The UK-EU trade agreement was silent on the VAT position of services, as expected. That said, there are now certain considerations service providers need to be mindful of when trading with the EU.
HM Revenue & Customs (HMRC) has updated many Public Notices, in most cases to replace “outside of the EU” with “outside of the UK” where this changes the VAT treatment or VAT recoverability on costs. Otherwise, limited guidance has been issued to clarify more complex areas in respect of the provision of services following the end of the transition period.
Where is VAT due to be paid?
The place of supply rules, determining where a supply of services is taxed for VAT purposes, have not changed in terms of the principles. However, certain changes have become necessary when considering whether or not to charge VAT to EU customers.
For B2B supplies of services, the place of supply is still, for most services, where the business customer is established.
When trading with the EU on this basis there is perhaps less emphasis now on including customer VAT numbers on sales invoices. The obligation to submit EC Services Lists as an additional compliance item has also been removed.
There remain significant exceptions to this rule, including supplies that are either of, or directly relate to land. These will continue to be taxed where the land is located and therefore UK businesses supplying these services in the EU need to continue to consider whether they are required to register in each EU member where they supply such services. Other exceptions to the general rule for B2B services include the supply of admission to an event and restaurant and catering services.
Supplies of professional and other intangible services
When UK businesses are supplying “’intangible services’, there is no longer the need to distinguish between whether the customer is a business or a private individual/non-business organisation when deciding whether UK VAT applies. The only consideration is whether the customer belongs in the UK, or has an establishment in the UK that is the establishment most closely connected with receiving the supply. Supplies of intangible services to private individuals resident in the EU are, from 1 January 2021, not subject to UK VAT. It should be noted that this does not apply to electronically supplied services.
HMRC defines intangible services as being:
- Transfers and assignments of copyright, patents, licences, trademarks and similar rights
- Acceptance of any obligation to refrain from pursuing or exercising a business activity
- Advertising services
- Services of consultants, engineers, consultancy bureaux, lawyers, accountants, and other similar services
- Data processing and provision of information, other than any services relating to land
- Banking, financial and insurance services
- The provision of access to, or transmission or distribution through, natural gas and electricity systems and heat or cooling networks and the provision of other directly linked services
- Supply of staff
- Letting on hire of goods other than means of transport
- Emission allowances
UK suppliers of services should guard against complacency when supplying services on a B2C basis to EU residents. If the service does not qualify as an intangible service as covered by the above list, the supply will be subject to UK VAT, or could require EU VAT registrations.
Electronically Supplied Services
Electronically Supplied Services (ESS) are services electronically delivered and the transactions are essentially automated, with no or minimal human intervention. They include supplies of software, internet access, online gaming and music and film downloads and streaming. In this context they are supplied on a B2C basis.
Following the end of the transition period on 31 December 2020, the VAT treatment of ESS has changed as the UK is no longer able to provide access to the EU Mini One Stop Shop (MOSS) single VAT return scheme.
UK-based suppliers of ESS are required to file their last MOSS return (to 31 December 2020) through the UK portal by 31 January 2021. They also need to register for the Non-Union MOSS through any EU Member State, or register for VAT in each Member State in which they have consumers.
EU based ESS providers that make supplies to UK individual consumers are required from 1 January 2021 to register for UK VAT on a stand-alone basis to continue to account for UK VAT on UK ESS.
Non-EU based ESS providers currently registered in the UK through the Non-Union MOSS are required to register for Non-Union MOSS in any EU Member State to continue to account for their ESS B2C sales under that simplification. Alternatively, they need to register in each Member State they have customers. A UK VAT registration is also required to account for VAT on supplies of ESS to UK consumers.
Financial services and insurance services
UK based suppliers of certain ‘specified services’ (financial and insurance services) that are exempt from VAT have additional VAT recovery when supplying a non-UK party (previously the scope was non-EU) or, in the case of insurance services, where the insured party resides outside the UK.
This welcome step does require companies in these sectors to review and amend VAT processes to capture the additional recoverable VAT where applicable. This will involve revisiting client set up and tax determination in accounting and ERP systems, revisited partial exemption processes, and potentially applying to HMRC for a new partial exemption special method.
The position is complicated for costs that span the end of the transition period and the UK’s exit from the EU. HMRC has confirmed that costs incurred before 1 January 2021, attributable to supplies to EU clients made after 31 December 2020, will not qualify for VAT recovery.
Use and enjoyment rules
Certain services are subject to specific use and enjoyment rules, which amend the place of supply in instances where they are applicable.The basic position is that if the following types of service, are being used and enjoyed by the recipient, outside the UK, then UK VAT will not apply:
- The letting on hire of goods (including means of transport)
- Electronically supplied services (B2B only)
- Telecommunications services (B2B only)
- Repairs to goods under an insurance claim (B2B only)
- Radio and television broadcasting services
Previously, for supplies of such services to the EU, the use and enjoyment rules did not apply (they were restricted to non-EU considerations). The rules can be challenging to apply for suppliers as they will be required to consider how customers use the services, by location.
Potentially, services that were wholly outside the scope of UK VAT may now be, at least partly, taxable in the UK if a customer has an establishment in the UK that is partly using the service (for example a global software licence with users in multiple countries).
Service providers should not be complacent
Whilst the service sector has, perhaps, not been as disrupted as sectors which deal in tangibles, there are still significant VAT implications for service providers to address. Some changes do result in markedly different VAT positions than were applicable before the UK left the EU.
The key message is for operators in the service industries not to be complacent and to cast a critical eye over their VAT position. They may well be impacted by some of the changes covered above.
For advice or assistance in determining how the VAT treatment of the services you supply has been impacted by Brexit, please contact your usual Saffery partner or alternatively speak to to Sean McGinness, VAT partner or Nick Hart, VAT director.