Value added tax (VAT) for services in the EU

28.08.2018

Definition of VAT

VAT is a form of taxation of the value added during production or distribution of products and services which is widespread in many countries. The sum of VAT received by the seller or producer, reduced by the sums of VAT included in the price of goods and services acquired by him earlier, must be paid to the budget. VAT is an indirect tax because the amount of tax is included into the price of goods and services and is payable by the customer to the seller who, in his turn, pays it to the budget.

This article focuses on VAT in the countries of the European Union (EU) to consider its specific features in comparison with other similar indirect taxes of other countries.

Almost all companies conducting business in the EU encounter VAT taxation during their activity, as well as their partners, suppliers, contractors, intermediaries from other countries. In most cases the differences in terminology and rules of administration of EU VAT in comparison with other countries cause some difficulties which are recommended to be resolved with the assistance of European tax and accounting professionals.

Nevertheless, the common principles of VAT taxation in the most frequent commercial transactions may be understood by analyzing provisions of applicable EU Directives. In this article such analysis is made using the example of VAT taxation of services.

VAT regulation in the EU

In the EU member states VAT taxation is regulated on the union (supranational) level. The basic instrument of its regulation is the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the Directive). This Directive establishes all key points of VAT taxation, except for VAT tax rates (they are established by each member state) and some other matters.

Taxpayers

In accordance with Article 9 of the Directive VAT taxpayer in the EU is “any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity”. This means that the fundamental characteristic of VAT taxpayer is the economic (business) activity.

In other words, any companies, partnerships and individual entrepreneurs may be VAT taxpayers. Persons that acquire goods or services for private use not connected with business activity cannot be VAT taxpayers. In most cases they are natural persons.

VAT registration may be mandatory (e.g. in the UK, where some companies or partnerships must register for VAT if their VAT turnover exceeds 85 000 pounds during previous 12 months (this threshold is subject to changes from time to time) or voluntary. VAT registration causes obligations of company to maintain VAT accounts and file VAT returns.

Taxable transactions

There are four types of VAT taxable transactions:

  1. Supply of goods;
  2. Intra-Community acquisition of goods;
  3. Supply of services;
  4. Importation of goods.

The services provided by VAT taxable persons to each other are named B2B services (business to business). The services provided by VAT taxable persons no non-VAT taxable persons are named B2C (business to consumers). There are different rules of determination of place where services are carried out for B2B and B2C services.

Determination of place of supply of services for purposes of VAT

Generally, services are taxed in the place where they are provided (supplied). However, for determination of country in which the services were provided (and, subsequently, the rules of charging and payment of VAT) it is required to be aware of:

  • Type or category of services;
  • Location of each party;
  • Status of consumer of services – whether it is a business structure and is subject to VAT or not.

There are several rules of determination of place of supply of services for the purposes of VAT established by EU legislation, including cross-border provision of services.

Place of supply of B2B services

The services provided by business entities to each other, known as B2B services, are VAT taxable in the country of the customer of services.

In accordance with the Article 44 of the Directive the place of B2B services to non-VAT taxable persons is the place of the customer (country of incorporation or residence of business of the customer). However, if the services are provided by the permanent establishment of the supplier that is situated in a different place than supplier itself, place of supply of services will be the place of the permanent establishment.

Place of supply of B2C services

The services that are provided to natural persons, that is B2C services, are VAT taxable in the country of supplier of services.

In accordance with the Article 44 of the Directive the place of supply of B2C services to non-taxable persons is the place of supplier of services (country of incorporation or location of supplier’s business). However, if the services are provided by permanent establishment of the supplier that is situated in a different place than supplier itself, place of the supply of services is the place of the permanent establishment.

There are several exceptions from the rules mentioned above established by the Directive. For example, B2B and B2C services connected with immovable property are VAT taxable in the place where such property is situated (article 47 of the Directive).

Examples

Below there are several examples where UK private limited company or limited liability partnership supplies consultancy services (or legal, accounting or audit services) to other companies resident in the EU or non-resident in the EU.

Consultancy, legal, accounting and audit services provided by the UK entity to other taxable persons that conduct business (residents or non-residents in the EU) are classified as B2B services.

The general rule of the Article 44 of the Directive is applicable to B2B services, which are taxed at the place of customer of the services. The standard VAT rate in the United Kingdom (as on 2018) is 20 %.

Example 1. The supplier of services is the UK company and the customer of services is other EU company

Case A. The customer of services is the EU company (other than the United Kingdom), registered for VAT.

In such case the consultancy services provided by the UK company to Cypriot company must be VAT taxed in Cyprus (where the customer is located).

In this case the supplier must not include VAT in the price of services (but just makes a note “reverse charge” with reference to the VAT number of the customer which indicates the customer’s responsibility to account for VAT in his country). In other words, the customer company is responsible to account for VAT provided that it is VAT registered.

The customer calculates VAT under reverse charge procedure, i.e. includes the amounts of local VAT payable in VAT Return in its country and deducts the same VAT amount simultaneously. As a result, the sum of VAT is zero, so neither party must pay VAT in fact.

However, to use reverse charge the customer must be a relevant business person, i.e. to be taxable person in terms of the Article 9 of the Directive, and be registered for VAT in any EU state. The customer must provide his VAT number to the supplier, who, in his turn, must check the validity of this VAT number and the information on the contractor connected with it.

Case B. The customer of services is the EU company (other than the United Kingdom) not registered for VAT.

If the customer (EU company) does not have VAT number, then VAT sums must be included in the price of services (and invoices must contain VAT) so that the tax payable by the supplier in his country, but VAT amounts may be deductible.

Example 2. Both supplier and customer of the services are UK companies registered for VAT

If one UK company provides services to another UK company, VAT must be included in the price and is payable by the supplier (VAT amounts may be deductible).

Example 3. The supplier of services is the UK company, and the customer in non-EU company (from any non-EU state, including offshore jurisdictions)

For example, UK company provides legal services to Russian company and the place of services according to the Article 44 of the Directive is Russia. In such case VAT in the UK is not charged and the invoice does not include VAT.

In other words, if the customer is non-EU company having no VAT number, VAT amounts are not included in the price of services.

However, this is possible only for B2B relationships, where the customer is taxable person or entity conducting business and has some evidence of these facts.

The supplier of services may consider the non-EU customer as a business person or entity if:

  • The supplier obtains certificate or other document from competent tax authority of customer’s jurisdiction stating that the customer carries out economic activity; or
  • If the customer has no such certificate, but the supplier knows VAT number or its analogue in customer’s jurisdiction that is used for identification of business entities, or any other evidence that the customer conducts business, provided that the supplier made sufficient effort to check the information provided by the customer.

Otherwise, when non-EU customer has no evidence of its business status in its jurisdiction the transaction will be classified as B2C and will be taxed in the country of the supplier.

Therefore, if business status of the customer is not sufficiently clear, the invoice must include VAT by default, and VAT is to be paid by the supplier in its country (and may be deducted afterwards).

The scheme and table below summarize all the aforesaid matters.

1. Determination of the place of supply of services for VAT purposes

Determination of the place of supply of services for VAT purposes

2. Rules of charge and payment of VAT for B2B services

Supplier
Customer
VAT taxation
EU
VAT registered
The same EU country
VAT registered
VAT is included in the price and mentioned in the invoice.

VAT is payable at a rate of the country of supplier and further may be deducted
EU
VAT registered
Other EU country
VAT registered
VAT is not included in the price and not mentioned in the invoice.

VAT is not payable in fact. VAT is reported by the customer under reverse charge procedure in his EU country
EU
VAT registered
Other EU country
Not VAT registered
VAT is included in the price and mentioned in the invoice.

VAT is payable at a rate of the country of supplier and further may be deducted
Non-EU
Not VAT registered
EU
VAT registered
VAT is not payable in fact. VAT is reported by the customer under reverse charge procedure in his EU country
EU
VAT registered
Non-EU
Not VAT registered
VAT is not included in the price and not mentioned in the invoice*

*If there is an evidence of business status of non-EU customer. Otherwise VAT must be mentioned in the invoice.

Tags: VAT

Back to the list

Contact us:

Spam protection. Please tick the box below:

* All fields are required