When customers overseas must be charged VAT on supplies of services

Following the UK’s final departure from the EU, it is a good time to check that international VAT issues are being dealt with correctly by our clients. So, as an important question, when must a UK business still charge VAT on supplies of services to overseas customers?

EU and non-EU customers – no difference

One outcome of Brexit is that we no longer need to differentiate between EU and non-EU sales of services. The key phrase is now ‘outside UK’, but this was not always the case.

For example, accountancy or tax services provided to a business-to consumer (B2C) customer in the EU used to be subject to UK VAT, but not if they were provided to a non-EU customer. This was good news for a customer in, say, America, but not France. The goalposts have now moved – there is no UK VAT in either case.

Land supplies

A recent query I dealt with related to an architect who was designing an extension to a big house in the Lake District; it was a holiday home owned by someone resident in Saudi Arabia. The architect correctly charged 20% VAT, but then asked if this was correct because he was issuing the invoice to an address in Saudi Arabia.

The key point with land supplies is that the place of supply always depends on where the land or building is based. If the property had been in Ireland, the architect would not have charged UK VAT on his fee, but would have needed to register in Ireland and charge the owner Irish VAT. A zero-registration threshold applies to an overseas business making supplies in an EU country.

The land services rule applies to both professional services – architects, surveyors, estate agents, conveyancing work – as well as the services of builders, plumbers, electricians, bricklayers and so on. There can sometimes be a doubt about what is a land service, but a helpful reference is HMRC’s VAT Notice 741A, section 7.

Performance services (B2C)

Imagine that you act for a professional opera singer who is registered for VAT and lives in the UK. She has been asked to perform at the birthday party of a wealthy individual who lives in Germany. She will issue her invoice to the customer’s home address in Berlin. Will she charge VAT on her fee of £10,000?

The answer is that “it depends” on where the party takes place. The services of an entertainer are classed as a “performance service” for VAT purposes, along with those that relate to “cultural, artistic, sporting, scientific, educational, entertainment and similar activities” – see VAT Notice 741A, para 9.5. And the relevant issue here is that the place of supply for B2C performances services is the country where the performance takes place.

So, if the birthday party is to be held in the UK, your client will charge 20% VAT, which makes things very simple. But if it takes place in Germany, it falls within German VAT rules and will be subject to German VAT. This is not so easy! As mentioned above, an overseas supplier does not get the benefit of any local registration threshold in an EU country; a zero threshold applies.

Note – our opera singer would have two options if the party took place in Germany. She could either register for German VAT or, alternatively, register for the One Stop Shop (OSS) scheme, which would result in the submission of a single return to an EU country of her choice, accounting for all of the EU VAT she has charged to her customers. So, for example, if she did separate concerts in France, Germany and Hungary, the VAT collected in all three EU countries would be declared on the single OSS return in the relevant box for each member state.

Use and enjoyment rules

The use and enjoyment rules are intended to tax certain services where they are consumed. So, the general business-to-business (B2B) rule about the place of supply being where the customer is based is overruled, as is the general B2C rule that the key issue is where the supplier is based. It is all about where the service is enjoyed or used. However, the range of services to which these rules apply in UK VAT law are quite limited:

• the letting on hire of goods, including means of transport;
• electronically supplied services (B2B only);
• telecommunication services (B2B only);
• repairs to goods under an insurance claim (B2B only); and
• radio and television broadcasting services.

The two most important categories for advisers are probably the hiring of goods category, such as the hire of machinery, and also the B2B supply of electronic services. Further details can be found in VAT Notice 741A, section 13.

Example 1

ABC Ltd in the UK has sold web-hosting services to an American business relevant to the customer’s UK branch. This is classed as a B2B electronic service, so the use and enjoyment rules apply. The service is consumed in the UK, so UK VAT is charged, even though a sales invoice is being issued to a non-UK business customer.

Example 2

A Chinese tourist visiting the UK has hired a camera to take photos of the stately homes he will be visiting as part of his holiday. This supply relates to a hiring of goods, so the fact that he lives in China is irrelevant. The place of supply is the UK because he is using the hired camera in the UK. The camera shop will charge him 20% VAT.

B2C professional services

There is a comprehensive list of services in the legislation where no UK VAT is charged on B2C sales of services where the customer is resident outside the UK (see para 16, Sch 4A, Value Added Tax Act 1994 (VATA 1994)). The list includes most professional services (eg, services of consultants, engineers, accountants, lawyers and many more). VAT Notice 741A, section 12 contains a full list of qualifying services and analysis of each different service.

However, if a B2C service is provided by a UK business to an overseas customer that is not included in the list, a UK VAT charge will apply in most cases because the place of supply is where the supplier is based (ie, the general B2C rule for services will apply). This assumes that the service is not subject to the exceptions considered above where different rules are relevant.

Example 3

Maria is VAT registered in the UK and provides veterinary services. She has travelled to France to treat a sick pet owned by a private individual in Paris. This is a B2C service and veterinary services are not listed in para 16, Sch 4A, VATA 1994, so her service falls within the general B2C rule. The place of supply is the UK, so she must charge UK VAT.

Note – if Maria was treating a sick cow owned by a farmer, this would be a B2B service and not subject to UK VAT. This service falls within the general B2B rule – the place of supply is France. The farmer will deal with the VAT by doing the reverse charge on his French VAT return, based on the French rate of VAT. 

See VAT Notice 741A, 6.2 and 6.3.

Conclusion

It is important to get the full facts about a deal before advising clients on the VAT liability of their fees. A comment from a client along the lines of: “We are doing some work for a customer in Belgium, do we charge VAT?” is not good enough. Here are three final tips:

• It is important to be clear about the exact nature of the service being supplied to the customer.
• Be clear about the B2C or B2B status of the customer.
• It is sometimes relevant where the service is being carried out, such as in the example of the opera singer.
• The challenge is to never assume that an invoice to an overseas customer always escapes a VAT charge. It doesn’t!

Author bio

Neil Warren, CTA (Fellow), ATT, an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997