Q:
Hello,
We have a UK startup Ltd, developing computer software and we are not registered for VAT. Our first customer is from an EC member country (they have a valid EC VAT number). Looks like we’ll not reach the 70k threshold needed for VAT registration in the near future. Do we have to register for VAT because of this EC sale?
Many thanks,
A:
Hi,
If the company’s only activity is the provision of IT consultancy to a French business customer, then it won’t be liable to register for VAT in the UK as the value of such supplies doesn’t count towards the UK VAT registration limit. I’ve explained why below as it’s important to understand.
As you know, you have to register for VAT in the UK when the value of your taxable supplies in the UK exceeds the registration limit, currently £70,000 in any 12 month period.
Therefore the value of supplies which are made “outside the UK” don’t count towards this limit, even though the supplies would be taxable if made in the UK. This concept is the EC “place of supply” rule which refers to the country in which the VAT liability arises; if the supply takes place in the UK, VAT is payable to HMRC, if in France to the French tax authority or other EC country as applies.
The supply of certain services that are made to businesses in other EC countries is deemed to be “where the customer belongs”. This means that if your customer is a French business (and confirms this by telling you his French VAT registration number) then your supply is deemed to take place in France even though you are a UK business. The customer accounts for French VAT on his French VAT return and pays the VAT to the French tax authorities instead of you charging UK VAT.
So you need to be certain that the services you are supplying qualify to be regarded as “supplied where received”. This applies to certain services that are listed within the VAT Act 1994, Schedule 4A, Section 16(2). This is a complicated subject and covers a long detailed list of services, but if you are making supplies of bespoke software then it will probably qualify.
The information is listed in HMRC VAT Notice 741: Place of Supply of Services, Section 15.5 here http://tinyurl.com/37s48bl which mentions IT consultancy services. “Off the shelf” software doesn’t qualify under this rule so the important thing is to be certain that the company’s services fall within this heading. Obviously I can’t be certain whether your services would qualify under this rule as it depends on the exact nature of the services that your company is providing, but I’m sure you can work it out for yourself.
Sections 2 and 3 of Notice 741 go into a lot of detail about the subject of the place of supply and I’d recommend that you read these so that you understand more about the subject. It’s not an easy read but worthwhile getting your head round if you are involved with non-UK customers. Have a word with your accountant about this, chances are they are familiar with the issue and I’m sure they’ll be able to help you decide whether or not the services you are providing fall within the “supplied where received” rule.
Finally, even though the services are deemed to take place outside of the UK and their value doesn’t count towards the UK VAT registration limit, the company can register for VAT on a voluntary basis if you want to be able to recover VAT on UK costs. See VAT Notice 700/12: Should I be Registered for VAT? See sections 1.5 and 1.11 here http://tinyurl.com/39jjyyu for further information on this, many businesses who supply overseas customers are only registered for VAT in order to recover VAT on their costs. The Notice also explains the other types of transactions that businesses have to count towards their VAT registration limits, including reverse charge services received from overseas suppliers, distance sales and EC acquisitions.
Marie