This article considers what has changed (and what hasn’t) for businesses trading in services with the EU, including situations where there are crucial exceptions to the general rules.
In many cases, the VAT on services is no different to pre-Brexit 2020. However, it is important that you do not accept VAT charges from an EU supplier. VAT on services from the EU does not apply on the basis that the UK is no longer part of the EU. Most supplies will continue to be non-VATable. Northern Ireland will follow UK VAT rules for services – it’s only for supplies involving goods that you need to differentiate between GB and NI.
If your business sells services to business customers outside the UK (B2B sale), then you will not have charged VAT on your fees in most cases since the rules changed in 2010. This is because the VAT charge depends on where your customer is based, rather than where you have your business, or where you carry out the work.
For example, a management consultant based in London might carry out work while on holiday in Spain, on behalf of a business customer based in France. The relevant country for VAT purposes (place of supply) is France, i.e. no UK VAT is charged on these fees.
The same rules still apply following Brexit – the place of supply is still France in the above example, i.e. no UK VAT is charged. The only difference is that you do not need to complete EC Sales List reports (ESL) in respect of your sales to VAT-registered customers in EU countries.
It is recommended that you still include your customer’s EU VAT number on your sales invoices – this is the best evidence of their business status. It is also helpful (but not compulsory) for you to continue to include a note on your invoices to EU customers, along the lines of: “No UK VAT charged – reverse charge on your VAT return.”
There is good news here: the status quo is maintained post-Brexit. Most of the services you buy from EU suppliers will not be subject to domestic VAT from their country. The pre-Brexit B2B principle remains the same. You should ensure that EU suppliers do not try to charge you VAT. This is because the UK is no longer a member of the EU. If you accept an incorrect VAT charge, there is no way that you can claim this back – it will be an extra cost to your business.
If you find that an EU supplier has charged you VAT, ask for a credit note to cancel the invoice and request a new corrected invoice. For many online services you need to enter your own VAT number in the account settings to trigger the correct VAT treatment. See the article on zoom for more information.
When you buy services from abroad, you must apply the reverse charge on your own VAT returns – this has always been the case, irrespective of whether your supplier is based in the EU or further afield.
Morven is a computer consultant in Linlithgow. She has used the services of two subcontractors, one based in America and the other in France, paying them £5,000 each.
Morven must apply the reverse charge on her next VAT return, accounting for output tax of £1,000 in each case (Box 1) and claiming the same amount as input tax (Box 4). The input tax claim is the same as her output tax payment because her business is not partly exempt, and she is using the services of the subcontractors for her business.
As this example shows, there is no difference in the VAT treatment if she uses an EU or non-EU supplier – that has always been the case.
The basic rule for selling services to non-business customers (B2C) has always been that VAT is charged based on where your business is based, i.e. the UK. So, for example, if Morven had done some consultancy work for a church in Ireland, she would have charged UK VAT until 31 December 2020. This assumes the church has no business income, i.e. the supply is classed as B2C rather than B2B.
There is a list of services in the legislation where no VAT is charged if the customer is based outside the EU. The good news is that the principle of “outside EU” changed to “outside UK” for these services from 1 January 2021.
So, what does this mean in practice? In short it means no UK VAT needs to be charged, which could mean savings for customers.
For the list of services where this rule applies, see Section 12 of VAT Notice 741A.
Angharad the accountant completes private UK tax returns for a person living in Spain (EU country) and another living in America (non-EU), charging a fee of £500 to each of them. Angharad has never charged VAT to the American customer because accountancy services are included in the list of services where no VAT is charged to non-EU customers.
She has always correctly charged £100 VAT on her invoices to the Spanish customer. From 1 January 2021, the fee will be not subject to UK VAT for the Spanish customer either.
Angharad might want to share the VAT savings with her Spanish customer, e.g. by agreeing a 10% increase in her fees. Both Angharad and the customer will be better off than pre-Brexit.
As an extra challenge, you need to consider if the VAT situation for services that you buy or sell might have changed because of “use and enjoyment” rules. These rules apply to some services, producing a different VAT outcome now that the UK is outside the EU.
For example, in the case of Angharad completing a tax return for her Spanish customer, the fee is subject to neither Spanish nor UK VAT since 1 January 2021. The fee would have been subject to Spanish VAT if Spanish tax law included a clause that accountancy and tax services were subject to a use and enjoyment clause, i.e. Spanish VAT would then be an issue because Angharad’s services are enjoyed/used by her customer in Spain.
In this case Spain does not apply such a clause for accountancy services. However, you will need to check the rules in any EU country you make sales to.
For the list of services subject to a use and enjoyment override in the UK, relevant if you are selling services, see Section 13 of VAT Notice 741A. The good news is that they are quite limited in scope, so will not affect most UK businesses. The same is true with tax law in EU countries, most services are not subject to a use and enjoyment clause.
The most important post-Brexit challenge is to consider the VAT position if you sell services to B2C customers in the EU. There could be considerable VAT savings here.
Remember, you don’t need to charge UK VAT on your B2C services, but you might need to register for VAT in the customer’s country and charge VAT there instead. As far as B2B services is concerned, the status quo is maintained, apart from the welcome time-saver that you no longer need to submit ESLs.
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