Making sense of 1&1′s decision to re-charge VAT
Over the past few days I have been receiving a steady stream of credit notes and invoices from my registrar 1&1. I use them for lots (we’re talking hundreds) of domain registrations for me and my clients.
The reason they are doing this is that the rate of VAT changed in the UK on 1st December 2008 from 17.5% to 15%. From their control panel:
Since 1 December 2008 the VAT rate has been lowered in UK from 17.5% to 15%. Although it was not a legal requirement, 1&1 Internet Ltd. has decided to refund all of its customers any difference that has raised due to the VAT rate change. However, as changes to VAT are seldom and because many of our products are billed months in advance, some of our adjustments may be difficult to understand.
In order to do that we have cancelled the invoice/s in full (only that invoice in which the charge was related to the period entering into December 2008). A new invoice has been raised because of the previously cancelled invoice that is charging you as per the accurate rates i.e 17.5% till 30 November 2008 and at 15% from 1 December 2008.
We will not recharge any of the invoices again, rather, we will simply credit the affected accounts with the adjusted amount, for all amounts over £3. If the adjustment is under £3, we will simply refund the amount on the next invoice.
Now, and change of 2.5% on a domain registration costing anything from £3 to £10 (approx) is in the range of 10-25p – not a significant amount – but it is one that, as a result of these changes, will need to be paid to the HMRC on my company’s next VAT quarter. For a large number of domains this adds up to an extra cost for my company which did not need to be applied by 1&1 (remember: no legal requirement to do this).
How does it create a cost for my company?
Let’s say I buy services for £1000. The VAT was £175 (17.5%).
On my VAT return date, I claim this back from the HMRC.
However, the same £1000 now has a VAT cost of £150 (15%), but because I have already claimed £175 and my new VAT liability for the same amount has been adjusted downards, the nett effect is that I have claimed more VAT than I am now eligible for, which means I need to pay it back next quarter.
My accountant said “in your case where you have paid in advance then I would expect the credit note to be accompanied by a cheque.” Naturally I will be speaking to 1and1 to see what can be done.
On the reverse side of this, given that this VAT change results in a nett COST to my business, it has the opposite effect for 1&1 – a net GAIN. This means that they will be claiming back a very large sum of money from the HMRC on their next VAT return because of all the small amounts from hundreds of thousands – if not millions – of domains.
How does it benefit 1&1?
Let’s say they invoiced £5m for domains. The VAT liability is £875000 at 17.5%.
On their VAT return date they pay this to the HMRC.
Now that the rate has been reduced to 15%, the liability is £750000, which means that they have paid £125000 more in VAT than they should have. Naturally, they will reclaim this on their next VAT quarter.
Happy New Year to 1&1!
The interesting thing to note looking forward is that VAT is supposed to revert to 17.5% in about a year’s time – it’s only temporary – which means the reverse of this will be true and 1&1 will get a larger bill from HMRC for their new VAT liability *if* they decide to re-invoice. If it’s “optional” as it is this time around, do you think they will do it?
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Choosing a good web site provider and registrar is critical for a successful internet business.
I have come to the conclusion that I made the dreadful error of choosing a company because it had a 5 page ad in a popular computer magazine. I believe I have put my trust in a straw man. In my opinion 1and1, with CEO Oliver Mauss, is a horrible company and many customers have voiced a host of complaints on various blogs.
It should be a warning that when their phone is answered by a recording that tells you if you have gotten a notice from NCO, a collection agency, to press a certain number. If they are a reputable business, why do they have to send so many accounts to a collection agency?
Patrick Frey (Patterico) of the Los Angeles District Attorneys Office alleges his domain was high jacked and put up for auction on SEDO. SEDO is an associate company of 1and1.
Patterico: “I believe I’m facing massive incompetence, thievery, or very possibly a deliberate combination of the two. It feels like evil intent — but not for political reasons. It feels like cyber extortion — people going after the almighty dollar. Commenters have pointed out corporate ties between 1&1, which can’t seem to process my timely renewal, and Sedo/Domcollect, which stood to profit from 1&1’s failure. Usually, corporate incompetence does not earn the corporation money — but 1&1 and its related companies have found a way to make money off of their own slipshod procedures.â€
Patterico was able to regain his domain.
Also Investigative journalist, Kelli Jack, has written 30 articles about this company and has a suit pending against them. Kelli alleges that 1and1 stole her domain name and sold it. Kelli states: “1and1 should be shut down.” As of today Kelli is working with the Pennsylvania Attorney General.
I have filed complaints with the Federal Bureau of Investigation, Federal Trade Commission, Eastern Pennsylvania Better Business Bureau, ICANN, and others. I recommend everyone else having a problem consider doing the same.
The Washington DC, Pennsylvania Better Business Bureau has them listed as “Unsatisfactory” Read comments on the BBB why. Read some customer comments on Red Flag.
Warth Publishing Inc
There are a lot of blogs and reports both praising 1&1 as well as warning anybody to avoid them. 1&1 are a *huge* company and inevitably will make mistakes. I have had some minor administrative niggles with them which have taken longer to resolve than I would have liked and there are elementary bugs in some of their address forms (which amazes me, and which I have pointed out to them many months ago yet still remain). However, until now they have provided me with a simple and easy domain registration service which is all I need.
I have been using them for a few years now as a domain registrar only. I handle all my company’s hosting through RackSpace and am a firm believer in “you get what you pay for”. I have never used 1&1 hosting services, but have used other virtual hosting companies with poor results. Hence the decision to partner with the best and go down the dedicated servers route. In the UK, domain registrations are handled by SCHLUND in Germany – who is the registrar in Pennsylvania? Essentially, 1&1 handle the fees and provide an account for you to manage domains, but they are registered with a third party and not 1&1 directly.
It appears that 1&1 have sent NCO incorrect data – and are somehow unaware that the data is wrong! Not very promising and I hope this issue doesn’t appear in the UK as I have cancelled and transferred a few domains away from my 1&1 account in the last couple of months (routine business). However, since registrations are actually with a third party and not 1&1 directly it is not difficult to imagine a situation where the registrar shows the domain cancelled, but 1&1′s admin system hasn’t updated properly. Given the elementary form bugs I mentioned earlier, it’s not beyond the realms of possibility that the error is down to ineptitude rather than malice. I would recommend collating all communications from 1&1 and any third party registrars when trying to appeal any such case.
As they say – caveat emptor – let the buyer beware.
Returning to the original post – having thought about it some more I can’t actually make sense of it. At all.
Basically, 1&1 have decided to refund the overpaid VAT to its customers. 1&1 claim this VAT back from HMRC. 1&1′s customers then receive the overpaid VAT and then have to repay it to HMRC. So the money just passes round the system for the sake of it, creating administration for everybody with zero benefit.
If anybody can shed any light on why 1&1 (or any company) would do this, please feel free to comment here!
I couldn’t agree more – this is just administration for zero benefit.
I found your blog while scratching my head about how to account to the VATman for an invoice dated mid January but with a tax point in June last year while trying to sort out my VAT return for end Dec!
I don’t think the treasury had any idea of the amount of admin they were creating with their pointless reduction in VAT…and that same block of admin will need repeating again come the return to 17.5%. Hey-ho.
Thanks Gerard,
The VATman actually provided some good guidance about how and when to invoice and basically said that for things like this you didn’t need to re-invoice, but they gave you the option to do so if you wanted. It’s 1&1 that created the admin by deciding to take up the option. If they decide to take up the option again when we revert to 17.5% we’ll all have the same paperwork all over again
Edward