The UK left the EU VAT area in January 2021, changing the rules for VAT on services and digital sales which cross the border between the EU and the UK. VAT can be a horribly complicated subject, so we’ll go over what the rules mean for UK businesses.
VAT is charged based on where goods and services are supplied to. For example, this means that taxable goods going into France are subject to French VAT, even if they started out as an export from the UK. The same principle applies to services, which is why the place of supply is so important.
What is the place of supply for VAT?
When we talk about VAT, the place of supply is the location that you supply the service to. For example, a customer has a head office in Germany and a smaller base in France, and they buy services from you for their French offices. The place of supply is France, even though their head office is elsewhere.
The place of supply is important because this is where the service is liable for VAT.
The place that the service is liable for VAT tells us what rate of VAT is due, and which country’s VAT authority it should be paid to. The rules you need to apply depend on whether you supply services to other businesses, or to consumers (who buy the services for their own personal use, not to use in a business).
Comprehensive VAT return service
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Making cross border supplies of services to other businesses (B2B)
If you supply services to a business in another country, you won’t charge VAT on the sale. Instead, the business buying the service accounts for the VAT as a reverse charge on their own VAT return. You’ll need to make sure that your invoices show exactly what services you provide, and where you supply them to, to make it clear why you didn’t charge VAT on the sale.
Making cross border supplies of services directly to consumers (B2C)
If you supply services directly to EU consumers (for their personal use, rather than being used in a business) the VAT that you charge will usually be determined by where the customer ‘belongs’. Because you’re supplying services to a customer in the EU, the supply is outside the scope of UK VAT. Again, you’ll need to be very clear on where the place of supply happens!
VAT on digital sales between the UK and EU
UK businesses used to be able to register for the VAT MOSS scheme, allowing them to submit a single VAT MOSS Return to account for the VAT on digital sales anywhere in the EU. With the UK no longer part of the EU VAT area this isn’t an option, and the process for collecting VAT on digital sales to EU and UK customers now depends on where the seller is.
UK businesses who sell digital services to consumers in the EU
If your UK business sells digital services to EU consumers, you have two options: