Posted: 06 Jun. 2023 5 min. read

Fintech VAT Top Tips – January 2023

The first in a series of short “top tips” articles covering the most common conversations we have with scaling Fintechs regarding VAT.

Fintechs buying in services from overseas may be creating a growing VAT exposure – how to spot and manage this common pitfall

With growing pressure on Fintech budgets and increasing scrutiny on profitability and cashflow, it is ever more important to be aware of your VAT obligations and risks so you can navigate and minimise potential exposures, which could otherwise hamper growth.

By far the most common VAT pitfall we see in the sector is where new growing Fintech businesses miss their liability to self-account for VAT on services received from overseas suppliers that at face value appear to be VAT free. Making this mistake can be costly and result in the creation of material, growing and potentially uncapped historical VAT liabilities.

Whenever I speak to a new Fintech business about VAT, one of my first questions will be about this obligation and risk, as we see things go wrong so frequently. If this issue has been missed, this can be a difficult area of discussion as it is something that can be costly to fix.

The reason this is a common error is because the obligation is counterintuitive, as it involves charging yourself VAT on a supply received from someone else (under the reverse charge mechanism). This is not normally the way that VAT works as it is typically a supplier’s responsibility to charge VAT. It also requires some degree of in-house VAT knowledge, which is a significant ask for a fast-growing and embryonic Fintech business with many other competing priorities.   

Reverse charge – what does this mean for me and how do I spot it?

Put simply, the reverse charge requires a business to self-account for UK VAT on a wide range of services received from an overseas supplier, if that service would been chargeable to UK VAT if provided by a UK supplier.

This mechanism creates a level playing field between UK and non-UK suppliers as it ensures that UK VAT is charged on supplies received from an overseas supplier, preventing businesses that cannot recover the VAT they incur gaining an advantage from sourcing purchases from outside the UK. Helpfully, it avoids creating an onerous UK compliance burden for the overseas supplier, however, it does this by shifting the VAT accounting obligation onto the UK business customer.

Overseas purchases can therefore create a liability to register for UK VAT

Overseas purchases that are subject to the reverse charge are treated like they are supplies made by the UK business customer. This has the following implications:

  • They count towards the compulsory VAT registration revenue threshold.
  • So, if a Fintech is not already UK VAT registered (e.g. on the basis its income is solely VAT-exempt) and services received from overseas suppliers which would have been chargeable to UK VAT if provided by a UK supplier in aggregate exceed a value of £85,000 in any twelve-month period, this creates a VAT registration requirement for the Fintech.
  • This VAT registration provides the mechanism through which it is required to then account for the reverse charge VAT, which for an otherwise fully exempt business would represent a wholly irrecoverable cost.

Fintechs that miss this obligation therefore risk creating a substantial historical exposure which can go back up to twenty years. Penalties can also be due, which are partly based on the length of the delay in registering.

Spotting this issue early can prevent a major exposure building, allow for this cost to be properly budgeted for and minimise penalty costs.

I’m already registered for VAT; do I still need to keep an eye on this?

In short – yes.

Where already VAT registered, a Fintech business has an ongoing liability to self-account for UK VAT under the reverse charge on most services bought in from non-UK suppliers. The main difference is that if UK reverse charge VAT is missed, this can create an exposure for under-declared VAT going back only up to four years, which is still clearly a significant period of time. In this case, both penalties and interest can also apply.

I understand the pitfall – what do I need to do next?

Consider your cost base to determine whether you incur relevant overseas costs. Common examples include cloud computing, paid for search engine/social media advertising and contractor costs. This can also include costs incurred from related companies overseas – for example, where costs of staff, employed by one entity but spending time supporting a different legal entity, are recharged.

If you think there is a potential risk for your business, please get in touch. We would be happy to discuss how to correct and manage the position with HMRC based on our experience with other Fintechs.


If you’ve done this, the next thing to do is consider how to optimise your VAT recovery position – we will explore this more in our next blog!
 

Author:

      

            

Adam Richardson
Associate Director - VAT, Deloitte

Authors

Dave Taylor

Dave Taylor

Director

Dave is a Director within Deloitte UK’s Financial Services & Insurance team. He leads the indirect tax proposition in relation to FinTech businesses, involving the consideration of how technology is disrupting the industry. He is also the UK subject matter expert for digital assets and cryptocurrencies. Dave advises clients on the VAT and IPT impact of their supply chains across the industry, but most significantly in the payments, digital banking and insurance sectors. He works closely and extensively with colleagues in transfer pricing, regulatory advisory and legal to provide clients with holistic support in bringing their products and services to market both domestically and internationally. Recent projects including advising clients on the treatment of payment-related services, the determination of VAT recovery methodologies, electronic intermediation of lending/insurance products, and the issuance and trade of NFTs and other digital assets through online platforms.

Eric Gilvray

Eric Gilvray

Associate Director

Eric is an Associate Director with the Financial Services Indirect Tax team in London, UK. He specialises in advising Financial Services businesses on indirect tax compliance and advisory matters. Eric takes a keen interest in the Investment Management and Fintech sub-sectors within FSI and has been assisting the UK practice lead up the VAT digital banking offering.