The end of the Brexit transition period has VAT consequences for businesses supplying cross border, even where the supplies are of services, and don’t physically cross a border.
If you are receiving services from EU suppliers
Generally speaking, this is the area with least change. Services (other than those subject to special rules below) provided to a UK business from the EU prior to 31 December would not attract VAT, as the supply is treated as made where the recipient is based. Accordingly, a non-UK-supplier would not charge VAT before and won’t now.
Depending on the nature of the supply, you may need to apply the Reverse Charge in respect of supplies received from outside the UK, but again, this is not a new requirement.
If you are providing services to EU customers
Before 1 January 2021, if you provided services to businesses located in the EU that were VAT registered, you would not charge VAT, provided you met the intra-EU invoicing requirements, and then recorded the recipient’s VAT number on an EC sales list. These EU recipients now fall into ‘Rest of the World’ for VAT purposes, and so VAT remains non-chargeable, although you no longer need to meet the intra-EU invoicing requirements and complete an EC sales list.
For non-VAT registered businesses and consumers based in the EU, VAT will previously have been chargeable, but now falls under the same treatment above ie VAT will not apply as the recipient is not in the UK.
Services such as those related to land, hospitality and transport have long been subject to VAT in the UK when provided here, regardless of where the recipient is based, because they are not subject to the general rule described above. Regardless of where the recipient is based, you may be liable to account for UK VAT on these services.
Do you need to register for VAT in the EU?
You may need to register for VAT in the EU in respect of services if they fall into certain special categories which lead to the place of supply being deemed to be where the customer is based, even if the supplier is in the UK. As previously mentioned, you may also need to register for VAT in respect of land, hospitality and transport services provided in the EU.
If you provided Digital Services to individual customers in the EU, before 1 January 2021 you would have needed to account for local VAT in the jurisdiction in which your customer was based (if an annual threshold was breached) using the Union ‘Mini One Stop Shop’ (“MOSS”) scheme. UK established providers can no longer use the Union MOSS scheme. Unless you are willing to register for VAT in each EU Member State in which your customers belong, you will need to register for the separate “Non Union” MOSS scheme. You may also be required to register for UK VAT if you breach the £85,000 threshold for VATable supplies.
In addition, there are certain services where EU Member States have the option to bring the transaction within the scope of local VAT when supplied to non-VAT registered recipients, to prevent tax advantages from arising under the use and enjoyment principles. Unfortunately, these will need to be considered on a case by case basis for each EU Member State, and local VAT registrations may need to be made and VAT charged accordingly. These additional services include advertising, professional services, financial services, equipment hire and the supply of staff.
If you are in a situation where you may need to register for VAT in more than one EU Member State, you may be able to reduce your EU VAT compliance by establishing an EU entity which is capable of servicing the EU market. However, careful planning is required.
Impact on your VAT recovery potential
For businesses that provide fully taxable services, the changes arising from Brexit may be limited to the reduced administrative consequences of no longer collecting overseas registration numbers and filling in EC sales lists. After all, the need to know the location of your customer and the nature of supply that you make will remain equally relevant.
If, however, you provide exempt services, such as certain Financial Services activities, the change of status of EU customers to ‘Rest of the World’ may bring further benefits. Exempt services provided to non-UK customers may be treated as ‘outside the scope of UK VAT with recovery’ which means that in considering your Partial Exemption claim to Input VAT, these supplies are effectively treated as taxable. This re-classification may well increase your ability to recover VAT incurred within your expense base.
Now that the UK has come to the end of the transition period and fully left the EU, what are the implications from a tax and customs duty perspective? Our experts have summarised the latest guidance, supplemented by their experience in recent weeks, in this month’s Tax Talk.