Manufacturing and production are at the core of any nation’s GDP.
In the UK, there are literally thousands of businesses, of all sizes and across all sectors, producing and manufacturing components, parts and finished products that are then distributed nationally and internationally for resale every day.
While manufacturing companies tend to spend the vast majority of their time focusing on their outputs, and quite rightly so, there’s also another element of their business they ought to be keeping tabs on too, and that’s their VAT affairs.
VAT involves numerous complex and technical rules, particularly in relation to the manufacturing sector. As a result, it can be a tricky for manufacturers to successfully navigate their way around the world of VAT without getting caught out by one rule or another. Let’s take a look at some of the areas where their main VAT challenges lie:
Various different types of tooling exist within the manufacturing sector, from work holding tools, such as jigs and fixtures, to cutting tools for milling and grinding and welding and inspection fixtures.
However, companies can find themselves being stung by extra VAT costs if their tooling contracts aren’t efficiently written up. For instance, they may have been asked by an overseas customer to make or buy tooling to manufacture goods for them and make a specific charge for supplying that said tooling. Now, these tooling costs can be zero-rated, providing the company has fulfilled the requirements of zero-rating, which means they’ve:
Supplied the tools to an overseas entity.
Obtained a statement from the customer declaring they’re not registered in the UK for VAT and have no obligation to register (for EU countries the customer’s EU VAT number with the country code prefix needs to be produced).
Used the tools to manufacture goods that will be exported outside of the EU or to another EU country.
Got commercial documentary evidence of removal from the UK.
Over the years, we’ve encountered numerous instances where organisations have incorrectly accounted for VAT on their tooling costs. Unfortunately, if the correct VAT liability isn’t applied, then this can significantly affect a company’s cash flow, with businesses having to incur an additional 20% cost for the tools and, of course, wait for their VAT refund to come through.
It’s also worth noting here that EU member states have a different view on how VAT should be accounted for on tooling transactions, so it’s worth checking the relevant criteria, depending on where your business is taking place.
2. CROSS-BORDER OPERATIONS
It’s essential that manufacturers make sure they’re accounting for their VAT correctly in cross-border transactions, as failure to do so can impact their VAT liability. For some businesses, this involves using the ECSL and Intrastat in relation to their statistical details.
The Intrastat must be submitted monthly (by the 21st of each month) by companies whose arrivals into the UK exceed £1.5 million or dispatches exceed £250,000. There’s no threshold for the ECSL, this must be reported on all ECSL to VAT-registered EU businesses.
All EU tax jurisdictions are governed by EU VAT directives, but in some cases, member states can implement local VAT legislation for certain aspects of the information and documents that are needed to claim under the Refund Directive.
Tax reporting in Eastern Europe tends to be more formal and requires substantially more documentation. Non-compliance with formal requirements (e.g. invoices not having a customer’s correct address and failing to provide transport documents) are often used to justify significant delays in answering a refund claim and can even lead to companies being denied the amounts requested.
Another consequence of operating in several countries is that companies often find themselves in the position of having to liaise with multiple tax authorities, suppliers and clients in relation to their VAT refunds, which takes away valuable resources from their core business activities.
They also need to be able to evidence their activity too if they’re claiming VAT relief for goods that are being sent across borders to be finished off or progressed elsewhere. Eligible companies need to be able to provide proof of the movement of their goods to apply for the relief, which can be an added burden for many to have to think about.
The UK’s impending departure from the EU is undoubtedly going to impact cross-border manufacturing and bring about changes to how companies operate.
Some businesses will need to establish new supply chains, while it’s inevitable that tighter controls will be imposed on customs and duties. Cash flow will also be a major factor if the UK’s unable to secure favourable customs arrangements with the rest of Europe upon its exit from the single market.
Whatever the outcomes, it’s anticipated they’re most likely to have an impact on current VAT arrangements in some shape or form.
3. ‘CLOUD’ MANUFACTURING
In more recent years, developments in technology have thrown up many a question relating to the impact manufacturing within the ‘cloud’ has on the VAT liability of goods and/or services that are being produced.
Common queries include, who’s liable for VAT? And does supply apply to goods, services or both when manufacturing is carried out from a remote location? These questions are also particularly important when it comes to cross-border VAT transactions too.
As with all things technology-related, this is an area that will continue to evolve as HMRC gets up to speed with the innovative ways manufacturers now operate as they continue to use technology to their advantage.
4. FLAT RATE SCHEME (FRS)
Another area that shouldn’t be overlooked by manufacturers, particularly start-ups and smaller manufacturing companies, but can be tricky to get to grips with, is the FRS.
There are plenty of benefits to be had from this VAT accounting scheme, ranging from the fact it’s a great way for businesses to simplify their financial record-keeping, as they’re not required to keep detailed records of sales or invoices, to the fact the associated VAT rates are fixed. They’re also lower than the standard VAT rate too.
If a company chooses to join the FRS, they can charge VAT at the standard rate (currently 20%) on their supplies. However, beyond this point is where things can start to get tricky, as they can only pay the flat rate of 9 to 9.5 or 10% to HMRC. The difference between the standard rate and the flat rate should then be retained by the manufacturer.
Furthermore, being on the FRS will block the recovery of input tax and companies can only reclaim VAT on a single purchase of capital items (goods) above £2,000.
In order to join the scheme, companies must prove:
They’re eligible to register for VAT
Their taxable turnover, exclusive of VAT, in the next year will be below £150,000
Their business isn’t associated with any other companies
Unfortunately, businesses aren’t eligible to stay in the FRS if their income for the year-ending exceeds the threshold of £230,000, inclusive of VAT. However, it’s possible that HMRC may allow them to stay in the scheme if they’re satisfied that their total income will not exceed £191,500 during the next 12 months.
The world of VAT can pose many a challenge for manufacturers, particularly with legislation and regulations being regularly reviewed and revised, country-specific stipulations and the impact of Brexit looming. However, with the right guidance and support, there’s no reason why manufacturers shouldn’t be able to make sure their VAT affairs are in the right order and working to the full benefit of their business.
About the author
Adnan Kayani is a Senior VAT Consultant based in Ayming’s London office. A member of Ayming’s VAT team for more than two years, Adnan’s role covers VAT advisory, compliance and recovery.