VAT rules are not static. On 1 July 2021, European Union (EU) VAT legislation is changing significantly as far as e-commerce is concerned. Further changes have already been adopted, taking effect in 2024, in relation to information to be provided by payment service providers, and in 2025 for SMEs. There are, in addition, a significant number of other VAT proposals being debated by the Member States (MS) that will affect UK businesses doing business with the EU, including:

• the VAT definitive regime;
• the VAT rates’ structure;
• the ‘status’ of the VAT committee;
• the application of VAT to financial services; and
• the VAT regime applicable to travel agents.

In most of the literature so far on the VAT consequences of the UK leaving the EU, the focus has been very much on the supply of goods and their movement between Great Britain (GB), Northern Ireland and the EU.

There are, however, important changes to the way in which the EU VAT system operates, as it applies to supplies of services that now (and in the near future) have effect, as far as UK businesses are concerned (including Northern Ireland).

This article will address:

• supplying services to non-business clients in the EU;
• EU VAT charged on services supplied to UK businesses and the potential for double taxation;
• the Tour Operators Margin Scheme (TOMS); and
• EU VAT and e-commerce changes from 1 July 2021.

Supplying services to non-business clients in the EU

The VAT Directive contains an optional provision by which the MS can effectively opt to modify the ‘normal’ ‘place of supply’ rules. This means that, for example, a supply that would otherwise be outside the scope of EU VAT is treated as being supplied within the EU, to the extent that the service supplied is effectively ‘used and enjoyed’ in the EU.

France is one MS that has adopted this provision. Any business established outside the EU that provides a service to a final consumer, which would fall under the general ‘place of supply’ rule (the service being deemed to be supplied where the supplier is established), may have to VAT register and account for French VAT if the service provided is effectively ‘used and enjoyed’ in France.

Italy, and around 15 other MS, have a similar provision, but it is generally more limited in scope. Interestingly, Singapore is proposing to introduce a comparable taxing mechanism from 1 January 2023 for non-digital services, subject to a relatively high de minimis threshold.

The ‘use and enjoyment’ provision referred to is not directly related to the requirement to account for VAT on telecommunications, broadcasting and electronic (TBE) services, where such services are supplied to a non-taxable person resident or established within the EU.

Since 1 January 2019, there is a de minimis registration threshold whereby EU established suppliers can supply up to €10,000 of TBE services in other MS without having to register (and charge VAT) in an MS other than their own. However, for non-EU established suppliers, this threshold does not apply. For UK businesses, this now means that VAT is due in the MS of the customer from the first Euro (or equivalent) of turnover!

EU VAT charged on services supplied to UK businesses and the potential for double taxation

The ‘place of supply’ of services rules for most services supplied by EU suppliers to UK businesses mean that the ‘place of supply’ of those services is the UK. This general rule is subject to exceptions, such as services related to real estate, entrance to exhibitions and so on. 

However, some MS, such as Spain, have adopted a ‘use and enjoyment’ test that is applied to business-to-business services, such that they will be subject to Spanish VAT if they are considered to be ‘used or exploited’ in Spain – for example, an advertising service supplied by a Spanish advertiser to a UK company for the latter to advertise and promote sales of goods on the Spanish market.

The Spanish VAT charged will normally be recoverable by the UK company under the 13th VAT Directive procedure, which in most EU MS is still very much paper-based.

This particular refund mechanism does have its own rules in terms of time limits and minimum amounts to be claimed. There is information, by country, of the process applicable, on the EU Commission’s website.

When they are ‘received’ in the UK by a UK business, these services supplied from Spain may be subject to a reverse charge in the UK, leading to potential double taxation. This is because, under the 13th Directive refund mechanism, the EU VAT charged will, in principle, only be recoverable by the UK business if such VAT would have been recoverable in the EU MS where incurred.

The Tour Operators Margin Scheme

A further aspect of the EU VAT legislation, which has potentially changed for UK businesses since 1 January, is the famous (or perhaps infamous) Tour Operators Margin Scheme (TOMS).

There has been considerable debate over at least the past 20 years as to the extent to which the TOMS applies to businesses established outside of the EU, or whether, by default, the ‘normal’ place of supply rules for services supplied by such non-EU established travel agents should apply.

Germany has decided that the TOMS will not apply to non-EU established businesses (including the UK) from 1 January 2022. As such, UK businesses will have to consider from next year in which ‘capacity’ they are acting when supplying travel services, where the destination country is Germany.

France, on the other hand, appears to accept that the special margin scheme does apply to non-EU established businesses, acting in their own name vis-à-vis their customers, to support the refusal to refund French VAT on costs incurred there by the non-EU established travel agent.

UK-established businesses that are supplying travel services to an EU destination must, therefore, consider not only their contractual relationships with suppliers and customers but also, in addition, the VAT regime applicable in the country of destination. A review of the potential VAT registration and filing obligations that may arise is recommended.

The EU Commission is currently examining the operation of the TOMS and is expected to come forward with proposals for a reform of the special margin scheme next year.

EU VAT and e-commerce changes from 1 July 2021

Any business that is supplying goods from outside of the EU (for example, from the UK – excluding Northern Ireland) into the EU to non-taxable persons should be aware that the EU VAT rules will change significantly from 1 July 2021.

The major changes include the following points:

1. The removal of the VAT exemption at importation, applicable to small consignments of a value up to €22.

2. The creation of a new special scheme, referred to as the Import One Stop Shop (IOSS), for distance sales of goods imported from third territories or third countries (which include GB, but not Northern Ireland) of an intrinsic value not exceeding €150.

3. A special scheme for importations of goods of an intrinsic value not exceeding €150 by postal services and express carriers.

4. Obligations to account for VAT imposed on electronic interfaces (platforms), wherever they are established, ‘facilitating’ supplies of goods. The platforms will become, in two situations, the person liable to account for VAT on the supply of the goods to the consumer, as follows:

a) Importations into the EU of goods from third countries or third territories (including GB) where the goods have an intrinsic value not exceeding €150.

b) Distance sales of goods within the EU where the underlying supplier (being the business that is making, contractually, the supply to the consumer) is established outside of the EU.

5. Enhanced and extended simplified payment and reporting facilities through two new schemes – the Union One Stop Shop (OSS) and the non-Union OSS, allowing businesses to account for the VAT due on all business-to-consumer services (and for intra-EU distance sales of goods) through one single place of registration.

6. Reinforced information and reporting obligations. From 1 July 2021, businesses, wherever established, will be required to retain, for 10 years, details of transactions that they have ‘facilitated’, whether for a supply of goods or for services, where the place of the underlying supply is within the EU. These record-keeping obligations are applied in addition to any EU MS’s own reporting obligations.

7. Fiscal representatives and intermediaries:

a) The VAT Directive provides that the MS can require non-EU established companies to appoint a VAT representative to account for the VAT due in that MS. The EU Commission has been contacted to determine whether, under the VAT Protocol in the Trade and Cooperation Agreement, signed between the EU and the UK last year, this Protocol would ensure that no VAT representatives are required in the EU. Several MS, but certainly not all, have already announced that they will not require UK businesses to appoint VAT representatives (for example, France, Italy and Poland).

b) The VAT Directive also provides that, from 1 July, non-EU established businesses must appoint an ‘intermediary’ established within the EU if these non-EU businesses wish to apply the IOSS. The EU Commission has also been requested to confirm that the UK will fall under the exception in the Directive not requiring the appointment of an intermediary when using the IOSS if there exist mutual assistance arrangements in place for the recovery of VAT. At present, only Norway meets these conditions.

Summary

As can be seen from the above limited examples, UK businesses doing business with and within the EU need to keep fully up to date with the rapidly moving EU VAT legislation and also the case law of the European Union Court of Justice.

The VAT and Duties Committee of the Tax Faculty will provide regular updates on these important issues for the benefit of all faculty members, with a webinar on 9 June 2021 focused specifically on the 1 July e-commerce changes. Watch the recording of this webinar.

About the author

Stephen Dale FCA, indirect tax expert and member of the Tax Faculty’s VAT and Duties Committee