Selling services cross-border brings with it a number of complex VAT considerations for a business. Understanding these complexities is critical as this enables you to ensure the business is paying the correct VAT in the correct location. This means the business is compliant and reduces the risk of errors and penalties from the tax authorities as well as reducing the number of queries from B2B or B2C customers about the amount or type of VAT charged. Being compliant is critical when due diligence is being carried out in the event of the business looking to sell or to seek additional funding – depending on the circumstances, an unidentified under-declaration of VAT overseas can derail this process.
Being VAT registered in the right place is important to the bottom line as it means the business is able to recover the VAT credits it is entitled to and so that it is able to declare VAT on sales where appropriate, regardless of whether the customers are businesses, not for profit organisations or consumers.
The VAT rules for sales to businesses and consumers differ and these are set out below. The VAT rules in this article are based on UK and EU principles but are broadly relevant and give an overview of key risk areas further afield although local rules should be checked.
VAT Rules for Services – an Overview
The complexity with VAT and services in the first instance lies in two areas and these differ from the VAT rules for goods.
Place of Establishment
Whereas the VAT rules for sales of goods are based on the physical location of the goods when sold, the rules for services are essentially based on the location of the business when providing the services in question. This may or may not be clear. Where the business only has offices, staff, technology/equipment and management in a single country, the position is clear. Where this level of resource is present in a number of countries, it is necessary to look to the establishment that is ‘most closely connected’ to the services being provided. In the first instance this basically means determining where the staff and technology etc is located that enables the businesses to provide the services in question. Establishments could be permanent or fixed establishments and for VAT purposes, either is capable of being an establishment for VAT purposes meaning the business effectively has a ‘footprint’ in a particular country, creating a potential need to VAT register. Hiring staff from an agency or having staff working virtually from home in a particular country can also constitute an establishment for VAT purposes. Post Covid in some industries it is less common for staff to be working permanently from a fixed office space and therefore this area has become more complex.
Type of Service
The UK and EU VAT rules distinguish between different types of service, with different VAT rules applying to each category. There is a ‘general VAT rule’ applying to the majority of services but a number of important exceptions to these rules that can change the location in which the VAT is due.
B2B or B2C Customer? the VAT rules for services also differ depending on whether the customer is B2B or B2C. For VAT and services, the test as to whether a customer is acting in a B2B or B2C basis is based on whether they are receiving the services ‘for business purposes’. This will normally be clear and the best evidence of business status is to seek the VAT registration number. If the organisation does not have a VAT registration number, alternative evidence of this status can be accepted. Businesses should put a process in place when onboarding new customers to ensure they capture relevant information or evidence to support the VAT status. This is particularly important when operating in an area where not for profit organisations are customers. Where the customer is a not for profit organisation that might have a mix of business and non business (eg charitable) income, they can be treated as a business. Using services for private purposes also counts as ‘non business’.
VAT General Rule
If a service does not fit into one of the exception categories below, it will be subject to VAT under the ‘general VAT rules’. These state the following:
- Where the customer is B2B based on the B2B VAT rules set out above, local VAT would be charged to business customers established in the same country. Where the business customer is overseas, no VAT would be charged, and instead it is likely the business customer would be required to self assess local VAT under the reverse charge (see below). This would apply in the EU and UK and in the majority of other countries worldwide that have VAT/GST type systems although local rules should be checked. The logic behind this VAT rules which was introduced in 2010 in the EU/UK, is that is means local VAT is not charged to a business overseas that would otherwise be able to obtain a refund of such VAT through the overseas refund mechanisms. Generally speaking VAT should not form a cost on a B2B level so having the customer self assess VAT removes the need for overseas refund claims to be filed on this type of service;
- Where the customer is B2C, the supplier of the services should charge local VAT regardless of the location of the customer. This VAT will form a cost as B2C customers cannot reclaim VAT.
Exceptions to the General VAT Rule
If the business is providing services that fit into one of the categories set out below, they are subject to these rules rather than the general VAT rules set out above:
Land Related Services
Rather than accounting for VAT based on where the business is established, if the services fall into the ‘land related’ category, they will be subject to VAT where the land in question is located. This means the business is likely to have to VAT register in this location so that local VAT can be charged and accounted for. Generally speaking, if the customers is a business customer, they may be required to self assess the VAT under the reverse charge mechanism rather than the overseas supplier VAT registering. For B2C customers who cannot self assess local VAT, the overseas business would need to VAT register and charge local VAT.
The complexity in this area lies in defining what are land related services (this can differ slightly from country to country) and in determining the VAT rate applicable as there are exemptions and reduced rate VAT reliefs that might apply to land related services. In broad terms, land related services are those which relate directly to a specific piece of land, property or installed equipment as opposed to generally relating to land. Land related services include the following:
- Surveying, valuing or assessing property (onsite or remotely)
- Construction (or demolition), repair, agricultural services
- Providing accommodation (hotels, campsites, apartments etc)
- Property management
- Estate agency services (including land)
- Drafting plans for a building, obtaining planning permission
- On site security
- Installation of equipment/machinery that becomes permanently fixed to the building
- Granting the right to use a specific area of land
Once the services do not relate to a specific piece of land/property, and instead are more general (eg general lease related contractual advice, design work for multiple locations), they are not land related and will either be subject to the general VAT rule or one of the other exceptions below.
Services Subject to VAT where Performed
For B2B customers, the services falling into this exception are limited to charges for admission/entrance to an event including services ancillary to this. This includes seminars, workshops, trade shows, sporting events and ancillary services would include eg charges for the use of cloakroom facilities. It does not include agency arrangements for such events.
For B2C sales, more services are included, namely those falling within the area of cultural, artistic, sporting and entertainment services. This includes entertainers performing at events, tours, entrance fees for sporting competitions. It also includes repair /valuation work on goods
Restaurant services fall under this rule for B2B and B2C customers.
Hire of Means of Transport
The first step here is to be sure whether what is being hired out is a means of transport. However for the purposes of simplicity here we will assume cars, yachts, bikes, aircraft, and lorries.
The next step is to work out the duration of the hiring agreement – for VAT this is carved up into short or long term. For most modes of transport short term means 30 days or less, with long term being more than 30 days. For vessels, this rule changes and short term means 90 days or less.
The rule for B2B and B2C is the same where the hire is short term – it is subject to VAT where the transport is located when it is handed over to the customer.
For long term hire for B2B customers, the services are subject to VAT under the general VAT rule above ie where the customer is established, regardless of where the vehicle is provided to the customer. However this rule is subject to the ‘use and enjoyment rule’ below.
Passenger and Freight Transport
Passenger transport is defined as services where the customer is transported from A to B in a mode of transport ie they are not required to drive themselves. Similarly freight transport is defined as services where goods/packages/mail is transported from A to B in a mode of transport ie the customer is not required to drive the vehicle themselves in order to transport the goods. If they are, this would be the hire of a means of transport rather than passenger/freight transport – see above.
For B2B sales, these are subject to VAT under the general VAT rule above. However from a UK perspective, UK VAT would not apply if the services are used outside the UK (overseas VAT would likely apply instead so a VAT registration may be needed in the overseas location).
For B2C sales, VAT is due where the transport takes place in accordance with the distance travelled if cross border. Overseas VAT registration liabilities may therefore arise.
Zero and reduced VAT rates apply to passenger and freight transport in many countries so advice should be taken to ensure the correct rate is applied.
Professional/Technical/Financial and Intellectual Services
These services include consultancy, accountancy, software, financial services and advice, legal services when provided to B2C customers (B2B sales of such services are subject to the general VAT rule). From a UK perspective, sales to UK B2C customers would be subject to UK VAT whilst those to overseas customers would not be subject to UK VAT (such sales to EU customers would be subject to EU VAT under the OSS mechanism). For EU established businesses supplying these services, such sales to EU customers would be subject to the rate of VAT applying in the EU supplier location, whilst sales to non EU customers would not be subject to VAT.
This category includes disclosed agents /brokers ie businesses bringing together someone selling services or goods and a customer. The agent’s revenue stream is typically a commission or fee for arranging the underlying sale (and is often but not always based on a % of the value of this sale). B2B sales are subject to the general VAT rule set out above whilst B2C intermediary services are subject to VAT where the underlying sale being arranged takes place. For example if a fee is charged to a B2C consumer for arranging an overseas hotel in the EU, the fee would be subject to overseas VAT.
These services include the following:
- images or text eg photos, screensavers, e-books and other digitised documents, for example, PDF files
- music, films and games downloads
- online magazines
- website supply or web hosting services
- distance maintenance of programmes and equipment
- supplies of software and software updates
- advertising space on a website
For B2B sales the services are subject to the general VAT rule set out above but subject to the use and enjoyment rule set out below. For B2C sales, from a UK supplier perspective they are subject to UK VAT if supplied to a UK customer and are VAT free otherwise but EU VAT would be due on such sales to EU customers at the rate in the customer country under the non Union OSS scheme For EU suppliers of electronic services, EU VAT is due on sales to EU customers at the rate applying in the customer’s country, and no VAT is due on sales to non EU customers.
Use and Enjoyment VAT Rule
This is a rule that applies to certain services and scenarios and overrides the VAT treatment set out above. The purpose of this rule is to ensure the services are subject to VAT where they are actually used/consumed ie where the services are enjoyed. From a UK VAT perspective, the location test is UK versus non UK use, whereas for EU based suppliers, the test is EU versus non EU use. This can create overseas VAT registration obligations for a supplier. The services subject to this rule in the UK are as follows:
- Hire of means of transport
- Hire of goods
- Telecoms Services (B2B only)
- Electronic Services (B2B only)
- Radio and Broadcast TV Services
- Repairs to goods under insurance claim (B2B only)
Within the EU the use and enjoyment rule is in some countries applied to a broader range of services eg marketing, so local rules should be checked.
The reverse charge is a system whereby the B2B customer is responsible for self assessing local VAT when they purchase services from overseas. This applies to most services unless they are exempt or zero rated when purchased from a domestic supplier or unless they are already taxed by the supplier on the basis they fall into one of the exceptions above (eg land related). NB it is possible that a double taxation scenario could arise if a country taxes a services under the use and enjoyment rules and a reverse charge is also due in the customer country on a different basis. This arose historically in Spain where marketing services are taxed under the use and enjoyment rule but were also subject to the reverse charge in the UK under the basic reverse charge rule applying to marketing services. The customer is liable to self assess the VAT and can recover this VAT on the same VAT return following the normal VAT rules for deducting VAT on costs – ie if they are ‘fully taxable’ and can recover VAT on business costs in full, they can recover the reverse charge VAT. For businesses that are partly exempt, they will only recover the relevant proportion of the reverse charge VAT.
It is important to note that reverse charge VAT can also be due on intercompany charges cross border. If a business has a branch structure rather than subsidiaries overseas, complexity arises in terms of when/how the reverse charge is due so specialist VAT advice should be taken in this case. This is particularly important for partly exempt businesses as the reverse charge VAT forms a cost and is therefore presents a high VAT risk if overlooked.
Specialist VAT Advice
This article demonstrates the broad range of VAT rules applying to sales of services cross border and it is important that businesses are able to apply these accurately to ensure their VAT position is accurate and optimised.
The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces. We provide global VAT and customs duty advice and VAT compliance services. To discuss how we can help contact us today.