Belated VAT charge by non-registered supplier?

Partial exemption

Our subscriber wants to avoid getting an unexpected VAT bill from the non-registered supplier , i.e. the celebrity, which, if input tax cannot be fully claimed, would increase the cost of the deal. So, the first key question is to consider what products the celebrity will be promoting.

If the celebrity will only promote our subscriber’s taxable products, a belated VAT charge will not be a problem because our subscriber will fully claim input tax.

If the celebrity only promotes exempt goods or services, no input tax will be claimed by our subscriber and the deal cost would be £120,000 with a belated VAT charge.

If the celebrity will promote both taxable and exempt products, input tax will be partly claimed as residual input tax, according to our subscriber’s partial exemption method.

Tip. Our subscriber could insist that the contract is for £100,000 including any VAT that could be charged by the celebrity in the future. The celebrity would then account for 1/6 of the £100,000 fee as output tax on their own return, without any recourse to our subscriber.

VAT registration rules

If the celebrity will not accept this suggestion, there’s another possible solution. For VAT registration purposes, a business or person must register when its taxable sales have exceeded £85,000 in any rolling twelve-month period. But there is a second, forward-looking test. If a business expects to make taxable sales of more than £85,000 in the next 30 days alone, it must register for VAT at the beginning of the 30-day period.

So, if the celebrity raises a single invoice for £100,000, or receives an earlier payment for this amount, there will be no way of them avoiding registering for VAT. The single invoice or payment will create a tax point for VAT purposes, which exceeds £85,000. It will be subject to VAT.

Tip. A tax point is created by either a sales invoice being issued or payment received, whichever comes first. It will be the invoice date in most cases and this will then be relevant for the VAT registration tests.

Split payment

It’s possible that the celebrity has no other taxable self-employed income because they are employed by their sporting team or club under PAYE. So, a potential solution could be to split the £100,000 sponsorship fee into different months. This will remove the problem of the forward-looking registration test.

Example. Sue has agreed a £100,000 sponsorship deal with Insurance Services Ltd. This will be her only self-employed income. If she invoices £50,000 on 30 April 2022 and the other £50,000 on 31 May 2022 or later, the 30-day test will not be a problem.

Trap. However, Sue will exceed the £85,000 threshold on 31 May 2022 for sales made in the previous twelve months - £50,000 x 2 = - £100,000 - so will need to register for VAT on 1 July 2022 with the historic test, i.e. the first day of the second month after exceeding the threshold. But this date comes after the £100,000 fee income has been received, so it will not be subject to VAT.