HM Revenue and Customs (“HMRC”) have issued guidance <click here> detailing how some aspects of the VAT treatment of services supplied between the UK and EU Member States will change from 1 January 2021.
Generally, the rules will not change too much. A business supplying services with an international dimension will still need to determine the ‘Place of Supply’ using the existing rules to determine the country in which VAT is due. These rules can be complex and are not explained in HMRC’s Brexit guidance (though there are links to the existing guidance – primarily Notice 741a <click here>).
A brief summary is that there are different rules if the services supplied fall under the ‘Basic Rule’ or are determined to be ‘Intellectual Services’, ‘Services supplied where performed’ or ‘Land Related’ services.
If a business is unsure of the ‘Place of Supply’ of its services, then it should seek further advice.
The new guidance provided clarifies some areas of VAT where the existing rules were unclear, because they drew a distinction between the treatment of supplies to EU Member States and those to countries outside the EU.
1. ‘Use and Enjoyment’ rules
Some services such as electronic services to businesses or hire of goods have specific ‘Place of Supply’ rules.
However, from 1 January 2021 where the services can be said to be either used or enjoyed outside the UK then HMRC have clarified that the supply would be ‘Outside the Scope of UK VAT’.
Previously, these ‘Use and Enjoyment’ rules only kicked in if the use or enjoyment happened outside the EU.
2. Business to consumer supplies of a professional, technical and intangible nature
HMRC have confirmed that when ‘Intellectual Services’ are supplied to consumers outside the UK then these will be ‘Outside the Scope of UK VAT’.
Previously such supplies were only ‘Outside the Scope’ if they were supplied to consumers living outside the EU.
3. European Community Sales List (“ESCL”)
UK businesses are no longer required to complete ESCL Lists when supplying services to businesses located in the EU.
4. Tour Operators Margin Scheme (“TOMS”)
At present when ‘Designated Travel Services’ (usually a package of accommodation and travel services) are supplied by UK businesses, then UK VAT is due on the margin between the selling and purchase price of the elements of the package where the services take place in the UK or EU.
‘Designated Travel Services’ supplied outside the EU are ‘Zero Rated’.
From 1 January 2021 supplies of designated travel services outside the UK will also be ‘Zero Rated’.
This is the UK position and businesses should clearly apply this treatment. However, Tour Operators should watch for developments. At present TOMs is a scheme to stop businesses in one EU Member State having to register for VAT in other EU Member States. It may be that the EU seeks to amend its rules and policies so that UK businesses become required to register for VAT in the EU from a future date.
5. Selling digital services to and from the EU
UK businesses selling digital services to consumers in the EU will no longer be able to use the VAT Moss System <click here>.
This means that EU VAT will be due on all supplies of digital services to EU consumers, regardless of the value of the sales.
HMRC have produced some guidance in respect of when VAT is due on the sale of digital services to the EU <click here>.
If a business is selling digital services from the EU to the UK, they will need to register and account for UK VAT.
6. Finance and insurance services supplied to persons outside the UK
If a business makes ‘specified supplies’ of financial or insurances services these are ‘VAT Exempt’. The ‘VAT Exempt’ status of the income means that these businesses cannot recover VAT incurred on costs. Currently, rules state that where the services are supplied to persons outside the EU then they can be treated as ‘Outside the Scope with recovery’ (a treatment similar to a supply being ‘Zero Rated’). This status allows the recovery of VAT incurred on expenditure relating to these supplies (or the part-recovery where the cost is an overhead cost).
HMRC’s new policy is that where the supply of these services is supplied to persons outside the UK then VAT incurred on expenditure can be recovered (as set out above).
Businesses that import and/or export should act now to ensure they are prepared for the changes coming on 1 January 2021.
Those with particularly complex supply chains seeking advice can contact Julian Borley, Director of VAT on email@example.com