Brace for Brexit 7: VAT savings for charities
Neil Warren considers how charities could receive more ‘VAT-free’ services when the transitional period for UK leaving the EU ends in December 2020.
The place of supply legislation that will apply from 1 January 2021 will mean that many business-to-consumer (B2C) supplies of services provided by a UK business will not be subject to VAT if the customer is located outside of the UK.
The current legislation means that the customer has to be outside the EU to benefit from VAT-free services, as officially confirmed to me by HMRC. Many charities qualify as the consumer in a B2C relationship because they have no “business” income, they rely on grants, donations and legacies. Many religious charities would come into this category.
Let me introduce you to my private client Marie. She has her own VAT-registered consultancy company in Manchester but used to live in Ireland. A church charity she was involved with in the Republic of Ireland asked her to carry out a CEO role for three months until the end of the year through her consultancy company. The contract has now been extended to 31 March 2021.
When we first discussed VAT, I gave her the bad news that her services would be subject to UK VAT under the general B2C rule, because the place of supply is where she has her business - in the UK. This is not good news because the Irish charity cannot claim input tax, it has no business income and is not VAT registered in Ireland.
Roll forward to 1 January 2021, when Marie’s services are now outside the scope of VAT, and the place of supply will be Ireland. The reason for this is that consultancy services are listed in VATA 1994, Sch 4A, para 16 (see VAT Notice 741A, para 12.6). HMRC confirmed that the customer location will be relevant for “non-UK” B2C supplies of these services from this date rather than “non-EU”.
There will be no need for Marie to register for Irish VAT because Ireland doesn’t apply a “use and enjoyment” override for consultancy services. As far as Irish VAT law is concerned, Marie’s place of supply is the UK under the general B2C rule for services.
Let us imagine the reverse for the business and charity locations.
Imagine that Marie lives in Ireland and her company is registered for Irish VAT, she does some consultancy work for a UK charity with no business supplies, making it a B2C transaction. The list of services in the above legislation is part of EU law (Article 59 of the Principal VAT Directive).
Any EU based supplier making B2C supplies of these services to non-EU customers will not charge domestic VAT, and from 1 January 2021, the UK is a non-EU country. Marie will charge Irish VAT at 23% on her services until 31 December 2020 but no VAT thereafter.
There is no need for Marie to register for UK VAT because the UK does not apply a “use and enjoyment” over-ride for consultancy services. As far as the VAT law is concerned, Marie’s place of supply is Ireland under the general B2C rule for services.
Big VAT savings
The potential implications of situations like those considered above are massive. Think of the potential VAT savings for Northern Irish charities using suppliers in the Republic of Ireland and vice versa. Although Northern Ireland will have different VAT rules compared to the rest of the UK for goods when we leave the EU, hence references to GB in many situations, it will follow UK rules for services.
Amend the UK legislation?
As you can see, there is potential for distortion of competition here: a UK business might be frustrated that it has a competitive VAT disadvantage compared to EU businesses.
A solution would be to amend the legislation to extend the list of services where the VAT charge depends on where the services are “used and enjoyed” (see VAT Notice 741A, section 13). But this would probably be a step too far. The best advice is for B2C charities and other B2C customers to enjoy the VAT savings.