Like many tech businesses, your company may frequently procure services from suppliers in other EU states. For instance, you may have all your programming done in Scandinavia or your hardware design work done in the Czech Republic. Under current VAT rules it would likely not matter whether procurement is run through your operation in the UK or through your subsidiary in France, because the liability to account for VAT would generally fall on the supplier – at the prevailing rate in the relevant EU member state. This is all set to change.
Whether you are a supplier or a customer, you should now consider whether it may be advantageous to restructure your supply chain.
Summary of key commercial points
Under new rules to be phased in from 1 January 2010, the customer or recipient of services in the EU will account for VAT to its home taxing authority, at the rate applicable in the recipient’s home state.
The key commercial points – affecting both suppliers and recipients of services within the tech industry – are the following:
• Although in most tech businesses your VAT expenditures will normally be recoverable from onward sales of products, there can be a real cash flow advantage – particularly in the early (and risky) stages of pre-commercial development – in reducing VAT liabilities.
• Technology companies who procure a variety of services from other EU suppliers may benefit by establishing central procurement functions in low rate VAT countries within the EU.
• The practice among customers of shopping for EU suppliers in the lowest VAT rate jurisdiction should now cease. The changes may help to level the playing field between EU and non-EU based suppliers, as the rate of VAT applied to their supplies will be the rate applicable in the member state in which the customer is located.
• If you are a supplier, it will be less important whether you are established in a low VAT rate jurisdiction and you may wish to consider whether other factors favour transition to another jurisdiction.
• You will need to update your accounting and billing routines and you may also wish to review your supplier/customer contracts to ensure that they reflect the new position with respect to VAT liability.
Does this apply to me and what should I do?
The new rules will apply to business-to-business supplies of all services except for supplies of property, passenger transport and restaurant or catering services or services relating to artistic and entertainment events.
We have outlined in greater detail the nature of the changes below. But structuring the affairs of your business in a tax efficient manner requires detailed advice tailored to the requirements and circumstances of your business.
We therefore recommend that you take advice in good time to begin planning for the change. The ebizlaw team at Fox Williams LLP has tax advisory capacity and we would be happy to set up a meeting to discuss tax planning, contract review and corporate restructuring appropriate for your situation. Please contact our tax partner Emma Bailey at firstname.lastname@example.org
Background and Current Position
Under current law, the basic rule is that the supplier has to account for VAT on supplies, to both businesses and consumers, in the country in which the supplier “belongs” for VAT purposes. A party “belongs” in the country where it has its business establishment or some other fixed establishment. If a party is established in more than one country, that party belongs in the country containing the establishment that is most directly concerned with the supply.
This means, by way of example, that a software programmer with a fixed establishment in Austria would account for VAT in Austria on services supplied to a UK tech business.
This treatment does not apply to supplies of the following services (known as “Schedule 5” services, in reference to the VAT Act 1994): advertising services; transfers of intellectual property; services of consultants, lawyers, financial services; and the letting and hire of goods other than means of transport.
Where a UK trader supplies Schedule 5 services to a resident in the EU for the purpose of a business carried on by him, the customer/recipient must account to its home taxing authority for VAT due at the rate, and subject to the rules of, the recipient’s home state. This is done using the “reverse charge” procedure, in which the recipient acts as if it had supplied the services to itself by accounting for VAT on the supply on its next VAT return and reclaiming the same amount as input tax on the same return. For fully taxable businesses this should be cashflow neutral.
The New Regime
The EU Council confirmed last year that a new Directive would be brought in to amend the rules on the place of supply of services for VAT purposes. Although these rules take effect on different dates according to the nature of the supply, some changes take effect as early as 1 January 2010.
Business to Business
The first of the key changes will affect business to business supplies. For supplies of services to business recipients, the place of supply will, in most cases, be the place where the recipient belongs rather than where the supplier belongs. This change to the basic rule brings the supplies of services into line with current Schedule 5 treatment (outlined above). This will include services supplied by businesses located both within and outside the EU to businesses located within the EU.
Where the recipient is located in the same member state as the supplier, the supplier must account for VAT. In all other cases, the recipient will be obliged to operate the “reverse charge” procedure.
The impact of this change can be illustrated by using the example of the Austrian software programmer supplying to a UK tech business. Following the change in the place of supply rules, the UK tech business would be required to account to HM Revenue & Customs in the UK for VAT on all business supplies it receives. However, the UK tech business could establish its main control and procurement functions in another EU member state to benefit from a more favourable rate of VAT.
Business to Consumer
Where services are supplied to non-taxable persons (business to consumer supplies), the general rule will continue to be that the place of supply of services is the place where the supplier has established its business.
The exception set out in Schedule 5 that applies under the current regime will continue to apply for business to consumer supplies under the new regime.