Julie Park

We are a Spanish company and have won a contract to build a waste disposal plant in the UK. UK and overseas subcontractors will supply us with components for the plant, which will be constructed outside the UK and then shipped here. Engineers on site will provide advisory services in relation to the contract. Will we be required to UK VAT register or is there a simplification we can use? If there is a simplification, does this also apply to the subcontractors?

The starting point has to be to map out the various transactions and identify where any VAT is due in relation to each, and then crucially who is liable to account for it. Although complex, a cross-border contract of this nature should ultimately be VAT neutral for the parties involved. However, neutrality is only achieved if all parties are VAT compliant where they need to be and if the VAT blueprint is properly embedded into processes put in place for invoicing, taking stage payments, etc. throughout the life of the contract.

Let’s focus first on the customer facing contract. Technically, if a business has a contract to supply installed goods to a customer – the key point here being that title passes in the goods in such situations after they have been installed – the place of supply for VAT purposes will be where the goods have been installed, in this case in the UK (VATA 1994 s 7(3)(a) refers).

The question then arises as to who is liable to account for the VAT: the UK established customer, or the Spanish established main contractor? A number of EU member states, including the UK, operate the simplification mechanism, which allows the established customer to account for the VAT. The UK has always made wide use of reverse charge type mechanisms where possible, recognising that it is preferable from a risk perspective to have an established entity bearing the VAT liability in the event HMRC needs access to assets in the case of a default. However, looking at the customer facing transaction in isolation to determine the answer to the question ultimately gives you the wrong outcome. This is because the transactions between the subcontractors and the main contractor hold the key in practice.

Where an overseas subcontractor will be shipping goods to the UK, someone needs to acquire or import them. From a legal and commercial perspective, the UK customer will not take on this liability as they are contracted to purchase installed goods. In the absence of a GB VAT registration number, overseas EU subcontractors cannot ship to the UK without local VAT which will form a cost for Spanish Co.

If, for example, the subcontractor in France needs to ship the components to Belgium for processing, before onward shipping to the UK, care is needed to ensure that a hidden VAT cost does not emerge. The question for the French subcontractor is how he gets the goods to Belgium without a French VAT charge, due to the requirement to either:

• have a BE VAT registration number to allow the zero rated despatch; or
• make use of the temporary movement easements allowing the movement to be ignored (SI 1992/3111 art 4(e)–(h) and SI 1995/2518 reg 42 provide the UK vires for this).

The temporary movement easement appears to provide a useful work around, but this is often unusable as commercial practice frequently results in the goods being sent to the final destination, rather than returned to the initial dispatch country. Unless the French subcontractor VAT registers in Belgium, it is likely that an embedded French VAT cost will arise.

Therefore, whilst the overarching simplification could technically be used by the main contractor when looking at the customer facing contract in isolation, the wider supply chain analysis provides a different outcome, making it clear that the simplification is ultimately of little use for all but the simplest of supply and installation contracts.

With regard to services, a further complication arises where the services are land related; for example, a Polish company providing specialist surveying services in relation to the installation. They too must ask the question of whether they are required to UK VAT register as their services relate to UK land/ immovable property. Their customer, Spanish Co, is not UK established, although it is UK VAT registered. It therefore has a mechanism to account for the VAT. UK guidance makes it clear that the extension to the reverse charge applies to land related services. Notice 741a (para 18.11.1) states ‘the extension to the reverse charge applies if you are UK VAT registered and receive B2B supplies of the services listed in para 18.11 which are supplied in the UK where your supplier belongs outside the UK’.

The position is confusing, as the UK and EU VAT legislation talk about the UK customer needing to ‘belong’  in the UK. VATA 1994 s 8(2)(a) states: ‘sub-s 1 above applies if the recipient is a relevant business person who belongs in the UK’. It is sufficient for Spanish Co to just be VAT registered in the UK, according to the guidance; whereas EU and UK VAT legislation suggest they need to have a fixed establishment in the UK. It is possible a fixed establishment could exist in the construction industry, e.g. a site office with staff and key decision making taking place. For the Polish subcontractor, however, the lack of clarity presents a risk.

The above illustrates how the numerous simplifications for intra-EU transactions cannot always be relied upon, as the conditions attached rarely match commercial flows. Where they cannot be used there are two outcomes: either an increased VAT compliance burden for businesses trading within a supposed single market; or a trapped VAT cost, impacting profitability.

For further information, please contact Julie Park on 0208 941 9200 or julie.park@thevatconsultancy.com

Background

In the context of international trade, a “fixed establishment” is a place (other than the main head office of a business) that has the “human and technical resources” to make or receive supplies.  This is relevant when looking at cross border services to determine where the supply is made from, where it is received and, therefore, where it should be taxed.

The Welmory case

In certain circumstances, it is possible for a fixed establishment to be created through a business’ relationship with a third party (e.g. if a business operates in a particular territory through a dependent agent). The CJEU was asked to consider whether a supplier had created a fixed establishment for its customer.

Welmory  Limited (based in Cyprus) provided an auction website for customers to use to buy goods in Poland.  The website was managed by Welmory Sp z.o.o (based in Poland).  When Welmory Poland invoiced Welmory Cyprus for its website management services, it believed the services were received in Cyprus and, as a cross border supply, did not charge Polish VAT.

The Polish tax authorities disagreed, and argued that the supply should be liable to Polish VAT, because Welmory Poland acted as the “human and technical resources” of Welmory Cyprus, creating a fixed establishment for Welmory Cyprus in Poland.  As a domestic supply, this would be liable to Polish VAT.

The CJEU confirmed the factors that are relevant when considering whether a third party can create a fixed establishment for another business.  In particular, it noted that whilst Welmory Poland did indeed provide some business infrastructure for Welmory Cyprus, it did not do so in the context of enabling Welmory Cyprus to receive its own website management services.

It is for the Polish Courts to apply the CJEU decision to the facts of the case.  However, it was noted that the webservers, software, key decision makers and the people able to conclude contracts were not based in Poland.  If these facts are confirmed by the Polish court, then we would expect it to conclude that Welmory Cyprus does not have a fixed establishment in Poland and the supplies properly take place cross border.

What does this mean for other taxpayers?

The prospect of suppliers routinely creating fixed establishments for their business customers would be worrying for many international businesses, in terms of the level of complexity it would create.  However, this CJEU case doesn’t really tell us anything new – there are circumstances in which the relationship between a business and a third party can create a fixed establishment but the nature of the infrastructure being provided (and in relation to which supplies) needs to be considered on a case by case basis.

If you would like to discuss the impact of this case on your business in further detail, please contact Julie Park on 0208 941 9200 or Julie.Park@thevatconsultancy.com.