The UK has been out of the EU for over two years now. The time has flown by. In terms of VAT, little has changed, except for the reduction in VAT rate on tampons from 5% to 0%. The reality, however, is that many transaction deals are handled differently. Our clients keep sending us multiple VAT questions that have to deal with on a regular basis. Here are some of the common VAT situations.
KEY POINTS
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Due to the UK’s non-EU status, the triangulation rules are no longer relevant, with the exception of businesses in Northern Ireland.
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The UK intermediary business must register for VAT either in the country where the supplier or customer is located.
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Some services are taxed based on where they are consumed under the use and enjoyment rules.
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VAT claims in EU countries after Brexit are more complicated than before.
VAT Question: End of triangulation
Many products are manufactured in east Europe and shipped to larger EU countries, such as France and Germany. UK businesses often act as intermediaries in these deals, buying products from manufacturers and reselling them. Most goods are shipped directly from the manufacturer to the final customer – say from Poland to Germany – excluding the UK. Commercially and logistically, direct shipment makes sense.
The VAT on this type of deal was covered by triangulation rules before the UK left the EU. A sells goods to B; B sells them to C; the goods go directly from A to C; but A, B, and C are in different EU countries and have VAT registrations in their respective countries. In this situation, A’s invoice to B and B’s invoice to C is zero rated, and C deals with the VAT on their return by accounting for acquisition tax and then claiming input tax. There is no need for A or B to register for VAT in another country.
The triangulation rules are no longer relevant since the UK is no longer a member of the EU. Northern Ireland is still part of the EU for goods, but not for services. Because of this, the UK intermediary business – B – must register for VAT in either the supplier’s or customer’s country, depending on where ownership of the goods occurs.
VAT Question: Obtaining an EU VAT number
Many UK business owners find it challenging to obtain a VAT registration number in an EU country. It is often necessary for the non-EU company to appoint an EU-based accountant or representative to act on its behalf, and the representative must guarantee the non-EU company’s VAT obligations.
If extra time and cost make getting a VAT number in a foreign country unprofitable, clients should always research the challenges before signing a deal.
VAT Question: Use and enjoyment rules
Take the example of a UK-based journalist who travels to Ireland for a major sporting event, and is VAT-registered in the UK. She hires equipment from a Dublin-based supplier. A journalist proudly displays her VAT certificate and confidently declares, “Don’t charge VAT, I’m a UK B2B customer.”.
However, the supplier says ‘This service is subject to the “use and enjoyment rules” under Irish VAT law because you are a non-EU customer. I must charge you Irish VAT at 23% on my invoice.’
In contrast to B2B or business-to-consumer (B2C) taxation, the use and enjoyment rules tax certain services in the country in which they are consumed, rather than in a different country. In some cases, they can save VAT both ways. Often, they only apply to non-EU customers.
Use and enjoyment legislation has the main problem of being applied differently in each EU country. There are some member states that apply a use and enjoyment clause to advertising and consultancy services. For example, a UK business providing a B2C service to an EU customer might need to register for VAT in that country if that service has a use and enjoyment clause; each contract must be examined individually. As a result, a supply will only be taxed once, so there will be no double taxation.
VAT Question: Place of supply – B2C services
We recall the case of Gray & Farrer International LLP v CRC [2023] EWCA Civ regarding whether introducing customers to potential partners falls under the definition of consultancy services or whether a dating agency makes supplies to non-EU customers outside the VAT scope. According to the Court of Appeal, HMRC won the recent hearing.
Many professional services supplied B2C to non-EU customers are exempt from VAT – including consultancy services – the place of supply is the customer’s country. As a result of Brexit, ‘outside the EU’ became ‘outside the UK’ on 1 January 2021. HMRC Notice 741A, section 12, contains a list of qualifying services.
Considering Gray & Farrer was about pre-Brexit supplies, it only concerned whether VAT should be charged to non-EU customers. As the judge found in the latest hearing, if the supply fell short of a professional service, then VAT is charged based on the general B2C rule for services, i.e. where the supplier is based, which is the UK.
VAT Questions: 13th Directive claims
In continuation of our earlier story about the journalist being charged Irish VAT on equipment hire, she can reclaim this tax through a 13th Directive claim.
When the UK was a member of the EU, VAT charged by EU suppliers to a UK business was recovered by submitting an online claim to HMRC, which was then sent to the tax authority where the VAT was collected. During the six-month period, the EU authority could either refund the claim or request additional information.
VAT claims in EU countries are more complex post-Brexit: they must be filed on paper and sent to the tax authority by post, in the language of the country in question.
You may also be interested to read:
HOW TO GET YOUR VAT REGISTRATION WITH LESS PAIN
UPDATE ON CHANGES TO VAT PENALTIES AND INTEREST FROM 1ST OF JANUARY 2023