16.01 GENERAL PRINCIPLES
Value added tax (VAT) is chargeable on any supply of goods or services made in the Isle of Man by a taxable person in the course or furtherance of any business and on imports of goods and some specified types of services. A taxable person is a person that is or ought to be registered with Customs and Excise, which administers the tax. Registration is mandatory if the value of supplies made exceeded £51,000 in the previous twelve months or is expected to exceed £51,000 in the next 30 days. Businesses with lower turnovers may ask for voluntary registration.
Goods are supplied at the time at which they are made available to the purchaser, and it is the location of the goods at that time that determines where they are supplied and, therefore, whether VAT is chargeable in the Isle of Man. Services are generally treated as being supplied where the supplier belongs. A business normally belongs in the country in which it has its business establishment or some other fixed establishment.
The value on which VAT is chargeable is generally the price agreed upon, but if the contract does not provide for VAT to be charged in addition, the supplier must account for VAT out of the sales price.
16.02 MECHANICS OF THE TAX
VAT charged to a business on its expenditure is called input tax, and VAT charged by it on the supplies it makes is output tax. Full credit is available for input tax except to the extent that it relates to:
- Expenditure not incurred for the purpose of the business.
- Expenditure directly or indirectly attributable to exempt supplies (see 16.04).
- Expenditure with respect to which a credit is specifically prohibited, such as that incurred on automobiles (generally), domestic accommodation for company directors, and entertainment (except of staff).
The formula used to determine the proportion of input tax attributable respectively to exempt supplies and to taxable supplies must be acceptable to Customs and Excise. In the case of land and buildings costing more than £250,000 and certain items of computer equipment costing more than £50,000, the initial credit for the input tax may be subject to adjustment over a review period if the extent to which the asset is used in making taxable as opposed to exempt supplies varies during this period.
If a VAT return shows that the VAT on expenditure exceeds the VAT on supplies made, a refund of the excess is made, although Customs and Excise officers may visit the business to check the claim.
Returns normally are made quarterly, although monthly returns may be allowed if repayments are due, and annual returns may be allowed if turnover is low. The return, together with the tax due, must be received by Customs and Excise by the end of the month following the period covered by the return.
Very large VAT payers are required to make monthly payments of VAT on account even though their returns will still be quarterly. Penalties as well as interest may be charged if the return or the payment is late. If the return materially understates the taxpayer's VAT liability or materially overstates the taxpayer's entitlement to a VAT refund, a penalty of 15% of the error may be charged.
Documentary evidence supporting the figures in returns must be retained for six years. VAT invoices must be available to support a claim for input tax credits. The detail required on invoices varies depending on the type of business, but it always includes the consideration due, the VAT number of the supplier, and the date; it also generally includes the names and addresses of both the supplier and the customer, the VAT chargeable, and the nature of the supply.
If a dispute concerning the treatment of a transaction for VAT purposes cannot be settled by agreement between the taxpayer and Customs and Excise, an appeal may be made to an independent VAT tribunal.
16.03 RATES OF TAX
There are two rates of tax: a standard rate of 17.5% and a lower rate of 0%. Supplies taxable at the rate of 0% are said to be zero-rated. Zero-rating is a form of exemption with credit for input tax incurred on related expenditure. In other words, although no VAT is chargeable on the sale, VAT on related inputs is recoverable. VAT of 5% is charged on domestic fuel including electricity and VAT of 5% is charged on tourist accommodation.
Unless a supply is zero-rated, exempt (see 16.04), or outside the scope of VAT, it is subject to VAT at the standard rate. The most common items outside the scope of VAT are supplies made by a person not carrying on a business (such as an employee), the transfer of a business as a going concern, and the receipt of dividends.
16.04 ZERO-RATING AND EXEMPTION
Zero-rating within the United Kingdom covers a range of supplies, including most food, books, most public transport, buildings constructed for domestic or charitable use, and children's clothing.
Exports of goods are zero-rated, but it is essential that adequate evidence is available to show that the goods have been exported outside the scope of VAT but with input tax recovery. Most international services rendered to overseas customers are now including specific types of services performed outside the Isle of Man; defined professional, financial, information, advertising, and intellectual property services supplied to persons belonging outside the EC and to businesses belonging in other EC member states; and services relating to land situated outside the Isle of Man. Services relating to real estate situated in the Isle of Man are always subject to VAT at the standard rate.
A business that only makes exempt supplies cannot register for VAT purposes or recover any input tax charged to it on its expenses. A business that supplies a mixture of exempt and taxable items may register, but it may only recover input tax on its purchases of goods and services to the extent that those goods and services are used in making taxable supplies. An apportionment of expenditure may be necessary, as described at 16.02.
Supplies of goods and services that are exempt from VAT include insurance, postal services supplied by the Post Office, most financial services, and education and health services. The grant or assignment of an interest in real estate is usually an exempt transaction. Certain transactions in commercial property, however, are subject to VAT at the standard rate, and the sale of new residential property is zero-rated. The owner of any interest in commercial property may elect to charge VAT on receipts from that interest, thus making it possible to recover VAT on any related expenditure. Once this election has been made, however, the owner must charge VAT on all future receipts, whether of rent or sales proceeds.
16.05 APPLICATION TO NON-RESIDENTS
Non-residents that are not registered for VAT purposes in the Isle of Man and are therefore unable to recover VAT incurred on expenditure in accordance with the procedures described at 16.02 may nevertheless be entitled to a refund of VAT under a different set of rules, sometimes known as the mutual recovery procedure. To be eligible for a refund under this procedure, a non-resident must not make any supplies in the Isle of Man other than the international transport of freight. No refund is available for VAT incurred on entertainment expenditure or the purchase of an automobile.
16.06 SINGLE MARKET
From 1 January 1993, changes have taken place in the system of accounting for VAT on imports that have been in free circulation in other EU member states, and Isle of Man exporters will have to provide Customs and Excise with details of sales to commercial EU customers. The new rules will not affect the right of a business to recover VAT paid on imports, and an Isle of Man exporter will still be able to zero-rate sales of goods to business customers in other EU countries, provided that the exporter's VAT invoice quotes the customer's VAT number. Sales to private individuals in other EU countries, however, will no longer be zero-rated.
Special rules have been introduced to cover mail-order sales and sales of automobiles, boats, and aircraft to private individuals in other EU countries. Although the new rules would technically require traders to be registered in each member state in which they do business, a simplification procedure has been introduced for triangular transactions, ie where the goods are delivered straight to the end user with the invoice passing through an intermediate invoicing company.
The Isle of Man authorities will accept VAT registrations by these invoicing companies to allow the simplification measures to be applied providing the books and records of the company are maintained on the Island. Many other member states will not permit registration without a formal establishment.
The information given is not exhaustive and is based on conditions existing at 5 May 1999. Readers are advised to consult with professionals, such as independent accountants, legal counsel, and investment bankers, before taking any formal action. Deloitte & Touche would be pleased to discuss specific problems.