There is an assumption among the directors of UK-based companies that there is no VAT payable if the customer is located abroad. This might be true, but the location of the customer itself does not determine the VAT status. The critical point is the place of supply, that is, the country in which the service is considered as supplied for VAT purposes. If it takes place in another country rather than the UK, VAT is not paid in the UK. But it should be taken into account that VAT or sales tax might be considered elsewhere.
Here’s how the rule operates, where businesses go wrong and what documents to keep.
What Place of Supply Means
The place of supply defines the location where the service is subject to VAT. For most services provided in a B2B setting, the basic rule is that the supply occurs where the customer belongs. For most services provided in a B2C context, the basic rule is that the supply occurs where the supplier is located.
Hence, when a UK-based company supplies a general rule service to an overseas business customer, the following can be stated:
- The place of supply is normally where the customer is located.
- The supply normally falls outside the scope of VAT in UK.
- The UK supplier does not charge VAT.
- The VAT is not charged by the UK supplier.
- The customer may have to account for local VAT under its country’s reverse-charge rules.
The overseas tax treatment cannot be taken for granted. There can be variations in the rules governing reverse charging from one country to another.
The Two Checks That Matter
Before considering the service out of scope in respect of VAT, consider:
- If the recipient of the service conducts their activities as a business.
- The location of that business in relation to the specific supply.
This second point becomes critical when a customer has establishments located in multiple countries. For instance, a customer’s headquarters may be situated abroad, while it may have a fixed establishment in the UK. If it is the UK establishment that has the closest connection with receiving the service, the place of supply could be the UK.
Relevant criteria can include:
- Which establishment entered into the contract.
- Which establishment gave the instructions.
- Where the service is used.
- Which establishment benefits from the work.
- Which establishment has the necessary human and technical resources.
- Which establishment pays for the service.
An overseas billing address or overseas registered office alone would not do the trick.
Proving Business Status
The supplier must hold commercial evidence proving the customer is in business and located outside of the UK. Where the customer is in an EU country, the VAT registration number is the most reliable proof. However, there are other pieces of acceptable evidence besides the VAT number.
If the customer does not have a VAT number, then the following may constitute evidence:
- A certificate or tax registration document from the relevant authority.
- Company registration details.
- A contract or engagement letter in the business’s name.
- Official business correspondence.
- Evidence of the customer’s commercial activity.
- Purchase orders, business letterhead or other commercial documents.
A business email address or website helps to prove the customer is in business. However, there should be other strong evidence to prove the same as well. When a customer is unable to provide a VAT number or any other evidence showing it is in business, then according to HMRC guidance, the transaction should be regarded as B2C. The supply of services completely for private use is also B2C.
Overseas Consumers
The original assumption that VAT is always applicable to an overseas consumer is incorrect as well.
According to the general B2C rule, a service provided by a UK enterprise is considered as a service provided in the UK. Hence, VAT in UK can be applied to it. Yet there are exceptions.
Some kinds of professional, technical and intellectual services provided to a non-business customer outside the UK are considered as supplied where the customer is resident. Such services might be:
- Advertising.
- Consultancy.
- Accountancy.
- Legal services.
- Engineering and certain design services.
- Data processing and the provision of information.
- Intellectual property rights.
- Banking, financial and insurance services.
- The supply of staff.
In this case, the service provided to an overseas consumer may be excluded from the VAT liability regardless of consumer status. The exact nature of the service should be examined carefully, as not all kinds of administrative and accounting activities will be included in these exceptions.
Digital services provided to consumers are subject to the following rule: they are usually taxed at the place of the consumer. Therefore, a UK service provider may need to register in the respective member states or utilise the non-Union One Stop Shop system of the EU.
How Reverse Charge Works
If a general-business B2B service is provided to an overseas company, the supplier in the UK usually provides an invoice without VAT. The client from overseas is then supposed to account for local VAT based on the regulations in its own country.
A suitable invoice note could be:
Outside the scope of VAT. The customer is to account for VAT based on the reverse charge if applicable.
Such wording can facilitate understanding the VAT treatment process. However, the supplier should ensure that the customer’s country does not require any special wording or information on the invoice. Additionally, HMRC recommends that the invoices provide details about the nature of the service rather than just saying “professional services.”
Remember that you need to keep the following items together:
- The invoice.
- The contract or engagement letter.
- Evidence of the customer’s business status.
- Evidence of where the customer belongs.
- Relevant purchase orders and correspondence.
- Any advice supporting the VAT treatment.
VAT documentation should usually be kept for six years.
Reverse Charge on Purchases
The reverse charge procedure can also be used in the opposite scenario.
Where a UK entity receives general rule supplies from a foreign supplier, the place of supply is normally the UK. The UK company should treat the receipt of the service as output VAT as though it has made the supply of the service to itself and be able to reclaim the related input VAT as per the normal rules of recovery.
The VAT-registered customer records the following:
- Output VAT in Box 1.
- Recoverable input VAT in Box 4.
- The net value in Box 6.
- The net value in Box 7.
For a partially taxable entity, there can be a potential offset of the output VAT and the input VAT. But there can be VAT costs for a partially exempt, non-business activity, or any entity that cannot reclaim the entire input VAT.
Important Exceptions
General rules for B2B and B2C do not apply to all services. Special rules should be applied prior to applying the general rule.
Some of the common exceptions are:
- Land and property services: Usually provided at the place where the particular piece of land or property is situated.
- Event admission: B2B admission to an event is usually provided at the location of that event.
- Restaurant and catering services: Usually provided at the place where the service physically takes place.
- Temporary hiring of transport: Usually provided at the location where the vehicle is made available to the consumer.
- Transport of passengers and freight: Special rules may apply depending on the journey and status of the consumer.
- Supply of digital services to consumers: Usually provided at the location of the consumer.
- Use and enjoyment: Some of the services may be taken out of the UK VAT system depending on the location of their use and enjoyment.
HMRC states that special provisions must always take precedence. General B2B or B2C provisions apply only if there is no special provision dealing with that particular service.
If an invoice contains more than one service, each must be reviewed separately as well. It depends on the facts of the case whether there is one composite supply or more individual supplies.
VAT Registration Threshold
The VAT registration threshold in the UK is currently set at £90,000. In general, a UK-based business needs to register if its taxable turnover over the last 12 months exceeded this figure, or will exceed it in the next 30 days.
Supplies of general services to foreign businesses are usually outside the scope of UK VAT. Unless there is some special rule that applies, their value is not included in the calculation of the £90,000 taxable turnover threshold.
However, even if this is the case, a VAT-registered business needs to include the value of such services in Box 6 of its VAT Return, according to HMRC’s guidance on filling in the form. These include supplies that fall under the place of supply provisions and are outside the VAT scope.
Another important point concerns purchases. The value of supplies that a non-VAT-registered UK business makes from overseas suppliers must be included in its taxable turnover when determining whether it should register for VAT, regardless of whether it has made any taxable sales.
Common overseas purchases that may require review include:
- Software and cloud services.
- Advertising.
- Consultancy.
- Legal and professional services.
- Platform and technology services.
What Happens When VAT Is Wrong
If HMRC determines that the supply was made in the UK and that VAT should have been charged, the supplier might have to pay the VAT, despite not charging it to the customer.
Consider the following scenario: a company supplies a product to an overseas customer for £100,000 without VAT. Subsequently, HMRC determines that VAT at 20% should have been levied and that the price of £100,000 is VAT-inclusive.
The VAT chargeable will be calculated as follows:
£100,000 × 20/120 = £16,666.67
Recovery of the above sum by the supplier from the customer will be determined by the terms of the agreement. Including a provision stating that the fees exclude VAT and that any VAT due is paid in addition can offer significant business advantage.
Penalties could arise for late payment of VAT. There could also be penalties in case the mistake was due to a failure to exercise reasonable care, although the position depends on the circumstances, behaviour and quality of any disclosure to HMRC.
Protecting Your Business
Before issuing a foreign invoice:
- Identify exactly what service is being provided.
- Determine whether there is any particular place-of-supply regulation.
- Find out if your client acts in a business capacity or as a consumer.
- Determine which region the client belongs to with respect to the supply.
- Ensure you have adequate supporting documentation.
- Find out the VAT or sales tax position in the customer’s country.
- Draft your invoice wording carefully.
- Insert the VAT safety clause in your contracts.
- Make sure of UK reverse charge implications regarding overseas acquisitions.
- Include those foreign sales that fall outside the scope of VAT in Box 6 if VAT is registered.
These steps should be a routine part of the customer onboarding and invoicing process rather than just in case of HMRC inquiries.
How Reflex Accounting Helps
Overseas VAT does not involve treating everything that you do in the same way. It all depends on the type of service, the nature of the client, where the establishments are located and whether a special rule exists.
Reflex Accounting can:
- Check overseas sales and confirm the correct UK VAT treatment.
- Check if customers satisfy the B2B requirements.
- Collect and maintain the necessary evidence.
- Determine the services subject to special place-of-supply rules.
- Review overseas purchases for reverse-charge obligations.
- Keep track of the VAT registration threshold.
- Improve contracts, invoice wording and bookkeeping processes.
- Review historic transactions and identify potential errors.
Contact Reflex Accounting for a review of your overseas sales before your invoicing mistake turns out to be a VAT liability.
