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Budget 2009: VAT cross border supply of services rules overhauled

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22nd Apr 2009
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The Chancellor has confirmed the widely expected changes in the time and place of supply rules for businesses making or receiving cross-border supplies of services in the UK.

Time of supply rule

UK businesses are required to account for the VAT on the receipt of such supplies as a reverse charge. Currently the time of supply (or tax point) for this category of cross border supply is normally when the supply is paid for. However, if the consideration is non-monetary, the tax point will occur at the end of the VAT accounting period during which the service is performed.

From 1 January 2010 the rules will be governed primarily by when a service is performed and a distinction will be made between single and continuous supplies. For single supplies, the tax point will occur when the service is completed or when it is paid for if this is earlier - the invoice date is irrelevant.

In the case of continuous supplies, the tax point will be the end of each billing or payment period. For example, if leasing charges are billed monthly or the customer is required to pay a monthly amount, the tax point will be the end of the month to which the bill or payment relates. Again, if a payment is made before the end of the period to which it relates or before the end of the billing period then that payment date, rather than the end of the period, will be treated as the tax point.

For continuous supplies that are not subject to billing or payment periods, the tax point will be 31 December each year unless a payment has been made beforehand. In that case the payment will create a tax point.

Change to place of supply rule

As expected, the old VAT Act 1994 Schedule 5 and the VAT (Place of Supply of Services) Order will be replaced with a modified set of rules. The current basic rule is that VAT is due where the supplier has established their business, and this applies to supplies to both business
and non-business customers. From 1 January 2010, the new basic (or general) place of supply rule for business to business supplies will be where the customer is established. The basic rule for supplies to non-business customers will remain unchanged, i.e. it will be where the supplier is established.

As now, there will continue to be exceptions to the new general rule, which make this whole area such a nightmare:

Supplies to both business and non-business customers of cultural, artistic, sporting, scientific, educational, entertainment and similar services, as well as valuation and work on goods, are currently taxed where the service is performed. There will be no change to the taxation of these supplies when made to non-business customers, but for supplies to business customers:

• from 1 January 2010, valuation and work on goods will be taxed where the customer is established under the new general place of supply rule; and
• from 1 January 2011, most supplies of cultural, artistic, sporting, scientific, educational, entertainment and similar services will be taxed where the customer is established, under the new general place of supply rule.

Supplies of admission to cultural, artistic, sporting, scientific, educational and entertainment events will remain taxable where the event takes place.

Land related services will continue to be deemed to be supplied where the land is situated.

Currently there is a single treatment for the place of supply of hire of means of transport for supplies to business and non-business customers, which is where the supplier is established (basic rule). From 1 January
2010, there will be a distinction between short-time hire (no more than 30 days or 90 days for vessels) and long-term hire:

- For short-term hire, the place of supply will be where the vehicle is put at the disposal of the customer.
- For long-term hire, the place of supply will fall under the new general rule. However, from 1 January 2013, the place of supply of long-term hire to non-business customers will generally be where the customer is
established.

There is no current exception for restaurant and catering services. From 1 January 2010 these services will be treated as supplied where they are physically performed. For restaurant and catering services carried out on board ships, aircraft or trains as part of transport in the EC, the place of supply will be the place of departure. This mirrors existing rules for goods
sold for consumption on board.

Currently the place of supply of intermediary services is in the same place as the service being arranged (subject to a simplification measure for supplies to business customers registered for VAT in another EU Member State). From 1 January 2010, the services
provided by intermediaries to business customers will fall under the general rule. Supplies to non-business customers will be unchanged.

The place of supply of the transport of goods is where the transport takes place, except for intra-Community transport which is supplied in the place
of departure. This rule will remain the same for supplies to non-business customers. Supplies to business customers will fall under the new general rule from 1 January 2010.

The place of supply of certain intangible services, such as legal advice, will continue to be treated as supplied where the customer belongs when provided to non-business customers outside the EC.

Ancillary transport services (such as loading, unloading or handling services) are deemed to be supplied where they are physically carried out. From 1 January 2010, these services will fall under the general rule when
supplied to business customers. Supplies of these services to non-business customers will continue to be taxed where performed.

The place of supply of passenger transport services, the use and enjoyment provisions and electronically supplied services (for non-business customers) will remain unchanged.

For cross-border supplies, in most cases, the business customer will account for the VAT using the reverse charge procedure (and recover the tax subject to the normal rules) as happens now for a wide range of non basic rule services.

Kevin Misselbrook, customer services director for Access Accounting, commented,

“With these new rules, businesses will have to track the dates of delivery that the services were provided, and account for VAT accordingly. Things get really complicated with invoices that cover multiple deliveries of services, or those occasions where the service dates change. Additionally there is a whole raft of rules and exceptions covering, for example, contract services, transport, entertaining services and education. This could lead to all kinds of confusion with so many different tax treatments being applied depending upon the trading scenario.

“This will place an even greater burden on business at a time when what they really need is help and support as they steer their way through the current recession. Indeed many organisations may not currently be aware that the new VAT rules will be coming into force, which is why we’re keen to see that this issue is not buried within the Budget.”

These changes are linked to the introduction of EC Sales Lists (ESLs) for services. They are intended to harmonise the reporting of cross border supplies by the supplier (on an ESL) with the inclusion of the supply (by the customer) on the VAT return.

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