In the scramble to a last-minute Brexit agreement, VAT on services with EU was largely overlooked.
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.