If a VAT registered business in the UK supplies services to a
foreign country; different rules apply when accounting for VAT. These
are determined by a number of factors such as whether supplies are made
to persons or businesses, classification of services and supplies made
to either where the customer 'belongs' or where the supplier 'belongs.'
Supply of services to a person
If services are being supplied to a person in either an EU or a non
EU country, the person or business who supplies the service (regardless
of the type of service) must charge VAT at the current rate on that
service.
Supply of services to a business in a non EU country
Where services supplied to a non EU country the supplier does not
have to charge VAT. The consumer must account for VAT in their country
of belonging according to their country's VAT legislation.
Supply of services to an EU business
Where the service is being supplied to a business in the EU, the
rules vary according to the type of services that are being supplied:
Supply of services according under the 'basic rule of supply'
Under the 'basic rule of supply' (Section 5 Notice 741 May 2008)
business that supply management services (not including consultancy,
accountancy, legal or financial services), subscription, broadcasting,
veterinary services, entertainment industry - production assistants,
hairdressers, makeup artists for films or TV clerical, secretarial
services, office facilities archiving services must charge VAT on the
supply. This is accounting for VAT where the supplier 'belongs'.
Supply of services that fall outside the scope of the 'basic rule of supply'
All business that fall into the categories
of consultancy, engineers, legal, accountancy, copyright and
royalties, finance, insurance, banking, telecommunications and the
supply of staff do not have to charge VAT to the consumer if it is a
business, only if the consumer is a person. This is accounting for VAT
where the customer 'belongs'. The supplier must be in possession of
the client's VAT number in their own country. The customer is required
to account for the VAT in their country under the 'reverse charge'
procedure.
If you are using the Flat Rate Scheme for calculating your VAT, the
sales turnover of the sales to a European client with a VAT number will
be part of your Flat rate Sales Turnover, and the Flat rate % should be
applied. Consequently, if you are making this type of supply, you
should opt out of the Flat Rate Scheme.
Electronically Supplied Services
For UK businesses that electronically (including email and internet)
supply services to a consumer in an EU country, no VAT is charged; the
consumer has to account for it in their country. Where the country is
a non EU country, VAT is accounted for under the special scheme
where VAT is charged at the rate of the country the service is supplied
to, filed on a UK VAT return for HMRC to forward the VAT on to that
country.
Changes in Legislation
On 1st January 2010, 2011 and 2012 new legislation comes
into effect for cross-border services supplied. Largely the new system
will simplify current legislation making, in most cases, the business
in the country receiving the service the one accountable for VAT under
the 'reverse charge' rules.
Useful links
Cross-Border VAT Changes effective 1st January 2010
Supplying Services Abroad
Special scheme
Schedule 5 of the VAT ACT 1994