The rules that determine whether and how much VAT is chargeable on services sold to, and received from, abroad come from knowing what the place of supply of services for VAT purposes is. These rules are detailed, complex and extensive and this note merely provides an introduction and outlines the basics. More of the detail where necessary may be found in the individual VAT notices for which links have been provided at the end of this article.

The Basic Rule

For VAT purposes, the place of supply of a service is the place where that service is treated as being supplied. This is the place where it’s liable to VAT (if any).

If the supply is in the UK it is subject to UK VAT. The rate of VAT will depend upon the service provided and it may be exempt, zero rated, standard rated or subject to vat at a reduced rate.

If the supply is in an EU member state or another country it is said to be ‘outside the scope’ of UK VAT.

The rules as to what happens in this case vary depending upon whether the supply is made to or received from another business (B to B) or directly to a consumer (B to C).

B to C supplies are supplies made to :-

A Private Individual
A charity, government department orother body that has no business activities
A person (natural or legal) who receives a supply of services wholly for a private purpose

B to B supplies are supplies made to or received from :-

Businesses.
Customers who have both business and non-business activities such as charities, local authorities and government departments
Any other organisation that is able to provide evidence of business activity (e.g.by supplying a VAT number)

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VAT on Services Received

For service transactions between UK based customers and UK based businesses, VAT must be applied at the appropriate rate to all transactions unless it is an exempt transaction.

UK recipients of services from businesses based overseas however, will generally not be subject to VAT.

VAT Reverse Charge

UK businesses that receive services from a non-UK supplier need to consider whether the VAT reverse charge applies to them. The charge applies where :-

The services supplied aren’t exempt
The place of supply of services is (ordeemed to be) in the UK
The recipient belongs to the UK
The recipient is VAT registered
The supplier belongs outside the UK

The reverse charge applies to almost all B2B supplies of services that aren’t exempt.

Where the reverse charge applies, the vat account is

credited with output tax calculated on the full value of the supply received
debited with an equivalent amount of input tax unless the partial exemption rules apply, in which case the amount of tax recoverable may be less.

For most businesses, the application of the reverse charge doesn’t make any difference to the amount of VAT due or recoverable (because the input and output tax amounts are the same).

The vat return itself includes the following :-

amount of output tax in box 1 (VAT due on sales)
amount of input tax in box 4 (VAT reclaimed on purchases)
full value of the supply in box 6 (total value of sales)
full value of the supply in box 7 (total value of purchases)

VAT on Services Sold

For UK suppliers providing services to customers in the UK, VAT must be charged and accounted for to HMRC regardless of where the customer belongs (so a supply made to the UK branch of a foreign business isn’t exempt from VAT because the business has an overseas base).

The VAT treatment of services provided by UK businesses to customers abroad depends upon where the service is deemed to have been provided and in some circumstances, UK suppliers may be liable to account for VAT to the authorities of the country into which they are supplying a service.

ForB2C supplies, the general rule is that the place of supply is where the supplier belongs, irrespective of where the customer belongs. There are however a number of areas where special rules apply

B2C supplies of professional, technical, financial intellectual or other intangible services to customers outside the UK are generally treated as having been delivered where the customer is and therefore tend to be outside the scope of VAT.
Services related to land are supplied where the land is located regardless of where the supplier or customer belongs
There are different rules for the hiring of means of transport depending on who receives the supply and whether the hire is short term or long term
Performance related supplies where the rules differ according to whether it’s a B2B event or a B2C event.
There are complicated rules on freight transport and associated services

Where a service is supplied from one business to another (B2B), the general rule is that the supply is made where the customer belongs. If the customer therefore belongs abroad, the supply will fall outside the scope of VAT and the suppler should ensure they have suitable evidence to be able to demonstrate that their customer is both a business and outside the UK. For EU customers, having their VAT number will be considered suitable evidence for this purpose.

Supplies to customers that have both business and non-business activities (e.g. government departments, municipal authorities, etc.) will be treated as above

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Use and Enjoyment (U&E) Rules

In addition to the rules outlined above, there are additional rules relating to the “use and enjoyment” of services that are designed to ensure that taxation takes place where the services are consumed. These rules are designed to cover situations where :-

The place of supply would under the normal application of the rules be the UK but the services are effectively used and consumed outside the UK
The place of supply would under the normal application of rules be outside the UK but the services are effectively used and consumed in the UK

They don’t apply to all services but cover kind of services listed below :-

the letting on hire of goods (including means of transport)electronically supplied services (B2B only)
telecommunications services (B2B only)
repairs to goods under an insurance claim (B2B only)
radio and television broadcasting services

In these situations, having initially determined the place of supply using the standard rules outlined above, an additional step is applied using the U&E rules to determine where the service is actually consumed and therefore which tax treatment should apply.