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Whilst the customs and VAT on moving goods between the UK and EU is far more complex, what are the rules around services?
In this first of two guides, we look at the provision of services from the UK to business customers in the EU. The second guide will focus on the steps to take for UK companies wishing to supply services in the EU.
From 1st January 2021, the supply of services to customers in the EU is treated the same as those to any customer outside the EU.
For Business-to-Business services, the service is deemed to be provided where the customer is resident. This is outside the scope of UK VAT and zero-rated. However, it is advisable to obtain commercial evidence showing that your customer is in business outside the UK. For EU customers, the best evidence is their national VAT registration number.
EU customers will use the ‘reverse charge’ method to show the VAT in their return.
Likewise, UK companies buying services from the EU need to apply reverse charge rules in their UK VAT return.
In essence, under the reverse charge rules, the customer acts as if both the supplier and the recipient of the services. It applies where the supplier belongs outside the UK even if they have a UK VAT registration number.
We have a worked calculation here.
For a business in the UK that is not registered for VAT, the value of reverse charge supplies must be added to the business taxable supplies to determine whether the company should be registered for VAT.
Even if the company has no taxable supplies, it must register for VAT if the total reverse charge supplies exceed the registration threshold in a rolling twelve-month period. The VAT registration threshold is currently £85,000.
For UK businesses supplying digital services to non-business customers in the EU, the ‘place of supply’ continues to be where the customer resides. VAT on those services is due in the EU member state in which the customer resides.
The £8,818 annual threshold for cross borders sales of digital services to EU consumers no longer applies, so VAT is due on all sales.
For UK businesses supplying insurance and financial services, the input VAT deduction rules changed from 1st January 2021. Supplies that were previously exempt from VAT move to outside the scope. This aligns with the existing rules for supplies of these services to customers outside the EU.
As a result, VAT incurred after 1st January 2021 on supplies used to fulfil services to customers in the EU can now be recovered.
You then include in the relevant boxes of your VAT Return the:
For example, you receive a reverse charge invoice from a company in France for €10,000. You will pay the supplier €10,000.
When you start preparing your VAT return, you need to manually calculate VAT on the €10,000 at the applicable rate, which is currently 20% in the UK, resulting in VAT of €2,000.
The resulting entries would be:
You then include in the relevant boxes of your VAT Return the following converted to GBP:
As the invoice value and the notional VAT are reported both under the sales and purchases sections of the same VAT return there is no VAT liability or recovery resulting from the transaction.
If you are the supplier of services from the UK to an EU customer, the invoices are raised without VAT and the total included in box 6 (total value of sales).
Modern accounting software such as Xero and QuickBooks, will handle this automatically and also take care of applying the exchange rate conversion for the VAT return.
If you need to manually calculate the exchange rate, the applicable rates are here.
Read our blog post on VAT On B2B Services From the UK With The EU Post Brexit here –https://cooperfaure.designmindshost.com/vat-on-services-uk-to-eu-post-brexit/
A date for the diary. On Wednesday 3rd March, Chancellor of the Exchequer, Rishi Sunak will be delivering Budget 2021. At its core will be measures to support the recovery from COVID-19.
HM Treasury are trailing “The Budget will set out the next phase of the plan to tackle the virus and protect jobs…”. In addition, the eligibility criteria for the fourth tranche of the Self-Employment Income Support Scheme grant will be announced.
It is no exaggeration to say that this will be the most important Budget in recent times. There are key dates around the corner:
Will there be much-needed support for those that have fallen through the cracks of the Self-Employment Income Support Scheme? Will the Furlough Scheme be extended into the summer? When does the VAT deferral instalment payment scheme go live? Are 2020-21 Business Rates to be scrapped for the retail, hospitality and leisure sectors? Will there be further extensions to existing policies? Is this the time for tax increases?
All these questions and more will be answered on Wednesday 3rd March.
As in previous years, CooperFaure will be providing a live Twitter feed as Rishi Sunak speaks in the House of Commons followed by a digest of the key announcements and a detailed review. Make date to join us on Wednesday 3rd March for Budget 2021.