contract must expressly specify who the employers are for example ‘Company A, Company B and Company C’, or ‘Company A and its subsidiaries’. There is no joint employment where for example there is a contract with one employer: which lays down that the employee’s duties include assisting others that the employee will work full-time for another where the job title shows that the employee works for a group of associated companies (for example a group accountant) Open Government Licence v3.0 , Intercompany Recharges & the VAT Implications

The UK Capital Goods Scheme is a UK HMRC mechanism that impacts the amount of VAT you maybe able to recover on high value assets such as buildings. Find out more. Introduction The Capital Goods Scheme ensures that where businesses acquire or create assets and recover the input VAT from HMRC on the initial purchase upfront, any subsequent change in the entities Taxable sales compared to its total sales (partial exemption recovery rate) is reflected in adjustments to the input VAT initially recovered. As of 29 July 2026, the scheme has been simplified and computer equipment has been removed from the list of assets covered and the threshold for Land and buildings has been increased from £250,000 (exclusive of VAT) to £600,000 (exclusive of VAT). So If for example you purchase a Building for £600,000 plus VAT and recover the VAT in full as your business is only making taxable sales, then the following year your business makes 50% exempt and 50% taxable sales then you will only be able to recover 50% of the VAT as the building is not being used exclusively to make taxable sales. So in effect the VAT recoverable on the asset can increase or decrease over the adjustment period depending on the extent of the use of the asset to make taxable sales. Assets Covered by the Scheme You’ll have to use the Capital Goods Scheme if you spend £600,000 (excluding VAT) or more on: buying land, a building or part of a building or civil engineering work constructing a building or civil engineering work refurbishing, fitting out, altering or extending a building or civil engineering work Civil engineering work includes things like roads, bridges, golf courses, running tracks and the installation of pipes for connecting to mains services. Aircraft, ships, boats and other vessels The scheme applies if you spend £50,000 or more (excluding VAT) on purchasing, constructing, refurbishing, fitting out, altering or extending an aircraft, ship, boat or other vessel. The adjustment periods These are: 5 intervals for computers 5 intervals for ships and aircraft 10 intervals for all other capital items Record Keeping You’re not required to keep VAT records for longer than 6 years. But the CGS requires you to make adjustments up to 10 years later. You should keep records long enough to show us how you calculated each adjustment. Values and definitions What does HMRC mean by ‘capital expenditure This is normally expenditure capitalised for accounting purposes. We’ll not normally challenge your capitalisation policy for the purposes of the CGS, except in cases of avoidance or abuse. In some cases charities may incur expenditure of a capital nature on land and property which is not capitalised in their accounts (for example certain heritage buildings or churches). This is generally because the charity does not have unfettered freedom to exploit or dispose of the land or property concerned. This will not prevent expenditure that’s essentially capital in nature from being adjusted under the CGS. The value of a capital item This is the VAT exclusive value of the item. Only the value of standard or reduced-rated taxable supplies is considered. Before 1 January 2011, the value of a capital item was determined by reference to the business-related expenditure. With effect from 1 January 2011, the value is determined by reference to total expenditure on an asset. This includes both business and non-business expenditure on an asset. Example A business purchases a building for £1 million and incurs £200,000 VAT. The building is to be used for 60% business purposes and 40% non-business purposes (for example, charitable use). Before 1 January 2011, £600,000 (60% of £1 million) determined the value for CGS purposes. Under the new rules that took effect from 1 January 2011, all of the expenditure on the building (£1 million) is the value for CGS purposes. As the CGS threshold for buildings is now £600,000, the building is a capital item in both scenarios. Expenditure incurred on a capital item before and after 1 January 2011 It will be necessary to determine the amount of business-related expenditure incurred on the asset up to 31 December 2010 and the total amount of expenditure (business and non-business) incurred on or after 1 January 2011. If the sum of these amounts exceeds the relevant CGS threshold, the asset falls within the CGS. The adjustable amount of VAT Prior to 1 January 2011, only VAT on the business-related expenditure on an asset (input tax) fell within the CGS. With effect from 1 January 2011, all of the VAT on an asset (in this instance input tax and non-business VAT) falls within the CGS. Example Following on from the example , prior to 1 January 2011, input tax of £105,000 (17.5% of £600,000) fell within the CGS. With effect from 1 January 2011, VAT of £175,000 (17.5% of £1 million) falls within the CGS (£200,000 after the increase in the standard rate of VAT to 20% on 4 January 2011). If expenditure is incurred both before and after 1 January 2011, the VAT on the business-related expenditure incurred up to 31 December 2010 and the total VAT incurred on the asset on or after 1 January 2011 fall within the CGS. Estimate the value If you do not know if a project exceeds the value threshold for the CGS until all invoices have been received you’ll need to estimate the value of the supplies you’ve received. This may happen with construction projects and refurbishments where VAT is incurred over a period of time and also with contracts that include a retention clause. A retention clause involves a proportion of the contract price being held back and only paid when the work has been satisfactorily completed. If, when you start the CGS, you estimate that the value of relevant supplies will exceed the value threshold, the item will become a capital item. Even if you find later on that the value does not reach the threshold, the item remains in the scheme and you should continue to make adjustments as necessary. If you do estimate the value of a capital item you’ll need to keep all the documents you based your estimation on, such as a contract, as our officer may ask to see it. What you should include in the value of land or buildings that you acquire Only include the value of the interest in the land or building supplied to you, if the supply was taxable and not zero-rated. Do not include any associated costs such as legal or estate agency fees. In calculating the value of the interest supplied to you in the land or building, you do not need to include the value of any rent or service charges unless it’s: been paid or is payable more than 12 months in advance invoiced by the supplier for a period of more than 12 months – in that case, you should include the value of rent or service charges when calculating the value of the capital item What you should include in the value of a constructed building or civil engineering work You should include the total VAT exclusive cost of any of the following supplies made to you: the interest in the land, if the supply to you was taxable (other than zero-rated) taxable (other than zero-rated) goods and services supplied for, or in connection with, the construction of the building or civil engineering work You should include all the costs involved in making the building ready, such as: professional and managerial services including architects, surveyors and site management demolition and site clearance building and civil engineering contractors’ services materials used in the construction security equipment hire haulage landscaping fitting out, including the value of any fixtures If you’ve purchased land and constructed a building on it If you’ve purchased land and constructed a building on it, this is treated as one capital item. What to include in the value of an alteration, extension or annex where the value of the Goods and services received is £250,000 or more You should include the total value of all taxable (other than zero-rated) goods or services supplied to you for, or in connection with, the alteration, extension or annex. You should include all the costs involved in making the building or civil engineering work ready. See examples at paragraph 4.7 . What you should include in the value if a capital item is refurbished or fitted out You should only include the value of capital expenditure on the taxable (other than zero-rated) supply of services and of goods affixed to the building or civil engineering work supplied to you for or in connection with the refurbishment or fit out. However, for capital items where the costs are incurred on or after 1 January 2011 there is no longer a requirement for goods used for the refurbishment to be affixed to the building. You should include all the costs involved in making the refurbished or fitted out building ready. See examples at paragraph 4.7 . Goods affix ed’ to the building These are goods which become part of the fabric of the building. Generally these are items that are sold with the property and are not portable or easily removed. ‘Goods affixed’ does not include items secured for safety or security reasons or computers or computer equipment. These may be subject to the CGS in their own right. The following lists will help you to decide if an item is ‘affixed’. This list is not exhaustive and the deciding factor is usually if the item becomes part of the fabric of the building. Common inclusions are: materials to build internal and external walls roofs and ceilings floors and hard flooring permanent partitioning windows lifts ‘built in’ storage such as cupboards or shelving air conditioning lighting decorative features Common exclusions are: office furniture storage unless it’s ‘built in’ carpets computers and computer equipment factory and office machinery Again, this list is not exhaustive. For capital items where the capital costs are incurred on or after 1 January 2011 there is no longer a requirement for goods used for a refurbishment to be affixed to a building. For capital items where the capital costs were incurred before 1 January 2011, this treatment is already allowed in relation to the ‘goods affixed’ condition by concession and is adopted by most businesses. If the refurbishment is in phases If you do this you’ll need to decide if the work should be treated as a whole for CGS purposes or if there’s more than one refurbishment. If you think that each phase is really a separate refurbishment then they should be treated separately for CGS purposes. Normally there’s more than one refurbishment when either: there are separate contracts for each phase of the work a contract where each phase is a separate option which can be selected, and each phase of work is completed before work on the next phase starts A refurbishment which is only undertaken in phases because the building is occupied and where the contractors work on 1 floor at a time is normally considered to be only one refurbishment. Regular refurbishments These are sometimes referred to as ‘rolling refurbishments’. Problems may occur if successive refurbishments begin before each adjustment period has expired. If this happens you should either: treat the original refurbishment as ‘destroyed’ (see paragraph 9.8 ) if there is nothing left of the earlier refurbishment or this earlier work is stripped out or replaced – the effect of this is that no further adjustments would be required to the input tax on the previous refurbishment continue to make adjustments for the remainder of the adjustment period if elements of the earlier refurbishment are retained For more information on the Capital Good Scheme please see VAT Notice Capital Goods Scheme (VAT Notice 706/2) Capital Goods Scheme

Self Billing Agreements - VAT Rules, Annual Review, Reverse Charge Procedure, Record Keeping I ntroduc t ion Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment. If you want to put a self-billing arrangement in place you do not have to tell HMRC or get approval from them. You do have to: Get your supplier or customer to agree to the arrangement Meet certain conditions If You Are The Customer Rules for Self-Billing You can set up self-billing arrangements with your suppliers as long as you can meet certain conditions, you’ll need to: enter into an agreement with each supplier review agreements with suppliers at regular intervals keep records of each of the suppliers who let you self-bill them make sure invoices contain the right information and are correctly issued Your suppliers do not have to be based just in the UK. You can self-bill businesses in other countries. You must not issue self-billed invoices to a supplier who has changed their VAT registration number until you’ve prepared a new self-billing agreement for them. If a supplier stops being registered for VAT then you can continue to self-bill them, but you cannot issue them with VAT invoices. Your self-billing arrangement with that supplier is no longer covered by the VAT regulations. Reverse C harg e Procedure There are special rules if you have a self-billing arrangement and you are involved in transactions that the reverse charge arrangement for business-to-business supplies of mobile telephones and computer chips applies to. Self-B illing Agreements You can only have a self-billing arrangement if your supplier agrees to put one in place. If you do not have an agreement with your supplier your self-billed invoices will not be valid VAT invoices – and you will not be able to reclaim the input tax shown on them. You’ll both need to sign a formal self-billing agreement . This is a legally binding document. The agreement must contain: Your supplier’s agreement that you, as the self-biller, can issue invoices on your supplier’s behalf Your supplier’s confirmation that they will not issue VAT invoices for goods or services covered by the agreement (because you’ll be issuing the invoices for them) An expiry date – usually for 12 months time but it could be the date that any business contract you have with your supplier ends Your supplier’s agreement that they’ll let you know if they stop being registered for VAT, get a new VAT registration number or transfer their business as a going concern Details of any third party you intend to outsource the self-billing process to You’ll need to set up a new agreement if your supplier transfers their business as a going concern and both you and the new business owner want to carry on with self-billing. Bear in mind that countries can set their own conditions for self-billing. So you’ll need to make sure that any agreement you draw up for a supplier in another country meets those conditio ns as well. If an HMRC officer wants to see the agreement you must show it to them. Reviewing S elf-Billing Agreements Self-billing agreements usually last for 12 months. At the end of this you’ll need to review the agreement to make sure you can prove to HMRC that your supplier agrees to accept the self-billing invoices you issue on their behalf. It’s very important that you do not self-bill a supplier when you do not have their written agreement to do so. You will not normally need to review an agreement if you provide self-billed invoices to a supplier for less than 12 months. Record keeping If you are a self-biller you’ll need to keep certain records. These are: copies of the agreements you make with your suppliers the names, addresses and VAT registration numbers of the suppliers who have agreed that you can self-bill them You’ll still be responsible for keeping these records if you outsource self-billing to a third party provider. If you do not keep the required records, then the self-billed invoices you issue will not be proper VAT invoices. Self-B illing Invoice s Once you’ve got a self-billing agreement with a supplier, you must issue self-billed invoices for all the transactions with them during the period of the agreement. As well as all the details that must go on a full VAT invoice you’ll also need to include your supplier’s: name address VAT registration number All self-billed invoices must include the statement ‘The VAT shown is your output tax due to HMRC’. Remember that you do not add any VAT to self-billed invoices that you issue to suppliers who are not VAT registered. Reclaiming Input T ax You’ll only be able to reclaim the input tax shown on self-billed invoices if you meet all the record keeping requirements. When you can reclaim the input tax depends on the date when the supply of the goods or services takes place for VAT purposes. Normally the date of supply for VAT purposes is the actual date when the goods or services are provided to you, the customer. But if you issue a self-billed invoice within 14 days of this date of supply, then the date you issue the invoice becomes the date of the transaction for VAT purposes. This determines which VAT Return you put the transaction on, and if there is a VAT rate change, it determines which VAT rate applies to the invoice. If You’re A VAT-Registered Supplier Setting Up A Self-Billi ng Arr angement If one of your customers wants to set up a self-billing arrangement with you, they’ll ask you to agree to this in writing. If you agree, they’ll give you a self-billing agreement to sign. The terms of the agreement are a matter between you and your customer, but there are certain conditions you’ll both have to meet to make sure you comply with VAT regulations. For VAT purposes you’ll have to do all of the following: sign and keep a copy of the self-billing agreement agree not to issue any sales invoices to your customer for any transaction during the period of the agreement agree to accept the self-billing invoices that your customer issues tell your customer at once if you change your VAT registration number, cancel your VAT registration, or transfer your business as a going concern Accounting For The Output Tax The VAT figure on the self-billed invoice your customer sends you is your output tax. When you have to account for this to HMRC depends on the date of supply of the goods or services for VAT purposes. This date of supply is normally the date when you actually provide the goods or services to your customer, so you might have to account for the VAT before you’ve received the self-billed invoice or been paid. You are accountable to HMRC for output tax on the supplies you make to your customer, so you should check that your customer is applying the correct rate of VAT on the invoices they send you. If there has been a VAT rate change, you will need to check that the correct rate has been used. If you’re a supplier who receives electronic self-billed invoices from a customer in another country you’ll need to make sure that: they issue the invoices in a format that’s acceptable to HMRC your accounting systems can accept the invoices Take care not to treat self-billed invoices as purchase invoices and reclaim the VAT shown as your input tax. If you do incorrectly treat the VAT as input tax you’ll have to correct the mistake. Detailed information about self-billing Find out how customers and their suppliers must treat VAT if they’re using self-billing arrangements in VAT Notice 700/62 . Self Billing and VAT

Learn and understand the HMRC rules around VAT for disclosed and undisclosed agents. Key points such as VAT tax points, invoicing and VAT accounting requirements. Agents and VAT Acting As An Agent (disclosed or Undisclosed) You’re an agent if you act for, or represent, someone else (your principal) in arranging supplies of goods or services. The supplies that you arrange are made by, or to, the principal you represent. Principals cannot avoid their liability to account for VAT on their supplies or to pay VAT on their purchases by using an agent. To act as an agent, you must have agreed with your principal to act on their behalf in relation to the particular transaction concerned. This may be a written or oral agreement, or merely inferred from the way you and your principal conduct your business affairs. Whatever form this relationship takes: it must always be clearly established between you and your principal, and you must be able to show to HMRC that you’re arranging the transactions for your principal, rather than trading on your own account you will not be the owner of any of the goods, or use any of the services which you buy or sell for your principal you will not alter the nature or value of any of the supplies made between your principal and third parties How agents are involved with VAT As an agent, you’ll usually be involved in at least 2 separate supplies at any one time, the: supplies made between your principal and the third party supply of your own services to your principal, for which you will charge a fee or commission — the normal VAT rules apply to your services as an agent It’s important to distinguish between these separate supplies. Liability of supplies The liability of the supply of your own services to your principal will not always be the same as the liability of the supply between your principal and the third parties. Selling agents If you’re a selling agent and the supply you’re arranging on behalf of your principal is taxable, your supply of services to your principal in arranging that supply is standard-rated. But, if the supply you’re arranging for your principal is exempt from VAT, your supply of services in arranging that supply may also be exempt. Buying agents If you’re a buying agent and the supply you’re arranging from the third party to your principal is taxable, your supply of services to your principal in arranging that supply is standard-rated. But, if the supply you’re arranging by the third party to your principal is exempt, your supply to your principal in arranging that supply may also be exempt. Intermediary services You may be able to zero rate the supply if you make arrangements for: the export of any goods to a place outside the UK a supply of services which is itself zero-rated as work on goods for export from the UK any supply of services which is made outside the UK Agents acting in the name of their principals As an agent, you may sometimes take a minor role in a transaction, and simply introduce your principal to potential customers or suppliers (third parties). At other times you may be more closely involved. You might: receive or deliver goods hold a stock of goods for your principal make or receive payment But, provided that the invoicing for the supply is between the principal and the customer, the only supply for VAT purposes being made by you will be the provision of your services to your principal. Invoicing Arrangements If y our principal is VAT registered, their supply to the third party is taxable and you’re registered for VAT then: Your principal must issue the VAT invoice made out to the customer and send it either direct to the customer, or through you to pass on to the customer, you only account for VAT on your supply of agent’s services to your principal If your principal is not registered for VAT but you’re VAT registered then: No VAT is due on the supply arranged by you but you must account for VAT on your supply of agent’s services to your principal, and possess evidence that you’re arranging the supply on behalf of your principal. The supply should be readily distinguishable in your records from supplies on which VAT is charged. Agents Registered for VAT who act in their own name You may sometimes be empowered by your principals to enter into contracts with a third party on their behalf. In such cases, particularly if your principal wishes to remain unnamed, you may receive and issue invoices in your own name for the supplies concerned. An agent who acts in such a capacity is usually referred to as an undisclosed agent or a commissionaire. In commercial terms, the transaction you arrange as an agent remains between your principal and the third party involved. But, you should note that these rules apply to supplies of goods and services. Goods If you issue an invoice in your own name for a supply of goods which you arrange for your principal, then for VAT purposes only, you must treat the transaction as though it was both a supply to you and a supply by you. Services If you’re an agent arranging a supply of services and both you and the supplier are registered for VAT, and the supplies are taxable, then you may treat yourself as both receiving and supplying those services. If you do this, you’ll be regarded as acting in your own name and treated for VAT purposes in the same way as an agent arranging supplies of goods. In both circumstances, you’re liable to account for VAT on the supply of the goods or the services, as well as on your own supply of services to your principal. But you may also reclaim as input tax any VAT charged on the supply made to you. As you do not alter the nature or value of your principal’s supply, the amount of input tax reclaimed will normally be equal to the output tax you account for on that supply. You must not reclaim input tax under this procedure before you have accounted for the relevant output tax. You must include the value of the supply in your VAT account and on your VAT Return as a supply both made, and received, by you. It’s important to remember that the VAT treatment of the supply you arrange does not affect your liability to account for VAT on your own supply of services to your principal. VAT Registration If you’re an agent, and the value of your taxable supplies is above a certain limit you must register for VAT. The value of your taxable supplies includes both the value of your taxable supplies to your principal and the value of any taxable supplies which you make in your own name. Invoicing Arrangements If your principal is registered for VAT, and their supply to the customer is taxable then Your principal must issue a VAT invoice to you for the actual price paid by the buyer, and you may then reclaim any VAT as input tax or use the self-billing procedure. If the customer is registered for VAT (or Not registered) you must account for output tax on the onward supply to the customer, and you must issue a VAT invoice to the customer, and you must also account for VAT on the value of your own supply of services in arranging the supply on behalf of your principal This example illustrates the accounting procedure. A VAT-registered person supplies standard-rated goods or services for £100 plus VAT to another VAT-registered person. The supplier uses an agent who acts in their own name. The agent takes a commission of 10%. The seller must issue a VAT invoice to the agent showing: Amount Goods or services £100.00 20% VAT £ 20.00 Total £120.00 The seller accounts to HMRC for £20.00 output tax. The agent may reclaim £20.00 as input tax. The agent must issue a VAT invoice to the buyer showing: Amount Goods or services £100.00 20% VAT £ 20.00 Total £120.00 The agent accounts to HMRC for £20.00 output tax. The buyer may reclaim £20.00 as input tax subject to any partial exemption considerations (read paragraph 13.1 ). The agent must also issue a VAT invoice when making a charge to the principal (the seller) for agent’s services showing: Amount 10% commission £10.00 20% VAT £ 2.00 Total £12.00 The agent accounts to HMRC for £2.00 output tax. Subject to the normal rules the seller can reclaim input tax of £2.00. In practice, the amount of money that passes between the agent and the principal in this example might only be £108.00, since the agent may deduct commission from the amount collected from the buyer, paying the balance to the principal. But, the full VAT invoicing procedure must still be followed. UK, EU and international supplies involving UK undisclosed agents F or UK undisclosed agents involved in domestic supplies If you’re a UK undisclosed agent involved in domestic supplies, the difficulties outlined in this section may not apply and there’s no intention to disturb the current commercial arrangements where you may be invoicing your principals for a separate supply of your own services, as described in paragraph 22.6 . But, if you want to, you may adopt the alternative VAT treatment set out in this section for your domestic transactions. VAT treatment of supplies involving UK undisclosed agents Introduction This section deals with the VAT treatment of international supplies of goods or services made through UK undisclosed agents. It also gives information on the option which allows UK undisclosed agents involved in domestic supplies to use this VAT treatment. Undisclosed agents take part in a supply of goods or services while acting in their own name but they’re supplying the goods or services on behalf of another. This means the third party to the transaction is often unaware of the involvement of an agent. The VAT treatment Agents involved in non-UK, non-EU or EU supplies, who bring themselves within the terms of section 47 VAT Act 1994 by acting in their own name, are treated as principals for VAT purposes and seen as taking a full part in the underlying supply of any goods or services. Consequently, as the agent is taking a full part in the supply, they’re no longer recognised as making a separate supply of their own services to their principal and the commission they retain is seen as subsumed in the value of the onward underlying supply. This treatment is for VAT purposes only. It has no impact on the legal status of agents or the way they’re treated for the purposes of other taxes or legislation. Impact of the VAT treatment (a) Goods imported into the UK, or acquired into Northern Ireland from the EU Note, for the purposes of the following illustration, the price paid by the final customer is £100, the commission retained by the agent is £20, and the money passed back to the principal is £80, all net of VAT. If you’re a UK undisclosed agent then the VAT value at importing goods on behalf of a non-UK principal importation is decided by the customs rules as previously, and will not change acquiring goods into Northern Ireland from a principal in an EU member state acquisition is £80 by virtue of section 20(3) VAT Act 1994 based on the value of the invoice raised by the UK and EU principal to you. You’re responsible for Intrastat declarations and must account for acquisition tax As a UK undisclosed agent that’s treated as a principal, you’ll be entitled to recover import or acquisition VAT in Northern Ireland, subject to the normal rules. You will then: Make an onward supply in your own name to your customer for £100 Account for any output tax due Your commission of £20 will be seen as subsumed in the value of your onward supply of the goods, and you’re no longer regarded as making a separate supply of your own services to your non-UK principal. You may treat costs incurred in the UK, such as warehousing and handling, as supplies to you and you may recover the input tax on them, subject to the normal rules. (b) International services If you’re a UK undisclosed agent involved in international services and you act in your own name under section 47(3) VAT Act 1994 , you’re treated as a principal. The services are seen as supplied to you as though you’re a principal, and supplied on by you. This means that you will be treated as taking a full part in the supply chain. As in the case of imported goods, your commission is seen as subsumed in the value of the onward supply. You’re no longer regarded as making a separate supply of your own services to your principal. Section 47(3) applies in this way in all cases where agents act in their own name in relation to international services. It applies to services being supplied both to and from the UK. Contains public sector information licensed under the Open Government Licence v3.0.

VAT liability table for Financal services type products such as loans, accountancy, banking, consultancy, commodities, advisory, share trading etc. Financial Services VAT Liability Matrix

Find out how VAT works in Italy including, VAT Registration, VAT Rates, General VAT rules, Accounting for and Paying VAT, How to Recover VAT on Expenses, VAT Returns, VAT Exemptions, VAT Grouping Rules. Introduction Value Added Tax (VAT) is a consumption tax that applies to the supply of goods and services carried out in Italy by entrepreneurs, professionals, or artists and on importations carried out by anyone. In some cases, also Intra-Community acquisitions are subject to Vat. In Italy the standard Vat rate is 22% and reduced rates are provided for several supplies of goods and services, such as 4% for listed food, drinks and agricultural products or 10% for electric power supplies for listed uses and listed drugs. Specific supplies of goods and services expressly listed in Presidential Decree n. 633/72 are exempt from Vat, for example education, insurance services, specific financial services, supply, leasing of particular immovable property. n Italy, Value Added Tax is known as IVA (Imposta sul Valore Aggiunto). As of January 1, 2026, Italy has implemented a significant structural reform with the introduction of the "Testo Unico IVA" (New Consolidated VAT Code), which simplifies decades of fragmented legislation into a single framework. 1. VAT Rates in 2026 Italy maintains four main VAT rates, though specific categories—particularly for art and collectibles—saw updates in late 2025. RateCategoryExamples 22%StandardElectronics, clothing, cars, professional services, luxury goods. 10%ReducedHotels/tourism, restaurant services, passenger transport, domestic electricity/gas. 5%Social/HealthSocial welfare services, certain medicines, and art/antiques/collectibles (as of July 2025). 4%Super-ReducedBasic groceries (bread, milk), books/newspapers (physical and digital), medical aids for the disabled. 0%Zero-RatedExports outside the EU and intra-EU B2B supplies. 2. VAT Registration Requirements Italian law distinguishes between resident and non-resident businesses. Italian Residents: There is a VAT registration threshold of €85,000. Businesses earning below this can operate under the "flat-rate scheme" (Regime Forfettario), which exempts them from charging IVA but prevents them from reclaiming input VAT. Non-Resident EU Businesses: Must register for an Italian VAT number if they store stock in Italy (e.g., using Amazon FBA) or exceed the €10,000 EU-wide distance selling threshold (unless using the OSS system). Non-EU Businesses: There is no registration threshold. Any taxable activity in Italy requires immediate registration. Fiscal Representative: Non-EU companies must appoint a local "Fiscal Representative" who is jointly liable for VAT debts. Bank Guarantee: From mid-2025, non-EU entities engaging in intra-EU trade from Italy must provide a €50,000 bank guarantee to register for the VIES system. I 1. VAT-Exempt Transactions (Art. 10 DPR 633/72)4 These activities are "in scope" for VAT but are legally exempted for social or economic reasons. Key Drawback: If your business only performs exempt activities, you generally cannot deduct input VAT on your purchases.5 CategoryTypical Exemptions HealthcareServices provided by doctors, nurses, and hospitals; diagnostic exams and specific medical treatments. EducationSchooling, university courses, and professional vocational training provided by recognized institutions. Finance & InsuranceGranting of loans, bank account management, insurance premiums, and stock brokerage. Real EstateMost residential leases and sales of "old" residential buildings (unless the seller opts for taxation). Culture & SportsServices provided by recognized non-profit cultural associations or amateur sports clubs. GamblingLotteries, betting, and authorized gaming activities. 3. Compliance and Filing The 2026 reform places a heavy emphasis on digital transparency and real-time reporting. Mandatory E-Invoicing (Fatturazione Elettronica) Italy is a pioneer in e-invoicing. All B2B and B2C invoices must be issued in a specific XML format via the government's SdI (Sistema di Interscambio) portal. Paper invoices are generally not legally valid for VAT purposes. Filing Deadlines LIPE (Periodic VAT Settlements): Submitted quarterly to summarize the VAT credit/debit position. Q1: May 31 Q2: Sept 30 Q3: Nov 30 Q4: Feb 28 (of the following year) Annual VAT Return (Dichiarazione IVA): A comprehensive summary due between February 1st and April 30th of the following year. Intrastat: Monthly or quarterly reports required for goods/services traded with other EU member states. 4. Key Mechanisms for Businesses To understand how VAT moves through the Italian system, it is helpful to visualize the "Reverse Charge" and "Split Payment" mechanisms used to prevent fraud. Reverse Charge: Used in specific sectors (like construction or electronics) and cross-border B2B transactions. The buyer, rather than the seller, accounts for the VAT. Split Payment: Primarily for businesses selling to Public Authorities. The authority pays the net amount to the business and pays the VAT directly to the Treasury. 5. Penalties for Non-Compliance Italy has some of the highest VAT penalties in the EU. Failure to file: 120% to 240% of the VAT due. New 2026 Fast-Track Assessment: The Italian Revenue Agency can now use e-invoice data to automatically assess VAT due if an annual return is omitted. If you pay within 60 days of this assessment, penalties are reduced to 40%. In Italy, VAT grouping—known as Gruppo IVA—is a regime that allows legally independent but closely linked entities to be treated as a single taxable person. With the implementation of the 2026 VAT Reform (Testo Unico IVA), the rules for VAT groups have been consolidated into the primary code, maintaining the "All-In/All-Out" principle while streamlining the digital reporting requirements. 1. The Core Benefits Irrelevance of Intra-group Transactions: Sales of goods or services between members of the same VAT group are out of scope for VAT. No VAT is charged, and no e-invoices are required between members (though internal records must be kept). Cash Flow Optimization: Instead of one company waiting for a refund while another pays the treasury, the group nets out all credits and debits, paying only the balance. Single Compliance Point: The group files one consolidated quarterly settlement (LIPE) and one Annual VAT Return. . VAT Recovery for Italian-Registered Entities If you have an Italian VAT number (direct identification, fiscal representative, or local subsidiary), you recover VAT through deduction. Mechanism: You subtract the VAT paid on your purchases (Input VAT) from the VAT collected on your sales (Output VAT) in your periodic settlements (LIPE). The "VX" Schedule: If you end the year with a credit (more Input than Output), you declare this in the VX schedule of your Annual VAT Return. Options for Credits: Carry Forward: Use the credit to offset VAT debts in the following year (most common). Horizontal Offsetting: Use the VAT credit to pay other taxes (e.g., INPS social security or IRPEF). Refund Request: Request a cash payment. Important (2026 Update): To request a refund or offset credits exceeding €30,000, you must obtain a "Visto di Conformità" (Compliance Seal) from a certified Italian accountant. Without this seal, the Agency will likely block the refund for a manual audit. 2. VAT Refunds for Non-Established EU Businesses If your company is based in the EU but has no Italian VAT registration, you use the 8th Directive procedure. How to Apply: You do not apply to Italy directly. You submit the claim through the electronic portal of your home country’s tax authority. Deadline: September 30th of the year following the expense. Thresholds: Quarterly claims: Minimum €400. Annual claims: Minimum €50. Timeline: The Italian authorities have 4 months to approve or reject the claim (extended to 8 if they request more info). 3. VAT Refunds for Non-EU Businesses Non-EU businesses (e.g., US, China) use the 13th Directive procedure. This is the most complex route. Reciprocity Required: Italy only grants refunds to non-EU countries that offer similar rights to Italian companies. This currently includes the UK, Switzerland, Norway, and Israel. The "Form IVA 79": You must submit this form in Italian or English to the Centro Operativo di Pescara. Mandatory Documents: Original paper invoices (digital copies are often rejected for non-EU entities). Proof of payment for every invoice. A "Certificate of Status" from your home tax authority. Deadline: September 30th of the following year. 4. Refundable vs. Non-Refundable Expenses Italy is notoriously strict about what qualifies for recovery. Expense CategoryRecovery Status Business Travel (Trains/Planes)100% Recoverable Hotel & Accommodation100% Recoverable (if for business) Business Meals100% Recoverable (must be documented) Cars (Purchase/Fuel/Lease)40% Recoverable (Standard "promiscuous use" rule) Entertainment/GiftsGenerally 0% (unless below €50) Mobile Phones50% Recoverable (fixed statutory limit) VAT Registration VAT Rules & Rates VAT Exemptions Paying VAT VAT Returns VAT Grouping VAT Recovery Annual Payment Advance Payment Periodic Payment Italy-VAT