VAT changes for cross-border supplies
Place of supply of services changes
As of the 1st of January 2010, the general rule for the place of supply of services will change. For supplies from one business to another (B2B) it is no longer the place where the supplier is established but, rather, where the customer is established. This rule applies for business transactions both within and outside the EU.
For B2C supplies of services, the general rule for the place of supply will continue to be the place where the supplier is established.
However, there have always been exceptions to the general rule for certain services and some of these exceptions continue to apply. For example, the place of supply of land-related services continue to be where the land is situated.
In certain other cases, previous exceptions now follow the general rule but the date of implementation may not be 1 January 2010. For example, services such as cultural and sporting activities only change from the place where services are performed to the new general rule from 1 January 2011. Consequently, depending on the type of international services that they are involved with, businesses need to review both the liability impact and the timing of such changes.
Impact on UK businesses
In the majority of cases, a UK business customer of non UK services account for VAT using the reverse charge procedure. This means that the business have to initially account for the output VAT and then recover input tax under the normal rules. It is effectively neutral overall for a fully taxable business, provided that the services are for business purposes.
Conversely, for a UK business supplying B2B services under the general rule, the responsibility for accounting for any VAT due becomes that of the customer.
Time of supply changes
As of the 1st January 2010, the time of supply, otherwise known as the tax point, for cross-border services are based on when a service is performed, rather than when it is paid. For single supplies, this means that the tax point will occur on the earlier of:
- when the service is completed; or
- when it is paid for.
For continuous supplies, the tax point is at the end of each periodic billing or payment period. For example, if charges for leasing are billed monthly or the customer is required to pay a monthly amount, the tax point is the end of the month to which the bill or payment relates.
If a payment is made before the end of the period to which it relates or before the end of the billing period, the payment date, rather than the end of that period, is to be treated as the tax point.
Continuous supplies that are not subject to billing or payment periods will have a tax point of 31 December each year. If a payment has been made earlier, the payment will create a tax point.
Changes to the VAT refund procedure
The cross-border refund system allows businesses that incur VAT on expenditure in a Member State, in which they are not established and make no supplies, to recover that VAT directly from that Member State, known as the Member State of Refund (MSR).
The current paper-based system is being replaced with an electronic one, with specific deadlines and interest if these are not met. This new system applies to all refund claims submitted on or after 1 January 2010.
Requests for refunds continue to be dealt with by the MSR. The amount of refundable VAT also continues to be determined under the VAT rules of the MSR and the relevant repayment to be made directly by that Member State to the business.
Main changes under the new electronic system
Under the new electronic system, the claim is sent to the MSR, via the business’s own tax authority, so eliminating the need for a VAT certificate of status, and the format of the claim is simplified.
After 1 January 2010, the period in which to submit claims for VAT incurred in the preceding calendar year was extended from six to nine months. Once the MSR receives the claim under this new system, it must normally be processed within four months and, if approved, repaid within ten working days. If further information is requested by the MSR, the processing period can be extended up to a maximum of eight months and, if these time limits are exceeded, interest will be paid.
Extension of ESLs to include services
An ESL is a declaration that lists supplies made by a UK VAT registered trader to a VAT registered customer in another Member State. ESLs are currently only required for supplies of goods. From 1 January 2010, ESLs are also required for intra-EC supplies of services to which a reverse charge applies in the customer’s Member State.
ESLs are not required for:
- supplies which are exempt from VAT according to the rules in the customer’s Member State;
- supplies covered by Article 194 of Council Directive 2006/112/EC;
- B2B supplies where the recipient is not VAT registered; and
- B2C supplies.
ESL reporting periods
The ESL reporting period for taxable supplies of services are a calendar quarter, although businesses may choose a reporting period of a calendar month instead.
Changes to the reporting period for ESLs for goods
The current ESL reporting period for intra-EC supplies of goods is normally a calendar quarter. From 1 January 2010 to 31 December 2011, quarterly ESLs can still be submitted if the total quarterly value of supplies of intra-EC goods, excluding VAT, does not exceed £70,000 in the current quarter, or any of the previous four quarters. Otherwise, from 1 January 2010, the ESL reporting period for goods are a calendar month. Further changes are to be implemented in 2012.
New time limits for submitting ESLs
As of 1 January 2010, the new time limits for submitting ESLs are reduced from the current 42 days to 14 days from the end of the reporting period for paper ESLs and 21 days for electronic submissions.