Q: We provide e-learning via a website to private individual customers worldwide. We have an office in New York and use the services of a UK associate company to set up new customer accounts, offer customer support and carry out marketing activity. They raise a monthly invoice to us for this. All our key decision makers and IT capability (including content development) are in the US. Our accountants believe we are liable to pay VAT on our revenues from EU customers and also that the UK company should charge us VAT. Is this correct?
A: Dealing firstly with the customer facing revenues, VAT is due. There is a mechanism for non EU companies selling such services to account for VAT – the Mini One Stop Shop (MOSS) scheme. This effectively means that you pay the VAT due in each EU country (typically determined by your customer’s country of residence) at the relevant rate.
However, from the background provided there is a wider consideration which creates UK VAT risk in the form of the UK associate company (UK Co) and this is linked to the answer to your second question about the charge for the support services.
Section 7A VAT 1994 states that the place of supply of B2B services is the country where the recipient (in this case US Co) belongs, unless they fall under any of the exceptions, eg land related services, passenger transport, admission to events. The exceptions are not relevant here.
To determine whether UK Co should charge VAT to US Co, we need to establish where US Co “belongs” – also referred to as where it is ‘’established’’ in the European law (Article 44 EU VAT Directive 2006/112). As you only have one office which is in the US, then as a matter of fact your “permanent establishment” is in the US, and as a starting point this would be your location for receiving the services (Article 20, EU Regulations 282/2011, HMRC guidance in public notice 741A paragraphs 3.3 and 5.2).
However, there is an additional question which must be answered which is whether the business has another establishment (referred to as a “fixed establishment” ) with the human and technical resources to receive and consume the services being provided. If the answer is yes, the services are taxed where this alternative establishment is located (Article 21, EU Regulations 282/2011).
For example, if US Co had a branch office in the UK with staff and infrastructure, meaning it could receive and use the services being provided by UK Co, this would likely be viewed by HMRC as being the establishment receiving the services – the monthly charge from UK Co would be subject to UK VAT.
You are probably thinking, “why is this relevant as we don’t have a UK branch?” which leads to a point that most businesses are unaware of, and something that HMRC are other tax authorities are increasingly focusing on.
HMRC’s guidance (notice 741A paragraph 3.4.1) states that a business can have a fixed establishment if:
“an overseas business contracts with UK customers to provide services. It has no human or technical resources in the UK and therefore sets up a UK subsidiary to act in its name to provide those services. The overseas business has a fixed establishment in the UK created by the agency of the subsidiary.”
Whilst the above example talks about connected parties both HMRC and other tax authorities (for example the Polish tax authority in the ECJ case Welmory) have argued that, as the business has UK customers and the UK supplier and overseas business provide the services together, either through an outsourcing agreement or a co-operation agreement, the sub-contractor services are consumed by the customer (US Co) in the UK by virtue of the sub-contractor’s establishment in the UK. The argument they use is that it would be “irrational” to say that the services are supplied where received in these cases (and not subject to UK VAT).
Clearly this can make it very difficult for a business to determine whether not charging VAT to an overseas customer is “irrational” and therefore should be subject to VAT. The case of Welmory in 2014 provides some assistance in this respect by stating the fundamental principles are:
- to “avoid having to undertake complex investigations in order to determine the point of reference (place of supply)”;
- whether the recipient has the human and technical resources capable of receiving the services being performed; and
- that the end supply being made by the recipient (US Co ) is to be considered separately from the supply from the subcontractor to it (UK Co’s supply to US Co).
In your case, following this rationale, as all of the business’s key decision makers and IT infrastructure are in the US, following the tests above, it seems clear that US Co is making its supplies to customers from the US, not from the UK in the form of the UK Co, and therefore US Co should account for VAT on EU revenues through MOSS. There would be no longer an advantage to them arguing that UK Co is the fixed establishment for the B2C revenues.
The knock on effect is that the charge from UK Co to US Co for support services is received in the US , and it would be “irrational” to conclude otherwise. Unfortunately, we are aware that HMRC continue to challenge this interpretation so it is recommended that you document the reason for UK Co not charging VAT , should HMRC query it – this may protect against any potential penalties in the future. It is hoped HMRC/other tax authorities and the EU provide clarity on this issue following Welmory.
Originally published in Tax Journal -Ask an Expert on 8 May 2015