OVERSEAS VAT - 07.07.2020

VAT on contracts involving three countries

One of our subscribers has a deal to provide management consultancy services to a retailer in Morocco. All work will be done in Morocco, but a separate business based in Spain will assist our subscriber. What are the VAT issues of this arrangement?

General business-to-business (B2B) rule

When you sell your services to a business customer, the default situation that applies in 99% of cases is that the VAT charge depends on where your customer is based. If your customer is based outside the UK, as is the case here, then no UK VAT is charged on your invoices. The place of supply is the customer’s country. This means that no VAT will be charged on our subscriber’s fees to the client in Morocco.

Tip. With the general rule, it is irrelevant where the work is performed. So, the VAT position will not change if our subscriber does some work in the UK, it is all about where the customer is based, i.e. Morocco.

Trap. There are a few exceptions where the general B2B rule does not apply. For example, the place of supply for short-term vehicle hire is always the location that the vehicle is put at the disposal of the customer.

Input tax

The good news is that as long as the work you perform for an overseas business customer would be taxable if you invoiced a UK customer for the same service, you can claim input tax on any UK expenses you incur that relate to your overseas contracts. This outcome is known as “outside the scope with recovery.”

Tip. If all of your work is for overseas clients in this way, your VAT returns will be net repayments each period because there will be no output tax on your sales invoices. You might want to switch to submitting monthly rather than quarterly VAT returns to help your cash flow.

What about exempt fees?

The “outside the scope with recovery” rule means that if your service to an overseas client would be exempt from VAT if supplied in the UK, then your input tax claims on UK costs relevant to the overseas contract would be blocked under the rules of partial exemption.

Trap. This block would include the input tax entry of any reverse charge entry you make on invoices you receive from overseas suppliers, such as the Spanish supplier here.

Subcontractor fees

The same B2B rule applies to the work of the Spanish-based subcontractor working for our subscriber. Even though they are based in Spain, and carrying out work in Morocco, the place of supply for their services is the UK because their customer is our subscriber. The subcontractor does not need to register for UK VAT because our subscriber will deal with the VAT by doing the reverse charge on their UK return, i.e. accounting for output tax in Box 1 and claiming the same amount as input tax in Box 4. The value for reverse charge purposes is the amount invoiced.

Trap. The reverse charge also applies to any expenses charged by the subcontractor on their invoices, e.g. the cost of airfares from Spain to Morocco. These expenses are classed as part of the fee for the services provided, they are not separate disbursements that avoid VAT.

Our subscriber should not charge VAT on the invoices raised to the overseas customer but can claim input tax on any UK expenses. The subcontractor will not charge Spanish VAT and our subscriber must deal with the VAT on their UK return with a reverse charge calculation.

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