The VAT rules that determine whether the supply of a service is outside the scope of VAT will change at 11.01 pm on 31 December 2020, as the transition period for the UK leaving the EU comes to an end.
From that point the UK is no longer treated as being part of the EU so the VAT treatment of services sold to customers based outside of the UK, will be the same as currently applies to customers in the “rest of the world” (ie non-EU).
Most business to business customers (B2B) will be outside the scope of VAT, because the place of supply is where the customer is based. The place of supply rules are explained in VAT Notice 741A, which has not yet been updated for transactions in 2021 and beyond.
The main difference for UK suppliers will be for services supplied to non-business customers (B2C) in the EU, particularly for those services in the list in para 12.2 of VAT Notice 741A. This includes most professional services including those of lawyers and accountants.
For example: a VAT registered UK accountant who completes personal tax returns for an individual resident in Spain must currently charge that customer 20% VAT. From 1 January 2021 the UK accountant will not have to charge UK VAT to the Spanish resident for those services, and won’t have to register for VAT in Spain either.
However, the UK business will have to abide by the e-commerce rules for their particular trade sector, which are changing from 1 January 2021. For example, providers of online services need to look at the local rules for each EU country where they operate, which may include licensing requirements. Local legal advice will be required.
Written by the Tax Advice Network