Let’s face it – tax can be a daunting endeavor. With the need to crunch some serious numbers, and not to mention a ton of considerations, many people are hesitant to tackle what is often considered an unbeatable beast.
But this can’t be further from the truth. In fact, one of the best ways of understanding the dos and don’ts of tax is a thorough understanding of the don’ts.
In this short piece we’ll take a look at one of the trickier aspects of tax – VAT with regards to international services.
On the face of it, VAT appears to be a straight forward to tax to deal with. Charge it to your customers and claim back VAT you’ve spent.
VAT might seem awfully simple, but when it comes to international dealings, there are several serious considerations to avoid the taxman knocking on your door.
Key Rules to Follow
For business to business customers, or B2B for short, the services are treated as being supplied in the country in which the recipient belongs, therefore no UK VAT is charged. For business to consumer, or B2C, relationships the services are treated as being supplied in the country in which the supplier belongs, therefore UK VAT should be charged.
This means it is highly important to identify the type of customer you have and set up your accounting systems to be able to deal with this.
Buying in Services from Outside the UK
When buying in services for your business from outside of the UK, you’ll have to account for what is called a reverse charge. A reverse charge is where you account for the input and output tax at the same time, therefore there is no VAT impact for standard rated business.
Important Factors for the Digital Supply of Services to EU Consumers
Previously the services were taxed in the country that the service provider was based, but from the beginning of 2015, new rules were brought in that required these services to be taxed in the member state in which the customer belongs.
This is crucial and an incredibly important aspect given its major impact for tech and digital companies that supply services across the European Union. There are two main considerations for businesses.
1) VAT Compliance
The very first aspect
this process is VAT compliance, as businesses need to account for and pay VAT due to a number of EU jurisdictions. To compensate or work in line with this occasionally frustrating compliance, HM Revenue & Customs run a simplified “mini one-stop shop” (MOSS) to collect tax due on behalf of the relevant country. Businesses need only determine and supply the residency of the consumer and charge the right amount for that relevant nation.
2) How to Price Digital Services
The second aspect is how to price services to consumers. You can either leave pricing unchanged and run the risk of eroding your margins (EU rates range from 15% in Luxembourg to 27% in Hungary), or you’ll need to change your pricing systems to reflect the prevailing rate of VAT in the consumer’s country.
As you can see, once you start trading services across Europe, VAT becomes a whole lot more complicated. Having a trusted accounting adviser can save you a lot of pain in the long run.
“David Gormer has 14 years leadership experience in accounting and business development in the City of London. Having qualified as a Chartered Accountant with Deloitte, David specialised in the London technology sectors and online accounting in the UK. He enjoys hearing about your business and working out ways to help you succeed. David’s personal and entrepreneurial approach makes him a trusted advisor and ally to his clients.”