Place of Supply of Services
What is the Place of Supply?
The “Place of Supply” is the term that we use in VAT to determine in which country the VAT liability arises. Supplies of goods or services that take place in the UK are liable to UK VAT.
If you are selling goods, the issue is quite clear cut as the place of supply is where the goods are physically located – for example if I sell goods that are in the UK, then the supply is obviously in the UK, but with services it is more difficult as the subject of the supply is intangible.
The normal rule is that if a UK business provides services to UK customers, the place of supply of the service is in the UK and liable to UK VAT. If a French business provides services to French customers, the place of supply is France and therefore is liable to French VAT.
But what do you do if the supplier is in the UK and the customer is in France or the supplier is in France and the customer is in the UK? Would the supplier charge UK VAT or French VAT? Would the UK supplier have to register for VAT in France and charge French VAT or would the French supplier have to register for VAT in the UK and charge UK VAT?
This would make life ridiculously complicated so there are special rules in EC and UK legislation that tell us how to deal with these situations.
These are called the “Place of Supply of Services” rules, referred to as “POSS” for short. There is a general rule which covers the majority of situations and enables EC businesses to make most supplies of services without charging VAT in most case or requiring businesses to register for VAT in their customer’s country.
The reason that UK VAT isn’t charged is because under the POSS rules, the supply concerned is deemed to take place in the country where the customer belongs.
In other words, the place of supply is moved to the customer’s country and therefore as the supply isn’t in the UK, the supply isn’t liable to UK VAT. This is often referrred to as the “tax shift” mechanism as the POSS rule means that the place of supply shifts from the UK to the customer’s country.
General Rules
• B2B supplies – ie business to business
The place of supply is where the customer belongs. This means that if the customer belongs in another country, the place of supply is where the customer belongs. This means that a UK supplier would not have to charge UK VAT if the services are provided to a business in any other country.
• B2C supplies – ie business to final consumer.
If the customer belongs in any EC country, the place of supply is where the business belongs. If the customer belongs outside the EC, the place of supply is where the customer belongs. This means that a UK business supplying services to private consumers in the UK or other EC countries must charge UK VAT. The UK business wouldn’t charge VAT if the customer belongs outside the EC, eg Australia.
Certain supplies are not subject to the general rules and these are explained in HMRC VAT Notice 741A.
Finally, just to confirm a bit of terminology. The effect of the POSS rules is that even though UK VAT is not charged in the majority of cases, it doesn’t mean that the supplies are “exempt” from VAT or “zero-rated” for VAT purposes. They are free from UK VAT because the place of supply is shifted to where teh customer belongs. The value of the supplies doesn’t count towards teh VAT registration limit as the effect of the POSS is that the place of supply is shifted from the UK. However the UK supplier is entitled to register for VAT and recover input tax on related costs as long as the supplies would be liable to VAT if they were made in the UK.
See HMRC VAT Notice 741A Place of Supply Services for further information here http://tinyurl.com/yht446x on the HMRC website.
And if you’re confused about how to include sales and purchases of services on your VAT return, check out the most recent edition of “Filling in your VAT return” http://tinyurl.com/628f4yr. Section 3 explains this by reference to each box on the VAT return.