VAT on "services" - some basics

VAT law states that a service is the supply of anything that is “not goods”! Even the supply of goods on hire is the supply of hire services.

That leaves a lot of very different types of supply all falling under the one category of “services”. VAT law therefore breaks this huge “services” category into numerous different sub-categories.

What services are being supplied?

HMRC rightly states (at Section 2.3 of VAT Notice 741) that:

“To begin with, it is essential that you think carefully about the nature of any services that you supply (or receive). You must identify the real nature of a supply of services … because it may affect which place of supply rule applies.

“Sometimes the same term may be used to describe a variety of activities. For example, the term ‘management services’ does not indicate the nature of the services supplied, some of which may fall under the basic rule whereas others may not.”

The “place of supply” is usually the country whose VAT rules apply to the transaction. But, as a result of complex rules for determining the place of supply, this is not always the country in which you intuitively think the service is being supplied.

The “basic rule” is that the place of supply is the country in which the supplier belongs. If the exact nature of the service supplied does not fall within one of the numerous sub-categories, then this basic rule must apply.

So the business must know precisely what type of services it is supplying or buying. Only then can it identify the sub-category into which its services falls; which in turn leads to a series of rules determining the correct VAT rate. This is a highly complex area.

Examples:

Scenario 1: If your UK business supplies bookkeeping services to a French business, there is no sub-category for “bookkeeping services”, so the basic rule applies. The place of supply is therefore the UK and your sales invoice should charge UK VAT at 17.5%. This standard rate will be reduced to 15% from 1st December 2008 until 31st December 2009 following the 2008 Pre-Budget Report.

Scenario 2: If your UK business supplies accountancy services to a French business, a sub-category exists for “accountancy services”. The relevant rules determine that the place of supply is where the customer belongs (France); and in this case that the customer will charge (French) VAT to itself, so your sales invoice should charge no UK VAT.

If HMRC’s VAT Notices (e.g. 700 & 741) are too daunting, seek further advice by calling HMRC direct or by engaging the services of an experienced VAT professional.

About the Author

2008 © Kevin Hall of Intrust Ltd, who can be contacted at Kevin.Hall@intrust.co.uk