Purple Lime explains VAT on services provided to the EU post Brexit

By Anita Jaynes on 28 March, 2021

Post sponsored by Purple Lime

It has been a few months now, and the reality of Brexit is starting to settle in for many of us. For business owners there was a lot of uncertainty around what impact Brexit would have on their business, particularly if they supply services to EU member states. For a long time the guidance on this was vague while deals were being discussed, but now the dust has settled, we have a much better idea of how things will work moving forward.

One of the bigger concerns we heard was around VAT – specifically what VAT would need to be applied to services being provided to the EU from the UK, who was responsible for that and if the VAT system would change with our leaving the EU and their VAT regime. While some areas are still being discussed, today, we want to tell you what we know about the new VAT processes for providing services to the EU.

What Has Changed?

VAT is a tax on the consumption of goods or services. VAT exists in a lot of countries, but the rules around it can be slightly different, depending on which country you are in, and if you are buying or selling goods or services to a different country. In general, a business charges its customers VAT on its sales, and then pays the VAT it has collected to their national tax authority, offset by the VAT it has paid to its own suppliers.

Up until January this year, the UK was a part of the EU VAT regime. This meant that our VAT system operated within the parameters set by the EU directives, and applicable to all EU states. However, the UK has now left the EU, which leaves a lot of question marks over how VAT will work from now on. In theory, the UK government could just choose to abolish VAT altogether – but that is very, very unlikely! VAT is so deeply entrenched in so many countries (including ours), that abolishing it would cause chaos. Instead, we might see some mild reforms, but the process itself will likely stay the same.

Place of Supply is Critical

Now, when trying to work out if, how and when to charge VAT, you need to know the place of supply. For VAT purposes, the place of supply of a service is basically where that service is treated as being supplied. If the supply is in the UK, then it’s subject to UK VAT, and you are legally required to charge any UK VAT due, and account for it to HMRC. If it’s in an EU member state or another country, then it falls ‘outside the scope’ of VAT.

If the place of supply for your services is outside the UK, then you or your customer may be liable to account for any VAT due to the tax authorities in that country. The rules vary slightly on what is being supplied, with digital services being treated differently to standard services, and goods having different rules again. And the rules change yet again depending on whether you are providing services B2B or B2C. So if you’re not sure about which rules apply to you, we recommend checking with your accountant.

Selling Digital Services to the EU

If you are selling a digital service to the EU, then the process is slightly different. There is a very simple framework that helps you decide in which country the transaction should be subject to tax, along with if and how you should apply VAT. The UK government defines digital services as:

  • Radio and television broadcasting services
  • Telecommunications services
  • Electronically supplied services (like digitised documents, online magazines, web hosting services or software)

Up until now most businesses wouldn’t have to worry about this, as we were also part of the EU and had tax treaties set up to handle it. But now, any digital services you provide outside the UK are not liable for UK VAT yet might be subject to overseas tax. To work out what this is, you will need to check:

  • The location of your customer
  • Whether it’s a digital service or a general service (for general services, you can find the rules here)
  • Whether your customer is a business or a private customer

If you’re a UK business supplying to a customer outside the UK, then you will need to check the rules for the customer’s country, since you might end up having to register for VAT, or the equivalent system, in that country instead. Once you know the place of supply (where your customer is located), then you must either:

  • Register for the Non-Union VAT MOSS scheme in an EU member state
  • Register for VAT in each EU member state where you supply digital services to customers

This will allow you to apply the adequate VAT to your invoices and ensure you will pay VAT in the correct country without running into any issues.

At Purple Lime, it is our aim to make finance as simple and straightforward as possible for you. We understand that Brexit has had a big impact on many businesses, and the ripples of change have not finished just yet. If you are confused about how to charge VAT on services to your EU customers, or just VAT in general, or want some advice about how to shore up your business finances, we would love to help. Get in touch with us by emailing hello@purplelime.uk.com or calling us on 01249 691360.

Visit Purple Lime online at: www.purplelime.uk.com