VAT saving opportunityUnder what circumstances might you issue this letter?
“Dear Client – I have some good news. From 1 January 2021, I will no longer need to charge you 20% VAT on my services. I suggest that we share the VAT saving – I will increase my fees by 10% from this date.”
It could be that you have deregistered from VAT on 31 December 2020, on the basis that UK taxable supplies are expected to be less than £83,000 in 2021, the deregistration threshold. This would be correct, and relevant in many situations in the post Covid-19 world. But there is another situation that will be relevant for many UK businesses, linked to the end of the transition period on 31 December 2020 following the UK’s departure from the EU.
B2C servicesThere are many services where no VAT is charged if a B2C customer is resident outside the EU (VATA1994, Sch 4A, para 16). The place of supply in such cases is the country where the customer lives.
One such service is accountancy, although there are many more (see VAT Notice 741A, section 12). Such services supplied to an EU B2C customer are currently subject to 20% VAT based on the general rule for B2C services - the place of supply is where the supplier is based, ie the UK where you have your business.
Example:ABC Accountants is based in the UK and registered for VAT. It completes an annual tax return for a private individual living in Australia and charges £1,000 - the fee is outside the scope of VAT.
ABC Accountants also completes a private tax return for someone living in Spain. This fee is for £1,000 + £200 UK VAT until 11pm on 31 December 2020.
Change on 1 January 2021There has been an expectation that the legislation will be changed on 1 January 2021, so that the VATA 1994, Sch4A para 16 services will apply where the customer is not in the UK rather than not in the EU. HMRC has now confirmed this will be the case.
HMRC’s press office said: “From 1 January 2021, the place of supply of services rules will remain broadly the same as they are now. The general rule for B2C services remains as where the supplier is based, with the exception of UK to EU rules changing to the same as those currently for UK to Rest of World.”
This means that the extensive list of services covered by the above legislation will be outside the scope of VAT for both EU and non-EU B2C customers from 1 January 2021.
The tax return in the previous example will be £1,000 and no VAT for the Spanish customer, the same as for the Australian customer – hence my ‘Dear Client’ letter. There will be no requirement for ABC to register for VAT in Spain either.
Input tax recoveryWhat if ABC’s work is entirely for B2C clients based in EU and non-EU countries, ie the firm has no UK based clients? Does this mean that ABC will need to deregister from VAT on 31 December 2020 because it no longer has UK taxable supplies?
The answer is ‘no’ – a business can register for VAT if it has income that is outside the scope of VAT under the place of supply rules, as long as the service in question would be VAT-able if supplied to a UK customer, as is the case with accountancy and tax work. Input tax can be claimed on related UK expenses – known in VAT speak as ‘outside the scope with recovery.’
ConclusionMost B2B services have always been outside the scope of UK VAT for overseas customers (EU and non-EU) because the place of supply is where the customer is based.
This will continue to be the case in 2021 and beyond. But the changes considered in this article will produce a VAT saving opportunity for many UK suppliers of B2C services to EU customers and at the same time, a decrease in the tax yield for HMRC.