VAT liability when payment is international

Place of Supply rules

I don’t know how familiar you are with the VAT rules relating to the place of supply or international services. It’s a complex area of VAT and a bit of a steep learning curve if you’ve not dealt with it before. There is a very short introduction in my article here https://vatexchange.co.uk/management-services/place-of-supply-of-services-2/ and detailed guidance in HMRC VAT Notice 741: Place of Supply of Services, which is on the HMRC website.

The rules are complicated because there are different rules to determine the VAT liability of different types of services that are supplied to or received from international businesses. The important factor is where teh supply is deemed to take place – or the “place of supply”

Supplied where performed

In principle, the VAT liability for training services is determined by where the training is physically carried out – if the training is physically performed in the UK, the supply is liable to UK VAT regardless of the payment arrangements. See VAT Notice 741: section 7 which deals with services “supplied where performed” and includes training.

Therefore, regardless of the payment arrangements, the supply of training is liable to UK VAT.

Contractual arrangements – who is supplying the service to whom?

In order to establish who is liable to charge the VAT, you need to establish the “chain of supply” – ie who is supplying services and who is receiving them.

I’ve come across similar situations in the past where an overseas holding company holds contracts with international clients for services that are supplied by subsidiary companies in different countries. The client contracts with the holding company which in turn contracts with the subsidiaries to carry out the work, so the subsidiary is actually supplying the holding company, not the client.

As I explained above, regardless of whether or not the UK or US company is supplying the Italian client, then the services are liable to UK VAT. And this is why the contracts are important. If the chain of supply is from the UK company to the US company to the Italian company, then the UK company would have to charge VAT to the US company. It may be necessary for the US company to register for VAT in the UK, recover the VAT charged by the UK company and then raise its own VAT invoice charging UK VAT to the Italian client – see below for further comments on this.

VAT registration?

Because the supply is in principle liable to UK VAT, whichever company supplies the services to the Italian company would have to be registered for VAT in the UK and charge UK VAT to the Italian client. Therefore if the US company is supplying the client, it may be liable to register for VAT itself in the UK if it isn’t already registered for VAT here – see section 7.8 of VAT Notice 741 for further information on this issue.

And what about the Italians?

There are a number of reasons why the Italians think that they shouldn’t pay UK VAT if their contract is with the US company. They are probably not familiar with the UK VAT rules and don’t appreciate that the US may be liable to register here and charge UK if it is supplying the services.

But there is a further factor that could explain why the Italians believe that they shouldn’t pay UK VAT. The VAT rules throughout the EC are based on certain EC Directives which are supposed to ensure that the rules are applied the same in each country. However the UK currently applies certain “place of supply” rules differently to other EC countries. In many EC countries, which I believe includes Italy, the VAT liability of certain “supplied where performed” services is where the business customer belongs. In this case, the supply is deemed to be “supplied where received”.

For example if the training service was being supplied by a French company for an Italian business client, the French company would not charge French VAT, but the Italian company would account for Italian VAT on its Italian VAT return under the “reverse charge” mechanism – see VAT Notice 741, Section 16 for information on this.

The UK is to implement similar provisions in 2010, but at present under UK law, the supply is “supplied where performed” and thus liable to UK VAT. However the Italian customer may well assume that it should not have to pay UK VAT but instead account for Italian VAT using the “reverse charge” procedure. And of course the Italian client would probably have to reclaim any UK VAT by submitting an EC Eighth Directive claim direct to HMRC unless it is able to register for VAT in the UK.

Contracts and HMRC guidance

As you can see, your query does raise a number of issues and none of them straightforward! I’ve dealt with many such queries in the past concerning international supplies of services and inevitably each situation is unique.

It’s only every possible to summarise the main issues when dealing with such queries as there are so many factors that could affect the VAT position. I would suggest that the first thing you need to verify is the contractual arrangement to establish which company is making the supply to the Italian client. Then look at the guidance in the HMRC Notice 741 as this should help with the principles involved and may enable you to reach your own conclusions.

These international queries can be very complicated and if the amounts of money involved are large, or if this is one of several similar contracts, I would suggest that you take formal advice or seek a ruling from HMRC to be certain of the position. Let me know if you need any further help – I would of course be pleased to provide more detailed advice subject to my normal fee arrangements. Alternatively you could refer the issue to HMRCs’ VAT Advice Centre for a formal ruling.

Good luck with your research!

Marie