Brace for Brexit 10: Digital services shock
Neil Warren investigates whether some digital supplies will suffer double VAT, or escape VAT completely, from January 2021 after the transition period for leaving the EU.
In Brace for Brexit 6 I explained that the general business to business (B2B) and business to consumer (B2C) rules for services will be unchanged when the UK’s transition period for leaving the EU ends, the status quo is maintained. I also considered the confirmation from HMRC that the list of services where no VAT is charged if a B2C customer is based “outside the EU” will change to “outside UK” – VAT Notice 741A, section 12. This is good news for many businesses.
Use and enjoyment of services
However, there is another important issue to consider as far as services are concerned, and these relate to those services where a ‘use and enjoyment’ override applies. In other words, the general B2B and B2C rules do not apply. It is worth listing these services – they are contained in VAT Notice 741A, section 13.
- the letting on hire of goods (including means of transport)
- electronically supplied services (B2B only)
- telecommunications services (B2B only)
- repairs to goods under an insurance claim (B2B only)
- radio and television broadcasting services
Changes on 1 January 2021
When asked how these services will change when we leave the EU, HMRC's press office confirmed: “The current use and enjoyment provisions will continue to apply, the only change being that UK to EU rules will effectively be the same as those currently for UK to Rest of World.”
But what does this mean?
Let’s consider a UK business that purchases web-hosting services from another UK business for use at its branch in France. This is a B2B electronic service that is currently subject to UK VAT at 20%. From 1 January 2021, the place of supply moves to where the service is consumed, which will be France, which is “outside UK.” This means that no UK VAT is charged on future sales invoices.
But this is not the end of the story, perhaps the UK supplier should register for VAT in France and charge French VAT?
As far as EU VAT law is concerned, each member state can choose the services to which it applies a ‘use and enjoyment’ rule. The phrase in Article 59a of the EU VAT Directive is that a Member state “may” change the place of supply to “any or all” of the services to which the general B2B or B2C rules apply.
Having checked the domestic VAT rules in France, there does not seem to be any use and enjoyment override for B2B electronic services. This means that our UK supplier does not need to worry about French VAT. The end result is that no UK VAT or French VAT is due.
Let’s turn the tables around: a French supplier sells web-hosting services to another French business for use at its UK branch. We now seem to have a double VAT problem:
- The supply is subject to French VAT because the general B2B rule means that the place of supply is France - ie where the customer is based.
- UK VAT law from 1 January 2021 means that the general B2B rule is overridden for electronic services and tax is due where the service is consumed ie UK VAT is due.
- This means that the same supply is subject to both UK and French VAT.
I asked the HMRC press office for a comment on this situation. The spokesperson declined to comment because it involves EU VAT rules. The spokesperson reiterated the position with UK VAT law, as I quoted above.
If my analysis is correct, this situation seems to create many problems. Imagine if customers receiving these services are an exempt business such as a bank with an input tax block on their expenses.
I have discussed the scenario with a couple of other VAT consultants; one consultant wondered whether the issue might be part of any final deal agreed with the EU, perhaps accepting that the country where a use and enjoyment clause applies overrides any other place of supply.
“Even if there is a provision to prevent a double charge to VAT from 1 January 2021, a lack of a standard approach to the application of the use and enjoyment rules throughout the EU is a complicating factor for businesses and advisers,” said Alex Millar, senior VAT consultant at Garbutt & Elliott LLP.
The reality is that if the new rules from 1 January 2021 create either VAT leaks or unfair double taxation, it will be up to the relevant tax authorities to tweak their legislation. But I’ll leave that challenge to the policy experts.