News
June 2009
VAT Update
Big changes to VAT place of supply rules – are you ready for 1 January 2010?
Many practitioners are aware that important changes are in the pipeline with effect from 1 January 2010 in relation to services provided to or received from overseas customers. But are you aware of what these changes actually mean? To quote from the title of the Cilla Black song……what’s it all about, Alfie?
Much will be written about the changes over the coming months – but to give you an early feel for the key issues, I am going to give a practical example of a business arrangement that will be different on 1 January 2010 compared to 31 December 2009.
New general rule for B2B supplies
The main principle of the 1 January changes is that in the case of B2B (business to business) supplies, the default position for the place of supply will change from the location of the supplier to the location of the customer. The position is unchanged for B2C (business to customer) supplies i.e. the location of the supplier remains the default position.
The default position only applies when the service in question is not included within the various lists of services where the place of supply is based on the location of the customer (known as ‘Schedule 5’ services and mainly relevant to professional services); the place where the service is being performed (think of a UK opera singer performing in Italy, her place of supply is Italy); or the location of land (the place of supply for a UK based architect advising on an Irish property is Ireland).
Example of new rules
Jones Clothes Shops Ltd has 20 clothes shops in the UK. An associated company called Jones Clothes Shops France Ltd has 5 shops in Paris. The UK company charges £50,000 per quarter to the French company for head office support costs i.e. management services.
Up to 31 December 2009
Under current B2B rules, the UK company will add VAT at 15% to the charge and declare output tax on its VAT return in the normal way. This is because ‘management services’ are not included within the various services I considered in the previous section, so the place of supply is the UK based on the default position. The French company than has scope to reclaim this VAT from HMRC by making an 8th Directive claim (a system of reclaiming VAT paid on expenses incurred in other EU countries).
From 1 January 2010
The position changes dramatically with effect from 1 January 2010. From that date, the default position for ‘management services’ (B2B supplies) will be the location of the customer, so the place of supply is now France. This means the £50,000 quarterly charge will no longer add UK VAT – and the onus is on the French customer to account for the VAT on his own return using the reverse charge system. This means he will account for output tax in Box 1 (£50,000 x standard rate of VAT in France) and claim input tax in Box 4 (assuming the expense is not related to exempt supplies).
Note – the good news for Jones Clothes Shops Ltd is that they can still reclaim input tax on their related costs even though they are not charging VAT to their French customer.
Another example
The supply of management services is one situation where the VAT rules will change next year – but there are many more. For example, a veterinary surgeon who treats animals owned by say a farmer in France will currently charge UK VAT on his services. But not from next January – the farmer is a business person in France (B2B rather than B2C) so he will account for output tax through the reverse charge system, irrespective of whether the animal is treated in France or the UK.
Our UK vet will therefore not charge VAT to the farmer – but he will if he also treats the pet dog of the farmer’s daughter as a separate service (B2C supplies).
How are changes taking place?
The legislation to accommodate the place of supply changes I considered above is being amended by the introduction of a new section 7A and Schedule 4A to the VAT Act 1994.
What are the implications of the changes?
- The aim of the changes is to simplify procedures so that more B2B transactions are dealt with by the reverse charge situation I explained above
- It is important that you recognise the impact of the changes so that you can consider the effect on your clients who provide services to overseas customers
- Don’t forget that these rules work both ways, so the outcome should be that your clients will pay less VAT to overseas suppliers, avoiding the complications of the related administrative issues
- The new rules introduce a requirement for all businesses that make B2B supplies to EU businesses covered by the reverse charge to submit an EC Sales List. This is a new return that can be submitted in paper or electronic format
Conclusion
1 January 2010 may seem a long way off – but it is good practice to ensure your clients who are involved with supplying or receiving overseas services are ready for the challenges ahead. There will be many press articles and HMRC announcements over the coming months, so hopefully my early feature will encourage an awareness about the radical changes to the rules.
