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Brace for Brexit 6: EU customers get VAT-free services

HMRC has confirmed that many business-to-consumer (B2C) services will follow the same rules for both EU and non-EU customers, and will be VAT-free from 1 January 2021.

10th Nov 2020
Independent VAT Consultant
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Brace for Brexit

VAT saving opportunity

Under what circumstances might you issue this letter?

“Dear Client – I have some good news. From 1 January 2021, I will no longer need to charge you 20% VAT on my services. I suggest that we share the VAT saving – I will increase my fees by 10% from this date.”

It could be that you have deregistered from VAT on 31 December 2020, on the basis that UK taxable supplies are expected to be less than £83,000 in 2021, the deregistration threshold. This would be correct, and relevant in many situations in the post Covid-19 world. But there is another situation that will be relevant for many UK businesses, linked to the end of the transition period on 31 December 2020 following the UK’s departure from the EU.

B2C services

There are many services where no VAT is charged if a B2C customer is resident outside the EU (VATA1994, Sch 4A, para 16). The place of supply in such cases is the country where the customer lives.

One such service is accountancy, although there are many more (see VAT Notice 741A, section 12). Such services supplied to an EU B2C customer are currently subject to 20% VAT based on the general rule for B2C services - the place of supply is where the supplier is based, ie the UK where you have your business.

Example:

ABC Accountants is based in the UK and registered for VAT. It completes an annual tax return for a private individual living in Australia and charges £1,000 - the fee is outside the scope of VAT.

ABC Accountants also completes a private tax return for someone living in Spain. This fee is for £1,000 + £200 UK VAT until 11pm on 31 December 2020.

Change on 1 January 2021

There has been an expectation that the legislation will be changed on 1 January 2021, so that the VATA 1994, Sch4A para 16 services will apply where the customer is not in the UK rather than not in the EU. HMRC has now confirmed this will be the case.

HMRC’s press office said: “From 1 January 2021, the place of supply of services rules will remain broadly the same as they are now. The general rule for B2C services remains as where the supplier is based, with the exception of UK to EU rules changing to the same as those currently for UK to Rest of World.”

This means that the extensive list of services covered by the above legislation will be outside the scope of VAT for both EU and non-EU B2C customers from 1 January 2021.

The tax return in the previous example will be £1,000 and no VAT for the Spanish customer, the same as for the Australian customer – hence my ‘Dear Client’ letter. There will be no requirement for ABC to register for VAT in Spain either.

Input tax recovery

What if ABC’s work is entirely for B2C clients based in EU and non-EU countries, ie the firm has no UK based clients? Does this mean that ABC will need to deregister from VAT on 31 December 2020 because it no longer has UK taxable supplies?

The answer is ‘no’ – a business can register for VAT if it has income that is outside the scope of VAT under the place of supply rules, as long as the service in question would be VAT-able if supplied to a UK customer, as is the case with accountancy and tax work. Input tax can be claimed on related UK expenses – known in VAT speak as ‘outside the scope with recovery.’

Conclusion

Most B2B services have always been outside the scope of UK VAT for overseas customers (EU and non-EU) because the place of supply is where the customer is based.

This will continue to be the case in 2021 and beyond. But the changes considered in this article will produce a VAT saving opportunity for many UK suppliers of B2C services to EU customers and at the same time, a decrease in the tax yield for HMRC.

Replies (23)

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Melchett
By thestudyman
10th Nov 2020 23:53

Thank you Neil. Does this change also include the provision of digital services to B2C EU customers?

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By sophier
11th Nov 2020 09:38

"Most B2B services have always been outside the scope of UK VAT for overseas customers (EU and non-EU) because the place of supply is where the customer is based.

This will continue to be the case in 2021 and beyond. But the changes considered in this article will produce a VAT saving opportunity for many UK suppliers of B2C services to EU customers and at the same time, a decrease in the tax yield for HMRC."

Currently we use the reverse charge directive for B2B EU based sales - what happens from 1st Jan 2021? Neil seems to be saying these are outside the scope of UK VAT?

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Replying to sophier:
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By evadoyle
11th Nov 2020 09:49

Yes. I would particularly be interested if the exemption applies to EU businesses not registered for VAT where U.K. VAt has to be applied as the reverse charge is not possible

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Replying to evadoyle:
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By Echo761
11th Nov 2020 10:44

Even if a business in the EU is not VAT registered it can still be in business, i.e. have an "economic activity", if it is then you still treat it as a B2B supply (and do not charge UK VAT...). The only difficulty is that you won't have an EU VAT number to easily show they are in business. You need to obtain alternative evidence.

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Replying to sophier:
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By Echo761
11th Nov 2020 10:41

For B2B purchases of services, you will still account for these under the reverse charge (subject to the normal rules). The supply of B2B services outside of the UK are still outside the scope of VAT.

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Replying to Echo761:
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By evadoyle
12th Nov 2020 15:42

Thanks all

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Replying to sophier:
re
By Jason Croke
18th Nov 2020 17:36

.

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By Comptable
14th Nov 2020 12:30

So if I am not VAT registered and I get a firm of accountants in Calais to do my accounting and maybe my tax work too, they will not need to charge me VAT?

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Replying to Comptable:
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By Echo761
11th Nov 2020 10:38

Provided you are in business in the UK and can demonstrate that to your French Accountant they should follow B2B rules and not charge French VAT.
https://www.gov.uk/hmrc-internal-manuals/vat-place-of-supply-services/va...

As you are not VAT registered in the UK you would not need to declare VAT under the reverse charge but the services would count towards your VAT registration threshold.
https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg0...

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By ioncube
11th Nov 2020 10:49

Confusing. Does this mean that the need for MOSS registration falls away? We're registered for MOSS in the UK and have been expecting to need to register for MOSS in Ireland after Jan 1st. so we can report VAT collected on B2C sales of software licenses to EU member states through there. Does the change mean that such sales would no longer be subject to VAT to EU member states, and as no VAT is due, there would be no need to be MOSS registered nor have any EU VAT filing handled? This would be great but sounds improbable.

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Replying to ioncube:
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By Echo761
11th Nov 2020 10:58

These are still B2C supplies - not to be confused with the VAT treatment of B2B supplies.
Subject to any deal... the UK will no longer be a part of the VAT MOSS service. UK businesses selling digital services. Will no longer be able to use the UK MOSS portal to declare VAT due in the EU Member States.
If you continue to make supplies of digital services to EU consumers after the UK has left the EU. Then you must charge VAT at the rate of the Member State of your customer, regardless of the value of the supply, and either:
- register for VAT in each Member State where VAT is due; or
- register for the VAT MOSS non-Union scheme in a Member State of your choosing.

Thanks (3)
Replying to Echo761:
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By ioncube
12th Nov 2020 14:45

Thanks, this has been the published guidance hence planning to register in Ireland, but doesn't it now contradict this article which seems to be saying that there will not be VAT on supply of B2C services, which software licenses are considered to be?

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Replying to ioncube:
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By Echo761
12th Nov 2020 15:55

I think you need to consider the type of B2C services being supplied, MOSS is for specific electronic services (e.g. supply of Apps) the article refers to "VATA1994, Sch 4A, para 16" services - not all B2C supplies. The place of supply in such cases is the country where the customer lives.

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Replying to Echo761:
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By ioncube
13th Nov 2020 14:52

Thanks Neil. So to clarify, if supplying software to a non-business EU entity, e.g someone in Denmark, VAT should still be charged (at 25% for Denmark), collected and submitted via MOSS, and the news in this article is not relevant to and does not impact such transactions?

We use Taxamo to calculate the VAT due to the many varied rates, different rounding rules and so on in the member states, so Taxamo should apply whatever the latest rules are anyway, but good to be sure.

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Replying to ioncube:
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By Echo761
16th Nov 2020 08:31

No problem, but I'm not Neil.

Taxamo website says "Do you currently use VAT Moss for UK tax returns? Taxamo is Brexit ready!"

But it does say Taxamo collaborate with Deloitte... let's hope it's not the same people involved with Covid Testing.

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Replying to ioncube:
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By Jason Croke
18th Nov 2020 17:48

Neil's article is about general services to consumers (B2C). General services like accountancy, legal, management consultancy, etc.

You are asking about something quite specific, which is digital services to consumers. Digital services, as in downloading apps, downloading digital content, digital subscriptions for anti virus software or similar - MOSS only applies to consumers (B2C), not B2B.

If selling to EU consumers (non-business), you will still have to file MOSS returns (charging/collecting VAT for each member state and filing a singular MOSS return).

Problem is, as the UK drops out of the EU in January then UK businesses can no longer use their UK MOSS registration. You will need to register for "Non-EU" MOSS in an EU member state of your choice, perhaps Ireland because common language is English and easier to understand Irish tax office correspondence.

You will have to deregister for UK MOSS next year and register for MOSS somewhere else. See here https://www.gov.uk/guidance/pay-vat-when-you-sell-digital-services-to-eu...

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By BryanS1958
12th Nov 2020 09:39

Does anyone know the position re distance supplies of educational services B2C from UK to EU? This would be one to one eg video lesson by tutor to student or one to a group eg video lesson by tutor to a number of students in different countries at the same time.

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Replying to BryanS1958:
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By Echo761
12th Nov 2020 16:10

Currently...
Using the internet, or some electronic means of communication, just to communicate or facilitate trading does not automatically mean that a business is supplying e-services. Using the internet for the following does not constitute an electronically supplied service:

•educational or professional courses, where the content is delivered by a teacher over the internet or an electronic network (in other words, using a remote link)

Then you need to consider the place of supply of services VAT Notice 741A Section 9

"9.5 B2C services relating to cultural, artistic, sporting, scientific, educational, entertainment and similar activities
Where B2C services are provided in connection to cultural, artistic, sporting, scientific, educational, entertainment or similar activities these services will be taxable at the place where they are performed."

BUT... you need to consider a raft of other things too, i.e. Establish precisely what is being supplied, is it a single/multiple supply, etc, etc.

Thanks (1)
chips_at_mattersey
By Les Howard
13th Nov 2020 11:46

Is there a risk that the UK provider of, for example, accountancy services, will be required to register for VAT in the Member State where the private client is based?

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Replying to leshoward:
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By Echo761
13th Nov 2020 12:10

Yes, if you follow the logic set out above "There are many services where no VAT is charged if a B2C customer is resident outside the EU (VATA1994, Sch 4A, para 16). The place of supply in such cases is the country where the customer lives." So if the customer lives in France and you make supplies there and breach the VAT registration threshold (currently Nil) I would agree.

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Replying to leshoward:
Caroline
By accountantccole
24th Nov 2020 10:00

Author suggests not
"The tax return in the previous example will be £1,000 and no VAT for the Spanish customer, the same as for the Australian customer – hence my ‘Dear Client’ letter. There will be no requirement for ABC to register for VAT in Spain either."

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Replying to accountantccole:
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By Echo761
24th Nov 2020 11:47

But, if the place of supply moves from the UK (outside the scope of UK VAT) then it must be in the country of receipt?

"This means that the extensive list of services covered by the above legislation will be outside the scope of [UK] VAT for both EU and non-EU B2C customers from 1 January 2021."

Author does not say why " There will be no requirement for ABC to register for VAT in Spain either."

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Replying to Echo761:
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By Echo761
24th Nov 2020 11:54

Interesting, further details here;

https://www.linkedin.com/pulse/vat-brexit-b2c-activities-terry-dockley

"After Brexit

From 1 January 2021, the UK rules will only treat these services as subject to VAT if the supplier and the customer are both based in the UK. Where the customer is based in the EU, the EU rules would treat the supply as made where the supplier is established, which would be the UK and, therefore, outside the scope of EU VAT. The only circumstance in which this would change would be where an EU country had implemented a “use or enjoyment” rule. In the absence of such a rule, the services of, say, a UK based accountant to a private individual based in the Netherlands, would escape VAT altogether. Thus, in the absence of any use or enjoyment rule, UK based suppliers of these professional services do not need to worry about registration outside the UK from 1 January 2021."

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