In this article we consider the treatment for ‘general rule’ services only, and not the exceptions to the general rule where the place of supply may be different (e.g., for land-related services, admissions to event, catering and performance-related services, telecoms, and e-services).
A business’ place of establishment will often determine the place of supply of services for VAT purposes. The general rule for business-to-business (B2B) services requires us to understand to whom the services are being supplied and where the recipient of those services belong. ‘Belonging’ for a business entity is where it has its business establishment. This is generally where the business operates its day-to-day affairs. A business can only have one business establishment. However, it may have many other ‘fixed’ establishments in other countries, either created by the incorporation of a branch or simply by having human and technical resources permanently present at a particular location.
The general B2B rules dictate that the place of supply is where the recipient is established. Therefore, a supply of service by a UK supplier falls outside the scope of UK VAT if provided to a customer that has its business establishment outside the UK. Where the customer has a business establishment in one country and one or more fixed places of establishment in different countries, then the supplier needs to determine which establishment is more closely related with the receipt of the supply.
The onus to determine the correct VAT treatment is on the supplier. The wrong VAT treatment can lead to both underpayment or overpayment of VAT which, apart from a cashflow impact, may lead to assessments being raised by tax authorities in different countries by rejecting the recovery of VAT which has been charged in error. Penalties may also apply.
Determining the correct place of establishment
In most cases it is clear to whom the services are being supplied, especially if there is only one establishment and the contracts do not contradict this.
A business establishment is usually the head office, headquarters, or ‘seat’ from which the business is run, i.e., the place from which the essential management decisions are being taken. A fixed establishment is any other place where the business has both the human and technical resources necessary for providing and/or receiving services on a permanent basis.
In determining which establishment the service is being received, you need to consider:
- at which establishment the services are actually consumed, effectively used, or enjoyed
- which establishment appears on the contracts, correspondence, and invoices
- where the directors or others who entered into the contracts are permanently based
- and, at which establishment decisions are taken and controls are exercised over the performance of the contract
However, it’s normally the case that the establishment actually providing or receiving the supply of services will override the contractual position if this is different. For example, if a UK company supplies services to a customer with a fixed establishment in the UK, but nobody in the UK is concerned with, or intervenes with, the supply of those services and this is all arranged and negotiated with individuals located at the business establishment overseas, then the supply is treated as outside the scope of VAT.
Why are establishments relevant for Customs Duties?
For the purpose of Customs Duties, UK Customs legislation requires a business to be established to carry out customs formalities and to be authorised to use certain special customs procedures (Temporary Admission, Inward Processing (Relief) etc.). Establishment for customs purposes (as opposed to establishment for VAT purposes or PE) means being incorporated at Companies House. If a business is not incorporated, then it needs to have a permanent place of business in the UK where for example:
- staff carry out work for the business
- from where accounts are submitted
- where orders are placed and /or processed and perhaps
- where the business records kept or a residence from where business normally and usually operates
Having an establishment for customs purposes is important for businesses that import goods into the UK or export goods out of the UK. This is because, in both the UK and the EU, a place of establishment is required in order to lodge import or export declarations in each respective jurisdiction. The lack of an establishment means that the business would not be legally permitted to do this themselves and will therefore need to appoint an agent acting under a special type of customs representation called ‘Indirect Representative‘. This agent would take on elements of risk and would be jointly liable with the business for any potential customs debt. These Indirect Representatives are in contrast to simply instructing an agent to lodge a declaration on the business’ behalf (‘Direct Representation’) – where all the risk and responsibility of ensuring the payment of customs duty and accuracy of any customs declaration is borne by the business not the agent.
Would you like to know more?
If you would like to discuss any of the above in more detail, please speak with your usual Blick Rothenberg contact or to Kim Verberckmoes or Alan Pearce using the details on this page.