Q:
I provide education services in the UK and I am not VAT registered because my annual income does not go over the threshold.
I have been offered a chance to teach in other EU countries. I understand that education services are treated as VATable in the country of supply. Will I now need to register for VAT in the UK and/or in the countries where I teach? And then submit VAT returns in the countries where I teach?
My research has found information about distance selling (and thresholds for various countries) but this seems to relate to a VAT registered entity selling to a non-registered entity in another country. In my case, I would be a non-registered person providing services to a registered entity in another EU country. Do these thresholds still apply?
A:
Your query raises a number of complex issues and the forum is really for dealing with simple queries or where I can tell you where to find further information. Giving advice on such a complex area is normally something that I’d have to do through my formal consultancy services.
However the subject matter covers a number of fundamental issues about the interaction of UK and EC VAT law and practice that I thought it would be interesting to write about in more detail. The answer to your query depends on many factors, but hopefully after reading this reply, you’ll have a better understanding of the issues involved and how to proceed.
I don’t know how familiar you are with VAT so bear with me if I’m telling you stuff you know already, but it’s important to get these principles correct from the start.
The short answer is that you probably won’t need to register for VAT in the other EC countries in which you perform services for one of two main reasons:
• Either your services are exempt from VAT under UK and EC legislation.
• If your services are taxable, then you may in theory be required to register for VAT in other countries under teh “Place of Supply of Services” rules. However the rules also allow the recipient of the service – ie your customer – to account for the VAT so that the supplier doesn’t have to register.
But first it’s important to understand how the EC VAT system works. The VAT system is inherent to the operation of EC trade and every member of the EC is required to implement a VAT system as set out in the EC VAT Directive, so the principles are similar in each member state. Of course there are local differences in practice and interpretation, but at least it means that you are starting from a common set of principles, and our UK and VAT legislation in other EC countries is based on the EC rules.
There are two classes of supplies: taxable and exempt. You are only required to register for VAT if you make taxable supplies, not exempt supplies. Some countries have registration limits – including the UK; some don’t – for example Germany.
The other factor is that there are different rules that apply to the VAT treatment applying to goods and services. This is fundamental so I’ll deal with this one first to get it out of the way.
Goods or Services?
Looking at your query, you’ve obviously done some research but the references to distance selling only apply to supplies of goods, not services and the difference is important. You may have been looking at VAT Notice 725: The Single Market, which sounds as though it would deal with EC VAT issues. Which it does, but mostly only as it pertains to goods, not services. So you don’t need to consider issues such as distance selling or acquisition VAT unless you are making supplies of goods.
You may provide some goods as part of your education service – perhaps books or CDs – but they might be treated as ancillery to the supplies of services. At this stage, let’s assume that they are but you can come back to that later if it’s not the case.
The notice that you need to be looking at is VAT Notice 741a: Place of Supply of Services which is here http://tinyurl.com/ye67t2s on the HMRC website. But it is a detailed notice and you really need to have some understanding of the main principles to be able to follow it. You won’t find the answer to your query in any one part of the notice as your query deals with a range of issues, so I’d suggest that you make sure that you read this post and the other suggested reading first and then use Notice 741a to confirm your detailed answers.
UK VAT Liability
I’ll start by setting out the UK provisions as I assume that the majority of your income will be from your work in the UK. It will also help to understand how the VAT system works and define the meaning of various bits of terminology.
Taxable or exempt?
The UK VAT liability of any supply is taxable at the standard rate (which is currently 17.5% in the UK) unless otherwise defined in the UK VAT legislation. The classification of the supplies as taxable is fundamental as you are only required to register for VAT in the UK if the value of your taxable supplies exceeds the VAT registration limit. If you only make only exempt supplies, or a mixture of both and the value of your taxable supplies is below the registration limits, then you won’t be required to register for VAT at all in the UK. You may, however, opt to register on a voluntary basis if you make some taxable supplies where the value is below the registration limit.
Just to clarify a further point, the UK also classes certain supplies as taxable but at the zero-rate. This is different from exempt in that you can recover VAT on supplies (purchases of goods and services) that you receive (this VAT is called “ input tax”) if you are making taxable supplies, at the standard, reduced or zero-rate. VAT on the cost of goods or services used to make exempt supplies cannot in principle, be recovered, with some limited exceptions.
And just to make life more interesting, in many other EC countries and the EC VAT Directive the zero-rate is referred to as “exempt with credit” rather than a zero-rate of VAT.
• Defining what you’re supplying
You say that you are providing “education services” and mention that you have been offered teh change to do teaching in the EC. The term “education services” is very broad and there are some sorts of education services that can be exempt from VAT in the UK or the EC. If the services are exempt from VAT then the value of their supplies doesn’t count towards the UK VAT registration limit and you wouldn’t have to register for VAT in the UK if that’s all that you are doing.
So to start, we’d need to know what sort of services you are providing. It could be anything from teaching in a school or university or certain types of personal tuition which are normally exempt from VAT; to training provided by commercial organisations to other businesses, which would typically be taxable. Here is the link to the HMRC VAT Notice 701/30: Education and vocational training which explains when education services are exempt from VAT in the UK: http://tinyurl.com/3y8elgk.
Please read the leaflet carefully as there are a number of factors that you need to consider when deciding whether or not your supplies are exempt in the UK. Although the supply of education by a school or university is exempt, the provision of teaching staff to that establishment is not covered by the exemption so if the teacher or lecturer was registered for VAT their services would be liable to VAT. A contract to provide the services of a self-employed teacher to cover for a member of staff on maternity leave, for example, wouldn’t be exempt.
EC VAT liability
The fact that your services might be exempt from VAT in the UK doesn’t mean that the same liability applies in other EC countries. However there is a provision in EC law that sets out the basis for the exemption of education services throughout the EC, so the same principle applies in all member states.
The EC VAT Directive states that the following supplies are exempt from VAT:
“the provision of children’s or young people’s education, school or university eduction, vocational training or retraining, including the supply of services and of goods closely linked thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objects;
tuition given privately by teachers and covering school or university education..”
EC VAT Directive 2006, Article 132 (i) – (j).
This provides the framework for the exemption of education services throughout the EC.
What I can’t tell you exactly is what the legislation in each EC member state says about the VAT liability and this could differ from country to country. Some countries might interpret the EC legislation more broadly than the UK and allow exemption in more cases and in this case you can rely on the broader exemption provided under the national law.
For the purposes of this post, I assume that your customers are businesses in other EC countries. If they are not businesses then the rules relating to your supplies will be different as I’ve explained briefly later.
If you want to be certain that your services are exempt, you’d have to contact the tax authorities in the member state concerned and explain the nature of your services in their countries and ask them to confirm the VAT liability of your services in that country and whether or not you need to register. You could also have a look at the information provided on the EC Commission website here http://tinyurl.com/2cq6sp. There is a lot of detailed information here including useful summaries of the VAT rates and reliefs in the different member states. Remember it’s only a summary though and you’d still have to establish whether your services are exempt in the countries concerned by reference to their national legislation.
One other way to find out would be to ask your prospective client if the services you are providing would be exempt in their country by reference to the EC Directive. If they’ve engaged overseas suppliers in the past, they can probably tell you whether or not your services would be exempt or taxable in their country.
And what if it’s taxable?
In principle, if you provide taxable services in other countries, then you would be required to register for VAT in that country and charge VAT at their national rate. This is because in most cases, the service would be deemed to take place in that country and as such is liable to VAT in that country for certain services that are currently deemed to be “supplied where performed”.
However from 1 January there are changes to the place of supply rules and some of these services will be covered by what is known as the general rule. This means that the place of supply will be where the customer belongs.
The general rule exists to avoid the difficulty of having multiple businesses registering for VAT in multiple EC countries. Instead of having to register in every country where you perform services, there is a procedure called the reverse charge (or sometimes the “tax shift”) mechanism whereby the customer – if a VAT registered business in that country – accounts for the VAT on the service so that teh supplier doesn’t have to register. That means that you don’t charge VAT on your invoices or submit VAT returns in that country.
Now the only real difficulty would be if your customer isn’t registered for VAT or isn’t a “taxable person”. In order for you to use the reverse charge procedure, your customer has to be a business and are receiving your supplies for the purposes of that business. The distinction might be important for you as the supply of education by certain public bodies may not be regarded as a business activitiy in the country concerned – for example in the UK, the provision of education by local authorities is a legal requirement, not a business activity. In those circumstances your customer may not be able to account for VAT on your behalf and you may have to register for VAT, whatever the value of your supplies in that country.
The whole subject of the place of supply is complicated but I’ve explained the main principles in an article and also explained how the reverse charge works here http://tinyurl.com/nw8ofr. If you want more detailed information, you can look at the HMRC VAT Notice 741a: Place of Supply of Services – Section 8 deals with teh provision of education services and explains when the supplies are covered by the revised “supplied where the customer belongs” rules from 1 Jan 2011. There are also detailed requirements about the information to be shown on invoices for such supplies at section 18 of the notice.
In conclusion
So based on these principles, you probably won’t need to register for VAT in other EC countries; either because your supplies are exempt from VAT OR your services are taxable but your customer can account for the VAT using the reverse charge procedure. However I can’t be certain of this because I don’t know all of your circumstances and in any event I don’t give advice on specific issues on this forum.
I’d recommend that you take some time to do some reading of the literature I’ve mentioned in this post to decide how you need to proceed. You might want to have a chat about it all with your accountant who probably has some experience of the EC VAT rules which I’ve mentioned here.
Let me know if you have any queries about the general principles and if you want formal advice about your specific circumstances, contact me here https://vatexchange.co.uk/contact.
Marie
6 December 2010