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By Dean Carey, Barinder Chadha

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When two parties to a transaction are in different EU countries, it is essential that each person knows where that transaction is subject to VAT and who is responsible for accounting for VAT to the responsible tax authority. On 1 January 2010, radical changes to the harmonised 'place of supply rules for services' occurred.

Previously, the default place of supply of a service was where the supplier was established. However, from 1 January 2010, the default place of supply depends on whether the customer is a 'relevant businessperson'.

• When the customer is not a relevant businessperson - ie, a business-to-customer supply (B2C) - the default place of supply will be 'where the supplier belongs'.
• When the customer is a relevant businessperson - ie, a business-to-business supply (B2B) - the default place of supply will become 'where the customer belongs'.

As with the previous rules, there will continue to be exceptions to the default position.

General Exceptions

The first step is to question whether the supply falls within the definitions of the General Exceptions.

• Services directly relating to land continue to be taxed where the land is located.
• Passenger transport continues to be taxed where the journey takes place, proportionate to the distances travelled.
• Hiring a means of transport is subject to VAT, where the means of transport is placed at the customer's disposal if it is a 'short-term' hire, which is a continuous period of 90 days or less for a vessel, or 30 days or less for any other means of transport.

A long-term hire of a means of transport will, until 1 January 2013, continue to be treated as made under the default place of supply rule but will also be subject to an override under the 'use and enjoyment' provisions set out in more detail below.

Supplies of cultural, artistic, sporting, scientific, educational, entertainment and similar services (including fairs and exhibitions, and ancillary services relating to such activities will, until 1 January 2011, be taxed where the service is physically carried out as a General Exception to the default place of supply.

From 1 January 2011, a similar B2C Exception and a more limited B2B Exception will replace this General Exception.

Restaurant and catering services will be treated as supplied where the service is physically carried out, except where provided in the course of an EU passenger transport operation.

A provision of catering or restaurant services during an EU passenger transport operation (a journey between two EU member states that does not include a stop at a non-EU location at which passengers may embark or disembark) is supplied in the country of departure.

Hiring of goods and telecommunication and broadcasting services are subject to a 'use and enjoyment' General Exception.

Enjoyment as an Exception

The essence of the 'use and enjoyment' rule is that, where under the default place of supply, a transaction either:

• Escapes VAT, but the service is 'used and enjoyed' in the EU; or
• Is subject to EU VAT, but use and enjoyment occurs outside the EU.

In those circumstances, the transaction should be treated as made where use and enjoyment occurs.

A non-EU business hiring goods to an EU customer should not have a commercial advantage over an EU supplier simply because his business is established outside the EU and the supply would escape VAT under the default place of supply.

Customer's status

General Exceptions apply to all customers, regardless of their status as a relevant businessperson. However, if the service provided is not within a General Exception, the next step is to identify whether the customer is a relevant businessperson, which is a person who carries out an economic activity in any location, or is registered for VAT anywhere within the EU. 

With the knowledge of the customer's status, it is then necessary to consider whether a B2B Exception or B2C Exception applies.

B2B Exceptions

Electronically supplied services, such as website supply, web-hosting, updating of software, images, text and making available of databases, are treated as supplied where they are used and enjoyed if this is in the EU and the service would otherwise escape VAT, or vice versa.

Admissions to cultural, educational and entertainment activities etc, and ancillary services relating to admission to such events, are to be treated as made in the country in which the events in question actually take place. This B2B Exception will apply from 1 January 2011.

B2C Exceptions

Supplies by an intermediary arranging a transaction are treated as supplied where that underlying transaction occurs.

The service of transport of goods between different EU territories is treated as supplied where the transport begins.

Transport of goods (other than between two EU territories as described above) is subject to VAT where the transportation physically occurs.

Ancillary transport services take place where the service is physically performed.

From 1 January 2013, long-term hiring of means of transport is to be treated as supplied in the country in which the recipient belongs, unless it is made available to the customer in the territory in which the supplier is established, in which case the place of supply is where the supplier belongs.

The use and enjoyment General Exception applying to the hire of a means of transport (see

above) will continue to apply in similar activities (including fairs and exhibitions), and ancillary services relating to such activities, including services of organisers of such activities.

Electronic services supplied to non-business customers in the EU by a non-EU supplier are treated as supplied where the customer belongs.

Recipients outside EU

The following B2C supplies are treated as made in the country in which the recipient belongs, if the recipient is outside the EU:

• Transfers and assignments of copyright, patents, licences, trademarks and similar rights;
• The acceptance of any obligation to refrain from pursuing or exercising (in whole or in part) any business activity or any rights within paragraph (a);
• Advertising services;
• Services of consultants, engineers, consultancy bureaux, lawyers, accountants, and similar services, data processing and provision of information, other than any services relating to land;
• Banking, financial and insurance services (including reinsurance), other than the provision of safe deposit facilities;
• The provision of access to, and of, transport or transmission through natural gas and electricity distribution systems and the provision of other directly linked services;
• The supply of staff;
• The letting on hire of goods other than means of transport;
• Telecommunication services;
• Radio and television broadcasting services; and
• Electronically supplied services.

Default place of supply

If the service is not covered by a General Exception, a B2B Exception or a B2C Exception, then the default place of supply applies.

Responsibility for paying VAT

Having established where VAT is due, the next question is who pays? For B2C transactions, the responsibility rests with the supplier, who will usually need to register in the territory of supply, subject to VAT registration thresholds, VAT liability considerations. Care must be taken, for example, as some member states have no VAT registration threshold and taxable supplies could lead to a liability to register.

A detailed list of European VAT compliance can be found at http://uk.accaglobal.com/uk/members/technical/taxation/

For B2B transactions taxed where the customer belongs under the default place of supply, the responsibility for paying VAT rests with the customer.
 
Where the transaction is B2B but is caught by a General Exception or a B2B Exception, it may be possible to make the customer responsible for accounting for VAT (EU law does not require member states to offer this facility).

EC Sales Lists

The changes also impact EC Sales Lists (ESLs) and the timing of payments. Prior to 1 January 2010, ESLs were  submitted by businesses selling goods to businesses in other EU members.

There are new requirements to submit ESLs recording sales of services to business customers in other EU territories when the default place of supply is applicable. For B2B transactions, this will cover most services that are not covered by a General Exception.

The deadline for submission is being shortened to 14 days for paper returns and 21 days for electronic returns. In some cases, monthly returns will also be required for supplies of goods.

Impact of ESL rules

• Businesses selling goods and submitting ESLs will need to ensure that systems can cope with a shorter submission period.
• Businesses supplying services for which the customer is responsible for declaring VAT must put in place a system that:
  1. Recognises the transactions that need to be included on an ESL;
  2. Has the VAT registration number of each of its customers; and
  3. Captures the value of such supplies to each of the customers concerned.

Timing VAT payments

In conjunction with these changes, the 'time of supply' rules are being altered for imported services. From 1 January 2010, VAT will be due for the following:

• When the service is complete; or
• If there is a regular billing period, at the end of the billing period; or
• On the date of payment if this is before either of the preceding dates.

An additional rule applies when a continuous service that is subject to a regular billing periods starts in a given calendar year and continues into the next. In this situation, where no invoice or payment arises in a particular calendar year, a supply is treated as made on 31 December of that year.

Time of supply rules will also change to ensure the date transactions reported on ESLs will match the dates on which customers account for VAT.

Dean Carey CTA is a partner at Constable VAT Consultancy LLP and a member of the ACCA Tax Committee. Barinder Chadha FCCA is a technical adviser at ACCA

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