From 1st January 2010 significant changes in the VAT treatment of supplies of services made to and received from overseas will come into force.
The principle behind these changes is to reduce the number of cross-border VAT charges and reclaims being made by businesses across the European Community (EC).
First of all it is important to remember that only the rules on supplies of services, not goods, are changing. This is because the changes to the law will bring the rules for intra-EC supplies of services more in line with those already in existence for intra-EC supplies of goods.
The fundamental change being made is to the deemed place of supply for intra-EC services.
As part of the changes, businesses making intra-EU supplies of services are now likely to be required to complete quarterly EU Sales Lists (please see separate article).
What’s the old rule?
The old “basic rule” to be applied to supplies of international services up until 31st December 2009 is that for intra-EU supplies, the place of supply is where the supplier belongs. There are a number of exceptions to this rule, including services relating to land and property, professional and financial services, cultural/artistic/sporting services performed and the Tour Operators Margin Scheme.
This means that under the old basic rule, a UK business selling services to a French customer would, for example, charge UK VAT to their French customer. Equally, a UK business receiving services from a German business would normally be charged German VAT, which is not reclaimable through the VAT return, but may be reclaimable via what is known as an 8th VAT directive refund (see separate article).
Supplies of services to customers outside of the EU are considered to be made where the customer belongs, and are therefore outside of the scope of UK VAT, which should therefore not be accounted for on these sales.
Where supplies of services are made which fall into one of the exceptions to the basic rule, then there may be a liability to register for VAT in the country in which supplies are deemed to be made. This will depend on the rules of the individual country.
If a UK business receives such services from an EU business, it must account for VAT via a reverse charge, declaring the VAT on box 1 for output VAT and 4 for input VAT (assuming business is not partially exempt) of the VAT return. The net amount should also be declared in boxes 6 and 7. Please note that boxes 2 and 9 are only used for goods and not services.
What’s the new rule?
For intra-EU supplies of services, the new basic rule from 1st January 2010 is that the place of supply for business to business (B2B) services will be where the customer belongs. For business to customer (B2C) services, the basic rule is unchanged at being where the supplier belongs. However, there will continue to be a number of exceptions to the basic rule.
When the place of supply is deemed to be where the customer belongs, the customer is required to account for the VAT under the reverse charge principles outlined above. Such supplies by UK businesses to EC B2B customers are excluded from Flat Rate Scheme turnover if applicable.
Where services are supplied to customers outside the EU, these will continue to be outside the scope of UK and EU VAT.
What are the exceptions to the new rule?
The following types of supply of service will be exceptions to the new rule and have a place of supply determined on a different basis as outlined below:
- Land related services (including hotels) – supplied where land is located
- Short-term hire of means of transport – supplied where vehicle made available
- Cultural/artistic etc services – supplied where performance takes place
- Work on physical goods – supplied where work carried out (for B2C customers)
- Restaurant/catering services – supplied where work carried out (N.B. if services are on a ship/train/plane, place of supply is country of departure)
- Passenger transport – where service takes place
For more details on the exceptions, please see HMRC guidance or consult your normal contact at CRM to discuss your specific circumstances.
Will there be further changes to these rules?
Yes; from 1st January 2011, changes are expected to the place of supply of cultural, artistic, sporting, scientific, educational and entertainment services for B2B transactions, with the place of supply reverting to the (2010 onwards) general rule that the place of supply of these services will be where the customer belongs. There will be an exception of admission to an event, which will have a place of supply where the event takes place.
From 1st January 2013, there are expected to be changes to the long term hire of means of transport, and from 1st January 2015 for the B2C supply of telecommunications/broadcasting/E-services.
What practical steps do I need to take?
If you supply services to EU customers which fall under the new basic rule, you should not charge UK VAT for supplies made on or after 1st January 2010 if they are B2B supplies. In order to protect your business against claims from HM Revenue & Customs for UK VAT on the value of these supplies, you will need to ensure that you have your customers’ VAT numbers to quote on the sales invoices you send them in respect of these services. Once you have obtained this from your customer, you should check the VAT registration details given to you by using this website: http://ec.europa.eu/taxation_customs/vies/vieshome.do?selectedLanguage=EN
You should record on those sales invoice the wording ‘Services subject to the reverse charge – VAT to be accounted for by the recipient as per Article 196 of Council Directive 2006/112/EC’.
You must also ensure that you report these values correctly on your VAT returns. For businesses using Sage accounts software, this is simply achieved by coding your sales invoices/receipts (if on cash accounting) to the specific designated tax code (accessed by clicking on settings, configuration, tax codes – older versions may vary).
You should also investigate whether supplying services to specific EC countries may require you to register for VAT in those countries if you exceed their local threshold.
If you are unsure whether your services will fall under the general rule or an exception, you should seek advice from your usual contact at CRM.
Additionally, you should make sure you are ready to either send in EC Sales lists, or if you are not yet required to do so, monitor as and when you may be required to do so in the future (please see separate article).
If you receive services from EC suppliers, you should make sure that you familiarise yourself with how to ensure that you account for the reverse charge on these costs. For most businesses, there will be no overall VAT cost in this, but they must be properly declared. For businesses using Sage accounts software, this is simply achieved by coding your purchase invoices/payments (if on cash accounting) to a specific designated tax code.
If you are not currently VAT registered, the value of these services received will be added to your own turnover in assessing whether the compulsory registration threshold has been breached