The tax rules for VAT and services

Many businesses are frequently confused by the tax rules for VAT and services. This post discusses the situations when it is appropriate for a VAT registered business to charge VAT for services and those circumstances when it is not.

VAT on services

The first stage is  to determine if the service is a business to business supply (B2B) or business to consumer supply (B2C).

In VAT terms a B2B supply is one made to a relevant business person.

What is a relevant business person?

 A relevant business person is considered one of the following:

  • They are a taxable person. The definition is far reaching though essentially any customer carrying on a business in the widest sense of the word.  
  • The person  is registered for UK VAT
  • They are VAT registered in another EU member state
  • That person is registered in the Isle of Man for a VAT equivalent tax

A B2B supply does not include one where the taxable person (see above) receives the services wholly for private purposes.

If the transaction is not a B2B supply because it is not made to a taxable person or is wholly for private purposes it will therefore be a B2C supply.

The place of supply

The next step when looking at the tax rules for VAT and services, is establishing the place of supply. Where the supplier or recipient belongs determines the VAT treatment of a transaction.

Unless the transaction falls within the list of exceptions the following general rule applies:

  • B2B supplies have a place of supply where the recipient belongs 
  • B2C supplies have a place of supply where the supplier belongs

If this is a B2B supply, then where the recipient belongs is usually determined as follows:

  • Where the recipient has a business establishment and no other fixed establishment, they belong in the country of that business establishment.
  • The recipient may additionally have fixed establishment(s) and both the business and fixed establishments are in more than one country. If that's the case, they are treated as belonging in the country of the establishment most directly concerned with the specific supply.
  • If there is no business or fixed establishment, the recipient belongs in the country of their residence. For a company, this is usually where it is incorporated

What is a business establishment?

There is no legal definition of a business establishment for VAT purposes. Ultimately there can only be one business establishment and generally speaking it is where the head office of the business is based. This head office is usually where the essential decisions concerning general management are carried out. It is also where the functions of central administration are carried out.

What is a fixed establishment?

Again there is no legal definition. However it is regarded as any country that has the permanent presence of both the human and technical resources necessary for making or receiving the supplies of services concerned. For example this may include a branch or subsidiary.

HM Revenue consider that where a company is incorporated will usually be regarded as a fixed establishment, though that is not always the case.

What about the place of supply for B2C transactions?

The place of supply for VAT purposes is usually where the supplier belongs though there are exceptions (see above). For example for particular consultancy services the VAT place of supply is where the recipient belongs.

Trading within the EU

If the place of supply is deemed to be in an EU country, then the  supply is liable to VAT in that country alone. 

So for example if you are supplying services to other business customers in the EU, the place of supply will generally be where your customer is located. 

Where the place of supply is deemed to be outside the UK and within the EU you need to consider the following:

  • Your supply may be deemed 'outside the scope' of UK VAT. If that's the case, the service supplied may not count towards the VAT registration threshold.
  • If you have a business or fixed establishment (see above) in that other EU country, you will have to register for VAT there if you exceed that country's turnover threshold
  • Where you do not have a business or fixed establishment in that EU country you need to determine if your supply is subject to the reverse charge. It may be necessary for your customer to be VAT registered in that EU country in order for you to reverse charge.

If your EU customer is not a business, the place of supply rules vary depending on the nature of your services. 

 The default position is the Place of Supply  is the UK, so you therefore charge UK VAT on your invoice at the correct rate for the service (e.g. standard, zero or exempt). This is exactly the same as if you were supplying the service to a non-business customer in the UK.

Trading outside of the EU

For sales made to business customers outside of the EU, which fall within the general B2B rule, no UK VAT is charged.  The supply of services is outside the scope of UK VAT, although there are some exceptions to this general rule.

For services made to a non-business customer (B2C) you should charge UK VAT unless your services are covered by an exception to the general rule (refer to place of supply above)

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at richard@tfaaccountants.co.uk.

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