VAT Help - Client is outside of the UK but delivery of service is the UK

Hi All,

I would be eternally grateful if someone can help me with what is probably a simple question but after trying to digest PN 741 I am stuck on something.

Please find some background on my company;
- We are a new company supplying news to financial institutions globally
- We are a UK Ltd company and VAT registered.

I have two scenarios which I am unsure about. One;
- we sell our news to a US company
- the contract is for the US parent with a US address
- the news service is being used in the UK
Q - Do we charge VAT on the invoice?
Under 2.2 of PN 741 it would appear we do; 'If the place of supply of your services is the UK, you must charge any UK VAT due and account for it to
HMRC regardless of where your customer belongs.'

Scenario two;
- we sell our news to a UK company
- the contract is for an entity of the parent company registered in Grand Cayman
- the news service is being used in the UK
Q - Do we charge VAT on the invoice?
My client says no as it is offshore but surely the same rule applies to scenario one?

Any help and insight on this matter is very much appreciated.

Many thanks,
Simon

VAT Help - Client outside the UK?

Hi Simon

First of all, congratulations on trying to digest PN 741 – even for seasoned VAT consultants it normally requires a strong G&T before reading!

There are 2 aspects to your queries; first whether the service you are providing qualifies to be treated as supplied “outside the UK” when the customer belongs outside the UK; and second whether or not the customer “belongs” outside the UK.

General B2B Rule

As you have rightly stated, the supply is liable to UK VAT if the supply is deemed to take place in the UK. However under the Place of Supply of Services rule, if the customer is an overseas business, whether EC or non-EC, then most services are deemed to take place where the customer belongs under what is now called the general B2B rule. The services covered by the B2B rule are listed in section 15 of PN 741 – they include the provisin of information and I would guess that your services fall within this category. See section 15.5.12 for a detailed list of what is included under this heading to satisfy yourself that your services are covered.

However for the purposes of this reply, let’s assume that the services are covered so normally would qualify to be supplied VAT free if the recipient is a business that belongs outside the UK.

Where does the recipient “belong” for VAT purposes?

So the issue that we need to consider is whether the recipient belongs “outside the UK” and this is where the confusion arises. The concept of “belonging” for VAT purposes is explained in section 3 of PN 741 and is similiar to the concept of residence or domicile for tax purposes. There are a series of criteria that HMRC use to establish whether or not the recipient of a supply belong in or outside the UK – see paragraph 3.2 which sets out the criteria. First of all, you find out whether the recipient has its main business establishment or a fixed establishment in the UK, or any other UK establishment which is most “directly concerned” with receiving the supply.

It’s this last point that is the most important. Suppose the recipient is a US company, with a fixed establishment – say a branch office or even a subsidiary company which acts on behalf of the US parent company - in say Germany, France and the UK. What you need to decide is which establishment is most directly concerned with receiving the supply. If it’s the US, German or French establishment, then the supply is deemed to take place in that country under the general B2B POSS rule. If it’s in the UK, then the supply is deemed to take place in the UK and is liable to UK VAT. Paragraphs 3.6 – 3.8 tell you how to decide the POSS in certain scenarios.

Now in both of the scenarios you set out, you say that the “news service” is being "used in the UK" and it’s this that makes me wonder if the clients concerned have some sort of establishment in the UK – even if it’s just “one man and a dog” – that could qualify as the place most directly concerned for the purposes of your contracts. If the client is a US news agency with a UK office which uses the information you supply to provide, for example, UK business reports then it would seem likely that the establishment which receives the supply is in the UK and therefore VAT is chargeable.

In your second scenario, you say that you sell your news to a UK company but the contract “is for an entity of the parent company registered in Grand Cayman”. In this case I assume that your client is a company registered in Grand Cayman. You say however that you sell your news to a UK company and it sounds to me as though this company could be acting on behalf of your client and therefore creating an establishment of the GC company in the UK.

Two points about the “Place of belonging” issue.

First of all, it is not an easy subject and there have been several VAT Tribunal and court cases over the years which have considered the issue from different angles, including complex situations involving multi-national suppliers providing services all over the world to multi-national clients.

The second point is that if your clients have UK establishments and you decide that you should be charging UK VAT, then it’s possible that they could register for VAT and recover the VAT that they incur in the UK. Alternatively they may be entitled to recover teh VAT through the EC VAT Refund Scheme for overseas businesses. However if they are businesses in the financial services sector, they may not be entitled to recover VAT because of their VAT exempt status so that may explain why they are adamant that you shouldn’t charge VAT.

But as the VAT registered supplier, it’s your liability and you need to make sure that you are treating teh fees correctly or you’ll end up bearing the VAT cost. It's normal business practice to ensure that contracts allow suppliers to add VAT to their fees so that the customers are required to pay the additional VAT amount even if they disagree with the VAT liability.

Obviously I can’t give definitive answers without seeing your contracts and some more detailed information about the clients and I would be happy to help through our formal consultancy services, but hopefully the information which I’ve set out above will help you to work the answer out for yourself.

Marie
26 September 2010

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