VAT and overseas customers
If you are registered for VAT, it is important that you identify your overseas customers and consider whether it is applicable to charge VAT on your sales invoices or not.
How do we establish whether VAT is charged or not?
For UK VAT purposes, the starting point is the ‘basic rule’ for determining the place of supply of services. This is dictated by the business status of the customer and applies unless the services fall into any of the ‘exceptions’ set out in VAT legislation.
Is your customer in business?
If you provide your services in your business to another business, this is deemed to be a business to business transaction (B2B).
Where the customer is not in business (therefore a member of the public) then this is treated as a business to consumer transaction (B2C).
For VAT purposes, it is important to identify whether your customer is in business or not.
The “basic rule” states:
If your customer is ‘in business’ for VAT purposes a business-to-business (B2B) supply occurs and the place of supply is the location of the customer.
If your customer is not ‘in business’ for VAT purposes, then the place of supply is the location of the supplier.
Therefore, if you are invoicing a UK company (i.e. the supplier and the customer are both in the same EU country), then the standard rate of VAT is applied at 20%.
As a business, if you are invoicing your services to an EU customer, then no vat is charged –this is because the place of supply is the location of the customer. In effect, any VAT accounting responsibilities are transferred to the customer. For example, if you are a supplier in the UK, and your customer is in Spain, the supply is outside the scope of UK VAT. However, it is within the scope of Spanish VAT, and your Spanish customer self-accounts for Spanish VAT under the ‘reverse charge mechanism’.
If you invoice an overseas customer, outside the EU, then again, no VAT is charged as it outside the scope of VAT, irrespective of whether they are a business or not.
For flat rate VAT purposes, an overseas supply of services is not included in the flat rate VAT calculation as the income is deemed to be outside the scope of VAT.
Therefore, being in the flat rate scheme may not be the best fit for companies who invoice significant amounts to the EU and abroad.
How do we establish if our customer is in business?
The simplest and most reliable way to determine whether a supply is made B2B or B2C is to obtain a local VAT registration number from the customer. To the extent a customer is registered for VAT in the UK or elsewhere in the EU, they will be a ‘taxable person’ for VAT purposes and the supply is B2B. You can verify customers’ registration numbers using the VAT information exchange system (VIES) website.
For EU VAT purposes, a customer is ‘in business’ and is a taxable person if they conduct any economic activity, in any place, whatever its purpose or results. Technically, a supply of basic rule services can be treated as B2B, even without a VAT registration number.
Best practice is to obtain your customer’s VAT number (once verified as a bona fide VAT number) and record same on your sales invoice to them below their address.
HMRC’s guidance on this states that you can accept other evidence of customer’s business status, such as a link to the customer’s business website or other commercial documents. If you choose to accept this, you risk taking on the associated VAT liability in the event that the customer is found not to be in business.
Therefore, it is essential that you obtain your customer’s VAT number.
Reporting EU Sales –the EC Sales List
If you are a VAT–registered business and have supplied services to EU customers, then you are obliged to complete an EC sales list.
If you have completed box 8 of your return, HMRC will automatically send you an ESL to complete. However, Brookson will file your ESL online on a quarterly basis.
What information goes on an ESL?
It is important to record all the VAT-registered EU businesses you’ve supplied in the reporting period, entering a line for each customer, for each type of supply, including the following:
- 2 letter country code
- their VAT registration number
- the value of the services you have provided where the place of supply is the customer’s country.
What if I haven’t made any Supplies?
The ECSL won’t let you submit a nil return. So if you haven’t made any supplies (or issued any credit notes) in the reporting period, you are not requiring to submit an ESL.
What if there is an error on the ESL?
- You are obliged to correct any errors on your online form, within 21 days of submitting the original declaration where:
- The error exceeds £100
- You have quoted an incorrect VAT registration number
A word of caution…
There are exceptions to the basic place of supply rule for which the place of supply will differ. The UK VAT legislation splits these exceptions into three categories. Those which:
- apply regardless of the customer’s status (‘general exceptions’);
- apply to B2B supplies only; and
- apply to B2C supplies only.
The general exceptions include, among others, supplies such as land-related services, which are subject to tax where the land is situated, passenger transport, which is taxed where the transport takes place, and telecommunications and broadcasting services, which are subject to the ‘use and enjoyment’ provisions.
Any provision of services must be analyzed carefully with reference to the nature of the work performed, where it is performed and who is being invoiced - if you consider that you are affected by any of the exceptions above, then please contact us to discuss this further.