A friend of mine runs a Marketing company.
She changed accountants last year because they missed to submit some VAT returns and she got penalties.
She appointed new accountants 6 months ago, paying a decent fee as she didnt want to have problems.
Today she received an email from the Finance Manager of one new European client who have queried why she is charging VAT as it is a B2B digital service (hosting their websites) and they are based in Europe so Reverse Charge should apply.
I told her I agree with the Finance Manager but then she told me she has charged hundred of thousands of pounds during the last 5 years to other European clients and all of them paid her the VAT. And none of the accountants have ever said anything about it.
Am I missing something or she has overpaid to HMRC?
What is the procedure to follow if she has incorrectly charged all that VAT?
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Replies (15)
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B2B supplies of web hosting to non-UK customers is outside the scope of UK VAT.
Your friend would have to refund her customers the VAT first (credit note) and then claim it back from HMRC, else HMRC will reject the idea of refunding the incorrectly charged VAT back to your friend unless she pays it on to the customer (unjust enrichment).
Get it right going forwards, customers haven't complained so far, just move on. Any VAT refund belongs to the customers wrongly charged by your friend, which is why I say move on, it'll be a load of time just to refund it back to the customer, more a moral dilemma perhaps.
I'd say change Accountants but unless your friend specifically asked for advice on this, then you can't expect an Accountant to check every invoice and every facet of the business...what does engagement letter say is being supplied?....It's the client that decides the VAT rate of supplies of their business unless they sought advice, and then may be an argument they have been mis advised.
Are you suggesting it's a 'general rule' service? Or are you assuming that the service is not effectively used and enjoyed in the UK?
This may be similar to your question, but ...
If the service is "hosting the websites" (of European clients) - then where is the 'supply' taking place?
Are you suggesting it's a 'general rule' service? Or are you assuming that the service is not effectively used and enjoyed in the UK?
Fair point TD, if use & enjoyment are in play then the supply would indeed by standard rated, despite the customer being overseas.
Thanks everyone. This is not my client but given she has raised the question I am willing to learn further.
Per HMRC I understand "general rule service" does not apply as "hosting websites" is included as a "Digital service".
https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a#...
"6.1 Introduction
The place of supply rules contain default or ‘general’ rules, one for supplies to business customers B2B and one for supplies to consumers B2C. There are a number of exceptions to the general rules and there are special rules to cover these.
To determine the place of supply of your service you should consider the exact nature of your services against each of the special rules first (read paragraph 6.4) and only if none apply will your service fall under a general rule."
So that means we have to look at section 13 Use and Enjoyment as you mentioned:
https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a#...
And they give an example for hosting:
"Where a relevant service is partially used and enjoyed outside the UK, the supplier (or customer required to account for the supply) should carry out an apportionment based upon the extent to which it’s used and enjoyed outside the UK. UK VAT will only be due on the portion that is not used and enjoyed outside the UK. Similarly, where a supply would be outside of the scope of UK VAT but is partially used and enjoyed within the UK, UK VAT will be due on that portion of the service that’s consumed here.
Example: a USA business purchases web-hosting services for its international business, including its UK branch — although the supply is received in the USA, to the extent that it’s used in the UK, it’s subject to UK VAT"
In my opinion the Use and Enjoyment of those websites are in those European Countries, the webs are build on the local languages and they are targeting local clients who read the web in Italian, German etc, nothing to do with UK.
Thank you and really good point about the Engagement Letters by the way. As part of my Know Your Customer, I do check on the VAT returns if customers are outside of the UK but my Engagement Letters don´t clarify very well who the responsibility for this is so I will reword.
OP: you've managed to include two phrases that, when combined, tend to make my blood run colder than usual:
- "A friend of mine .."
and
- "hundred of thousands of pounds".
Please take care not to be (even perceived as) providing advice to your friend.
Haha I know. It would even seem is a client of mine and I am trying to hide an error done by myself, but luckily this is not the case.
First thing I suggested was that she talks to the accountants but given I am one too, and so many Finance Managers and Accountants have missed it, I wanted to double check if I was correct in my understanding. Thank you Hugo!
Your friend has been doing this for years and has just appointed a new accountant. She hasn't asked them the question she's asked you. She should. She really should.
There's more to it than Jason suggests, imho. (Of course I therefore agree with cold-blooded Hugo.) BTW, if the places of supply include EU countries there is the question of registering in those countries to consider. (That may be more than one question, if it's more than one country.)
I agree. She asked me just because she really had to get paid for this invoice that the European company was challenging and her Accountants would not reply on the same day. But it is with them.
In terms of you last comment re registering on several countries, I think it does not apply based on the response I have given above to other members, but I am just a newbie and you are the Tax Dragon so if you please can review that answer from me and let me know, that would be much appreciated!
Thank you :)
You sound way too close to your friend's business, if you can comment on what her customers do with the services she supplies. (She shouldn't discuss that with you, imho. At least, she shouldn't if she supplies Nigel Farage's German business. Not all publicity is good publicity. Except for Nigel.)
Your link above - 13.6.
Haha agreed somehow :)
Re 13.6 "you may be liable to register for VAT in that member state.". That "may" leaves me confused. What would be the next step to look at?
BTW, if the places of supply include EU countries there is the question of registering in those countries to consider.
No, it doesn't. Not for a service to a relevant business person. The reverse charge applies.
Far be it from me to challenge the excellent responses from proper experts. But...
Your friend runs a marketing company. And is hosting websites for clients.
Now webhosting is quite a technical activity and usually provided by companies that specialise in that sort of thing. Does your friend actually own and manage the servers? Or are they creating and managing client websites, using server capacity rented from the likes of ionos?
If the latter, then it speaks to the use and enjoyment provisions. And if website has, say, a .de domain, it's prima facie being used and enjoyed in Germany.
