In recent years the EU has swelled to 27 member states, the burden of policing of VAT in each country and the EU as a whole has increased substantially. 1 January 2010 not only brought in a new decade, it introduced fundamental changes to the place of supply of service, specifically for intra-EU transactions. This change is important for businesses that have cross border activity, specifically services and more specifically intra-EU services.
Prior to this change there was a one size fits all state of affairs (subject to the exceptions) illustrated with the default place of supply of services being where the supplier is established.
The change has been implemented to simplify and harmonise the treatment across the EU. Therefore, from 1 January 2010 you will need to consider whether the service is supplied to or receive from a ‘relevant business person’. Thus the new default positions are:
• Where the customer is a relevant business person (ie ‘B2B supplies’) the default place of supply of services is ‘where the customer belongs’.
• Where the customer is not a relevant business person (ie ‘B2C supplies’) the default place of supply of services is ‘where the supplier belongs’.
As before there will be exceptions, where there was one set of exception now there are three sets of exceptions to consider, they are:
• General exceptions (to be considered before deciding whether it is a B2B or B2C supply)
• B2B exceptions
• B2C exceptions
Each exception has its own default place of supply and to coin a phrase, the devil is in the detail. As there are too many to exceptions to list individually, a summary can be viewed in the flowchart mentioned below.
Establishing the place of supply is essential to determine that the correct organisation accounts for the VAT. In simple terms, once a B2C transaction has been established the place of supply is where the supplier belongs, therefore the supplier charges VAT at the applicable domestic rate. For B2B transactions, the reverse charge mechanism is used, which in essence remains unchanged. This is where the supplier obtains the VAT registration number of the customer, includes it on the invoice it submits and does not charge VAT. The customer reverse charges, it charges itself output tax and claims input tax deduction at the applicable domestic VAT rate. The effect in most circumstances is neutral except for partially exempt businesses.
It is worth mentioning, dependent upon the nature of a transaction, there may be a requirement for businesses to register for VAT in another EU state. This requirement has previously existed and should always be kept in mind when trading with the EU. Details of what VAT is called in each country, country codes, standard rates of VAT, the format each country uses for VAT registration numbers, the frequency and useful links to official government websites can be found at:
http://uk.accaglobal.com/uk/members/technical/taxation/new/vatanalysis
As an outline, the changes are best displayed by a flowchart to track the process of establishing the place of supply of a service - see 'Related documents'.
The place of supply changes complement other EU wide revisions such as amendments to the time of supply, easing the process when obtaining refunds from another EU member and additional reporting requirements for EC Sales List’s (ESL’s). The reporting requirements for services have been put in place to enable the tax authorities to check the correct VAT has been accounted for in each country.
HM Revenue & Customs have produced a number of useful guides. Documents providing the details of the VAT package 2010 and the Revenue & Customs Brief 02/09, as well as 2009 Budget Notices 74, 75, 76 and 77 are available under 'Related links'.