VAT on Services

As I understand, VAT is chargeable on services rendered in the UK and the EU.

But should VAT be paid on services purchased outside of the UK/EU?

If you import goods from abroad, you would normally pay VAT at customs would you not? Are overseas services exempt from VAT or other duties?

If indeed overseas services are exempt from VAT and duties, would this not create some opportunities in the form of tax loop holds to avoid VAT all together.

For example. A software developer (in the UK) sells an item for 120GBP (100 + VAT) to someone in the EU.

A USA company however can buy the same software for just 100GBP (no tax).

The same USA company can then sell the software to EU customers for 110 (10 cheaper).

Is that right?

Can this be done? Is it legal?

As far as I know, it is legal, but how can such an obvious loophole be made in the tax system?
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Comments

  • System
    System Posts: 178,077
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    The US company has to pay VAT. VAT is payable for services and goods sold in the EU. Since the developer is in the UK then they charge VAT regardless of the location of the buyer.
    If you are registered for VAT, you must charge VAT on all supplies of goods and services that you make within the UK, at the appropriate rate, unless they are specifically either exempt from VAT or outside the scope of UK VAT.
    http://www.hmrc.gov.uk/vat/managing/charging/charging.htm
  • Randvegeta
    Randvegeta Posts: 353 Forumite
    That is just untrue.

    VAT is not applied to goods/services exported out of the EU.

    For example, my company buys software from a UK company VAT free because my company is based in HK.

    http://www.hmrc.gov.uk/vat/managing/international/exports/goods.htm

    Skype, also based in the EU, charges VAT. But as my Skype is registered with my HK address, no VAT is charged.

    So VAT is not charged to non EU entities.
  • System
    System Posts: 178,077
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    edited 31 March 2012 at 2:44PM
    Digging through various states tax laws seems to indicate that the US companies pay sales tax unless it is an exempt item or they go through the full export procedure (doubtful for a single item).

    This is possibly because sales tax is state run and not federal. YMMV depending on the state, some may not charge a sales tax for sales outside the USA

    They also pay sales tax when they buy in from out of the country/state like we get shafted for VAT when buying from abroad

    So all in all its not a tax loophole, HMRC let their own country screw them over subject to their tax laws.
  • real1314
    real1314 Posts: 4,432 Forumite
    edited 31 March 2012 at 3:08PM
    Randvegeta wrote: »
    As I understand, VAT is chargeable on services rendered in the UK and the EU.

    But should VAT be paid on services purchased outside of the UK/EU?

    If you import goods from abroad, you would normally pay VAT at customs would you not? Are overseas services exempt from VAT or other duties?

    If indeed overseas services are exempt from VAT and duties, would this not create some opportunities in the form of tax loop holds to avoid VAT all together.

    For example. A software developer (in the UK) sells an item for 120GBP (100 + VAT) to someone in the EU.

    Correct

    A USA company however can buy the same software for just 100GBP (no tax).

    Correct

    The same USA company can then sell the software to EU customers for 110 (10 cheaper).

    Incorrect. When the US company sells the software in the EU VAT is payable on the sale (or the equivalent in the relevant EU country). Hence the price would either be £110+vat = £122 or £110 inc vat (£91.66 + 20% vat), so the US company makes a loss. If the US company sold the item in the US, the relevant US sales tax would be payable

    Is that right?

    Can this be done? Is it legal?

    As far as I know, it is legal, but how can such an obvious loophole be made in the tax system?

    You've just missed a step, that's all. There is no loophole.:cool:
  • System
    System Posts: 178,077
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    edited 31 March 2012 at 4:05PM
    Incorrect. A US company can not charge VAT.
    If the place of supply of your service is not in the EU, then your supply of services is outside the scope of VAT. You don't have to charge EU VAT or include the sale on your VAT Return.
    Although this is talking about UK companies it applies to any company that is not EU based.

    How can a US company charge VAT if they are not eligible to register for VAT because they are not EU based?
    ETA
    A foreign company only needs to register as a NETP for VAT in very specific circumstances and normal trading would not fall into those circumstances
  • John_Pierpoint
    John_Pierpoint Posts: 8,391
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    As the supply is a collection of digits encoded into a sine wave of electricity, just how does HMRC intercept the supply or intercept the payment in order to grab 20% in tax?
  • Randvegeta
    Randvegeta Posts: 353 Forumite
    FYI, my example of using USA is not really relevant.

    As far as I know:

    1. Services sold outside of the EU do not have VAT charged (see my link to HMRC above.

    and

    2. Overseas companies do not have to charge VAT on goods/services sold to EU countrie. Even if they did, there is no way for the EU to impose such obligations since those have no jurisdiction.

    So the question is, is the consumer obligated to pay VAT on services purchased outside of the EU or not? If not, it certainly would seem to be a tax loophole.
  • System
    System Posts: 178,077
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    edited 31 March 2012 at 7:50PM
    Randvegeta wrote: »
    So the question is, is the consumer obligated to pay VAT on services purchased outside of the EU or not? If not, it certainly would seem to be a tax loophole.
    You pay import & VAT on incoming goods and services from outside the EU. Countries within the EU are obligated to collect VAT & in the case of the UK, import duty on goods coming into the country from non-EU area if they would normally attract VAT if sold in the EU.

    However the problem comes with electronically delivered goods as there is no way for HMRC to monitor this
  • Randvegeta
    Randvegeta Posts: 353 Forumite
    !!!!!! wrote: »
    You pay import & VAT on incoming goods and services from outside the EU. Countries within the EU are obligated to collect VAT & in the case of the UK, import duty on goods coming into the country from non-EU area if they would normally attract VAT if sold in the EU.

    However the problem comes with electronically delivered goods as there is no way for HMRC to monitor this

    Electronic goods and services would not be something that goes through customs since they are not posted.

    So you are saying that the consumer is actually obligated to pay the VAT but most people just don't since it is not possible for HMRC to actually collect this? Right?
  • System
    System Posts: 178,077
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