VAT on Services

Randvegeta

That is very interesting. I wonder how the EU would enforce this, or how many overseas companies comply with this.

It is virtually impossible to track, and it adds such an administrative burden, I can't imagine any non EU company doing this given there would seemingly be no repercussions to NOT complying.

Scarpacci

I have only ever really seen US companies with a European presence actually account for VAT on digital services. A company like GoDaddy.com, for instance, which has a London office or Google which has offices across Europe. Digital River, who handle software distribution for quite a lot of companies, also do. Maybe ensuring the bigger companies do pay VAT is all the EU was really bothered about?

Whether it's the (EU) law or not, most digital U.S. businesses don't seem to be bowing down to the EU as if they have worldwide tax authority. Web hosting is a field I'm familiar with, and there's lots of smaller US firms who will have European customers - not just businesses, but consumers who do it for a hobby - and I've not seen a single small or medium-size American company ever charge VAT.

thenudeone

John_Pierpoint wrote: »

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?

Because the company is legally obliged to register for VAT and charge it where it hast to; and hmrc will levy penalties if it doesn't?

hmrc has the power to inspect companies and demand access to accounting records

It doesn't have to "intercept" anything during the supply of an electronic service; any more than it "intercepts" anything you buy at Tescos.

Scarpacci

thenudeone wrote: »

Because the company is legally obliged to register for VAT and charge it where it hast to; and hmrc will levy penalties if it doesn't?

hmrc has the power to inspect companies and demand access to accounting records

It doesn't have to "intercept" anything during the supply of an electronic service; any more than it "intercepts" anything you buy at Tescos.

But for foreign companies based outside the EU, who the EU says must register for VAT if they sell digital products or services to EU consumers, just how could HMRC or any other tax agency attempt to apply the law? There seems to be a great difference in what the law calls for and their ability to enforce it.

Randvegeta

thenudeone wrote: »

Because the company is legally obliged to register for VAT and charge it where it hast to; and hmrc will levy penalties if it doesn't?

hmrc has the power to inspect companies and demand access to accounting records

It doesn't have to "intercept" anything during the supply of an electronic service; any more than it "intercepts" anything you buy at Tescos.

EU law is not world law! It is illegal to sell alcohol in Saudi Arabia, but they cannot enforce this outside of their own country!

HMRC has no power to inspect overseas companies. Non EU (heck even not UK) is outside of HMRC's jurisdiction.

Let me put it this way.

In the UK, if you sell goods to non EU countries, VAT is not applicable. If some form of TAX is due in the country of which you are selling your goods to, is the UK based company breaking the law of that foreign nation? If it is, do you think they would care?

thenudeone

I was referring to a UK company supplying electronic services to customers overseas.

If the supplier is based outside the EU then there are, as have been pointed out, various issues which might preventing the charging of VAT, but that hasn't stopped the EU implementing a mechanism for such companies to register, charge and remit VAT.

JasonLVC

Randvegeta wrote: »

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).

The UK business sells the product to a US customer. Place of supply will be where the customer is based (US) and thus the sale is outside the scope of UK VAT and the invoice is £100 (no VAT).

The US business then sells the same product back into the UK (or other EU member state) for £110 no VAT. It looks like there is a cost benefit for the US business over the UK business. Not so.

You need to read this lengthy post s.l.o.w.l.y (or twice) as its a tough sell to explain this one in a forum post.

Two things you need to consider. Firstly, reverse charge.

Certain services when a UK business buys them in from non-EU (and EU) suppliers, the UK buyer has to treat the purchase as a self-supply. In other words, they treat as a sale to themselves.

If the UK buyer is VAT registered, they would calculate VAT on the US invoice and declare it as output tax in Box 1 (as if they'd made a sale themselves). They would then also reclaim the input tax in Box 4 as if it was a normal purchase with VAT on it - assuming the UK business can reclaim all its input tax as normal.

Overall effect is UK buyer, if they buy from UK it costs £100 (buyer reclaims VAT) or if it buys from US then pays £110 (buyer reclaims VAT it charged to itself). USA business is £10 dearer.

If the UK buyer is not VAT registered, they would do the same as above and calculate the VAT on the US invoice and treat this purchase as a sale. The 'sale' therefore counts towards the UK buyers VAT registration threshold and they may have to register for VAT as a result. For example, UK business sells insurance (exempt from VAT, no need to register for VAT and cannot reclaim VAT if it was registered).

If it buys in US 'software services' then it avoids having to incur VAT so is cheaper to buy from US than local UK supplier. It still has to record the value of those purchases as sales. If the value of those 'sales'/purchases exceeds the UK VAT registration threshold of £77k then the UK insurer will now need to register for VAT, even though it only makes exempt insurance sales!

Once it is VAT registered, it does the same as a VAT registered business and declares the purchase as a sale and pays output tax in Box 1. However, as the majority of its sales are actually exempt insurance, it is prevented from reclaiming input tax, so the insurer cannot reclaim the input tax. Thus there is no benefit for the UK insurance business to buy fom the US as it ends up having to pay VAT in the UK and cannot reclaim it. in your example, it'd be £110 + VAT and VAT not reclaimable, so USA supplier will be a lot dearer.

Of course, if the value of purchases is less than £77k then the UK insurer can get away with it and there is some VAT advantage for a non-VAT registered entity in buying from overseas, but only on a smallish scale.

The other thing by the way is that from 01 Decemer 2012, all non-UK traders (ie, USA businesses) making sales into the UK will be obliged to register for VAT as the VAT registration threshold for such entities will be Nil from that date, forcing any US business with no UK presence, to register for VAT. If the US fbusiness has a UK presence then these rules don't apply.

Still difficult to spot/pin down overall, but generally governments expect small level of leakage across this type of thing, not worth getting stressed about as a country.

Randvegeta

JasonLVC wrote: »

The UK business sells the product to a US customer. Place of supply will be where the customer is based (US) and thus the sale is outside the scope of UK VAT and the invoice is £100 (no VAT).

The US business then sells the same product back into the UK (or other EU member state) for £110 no VAT. It looks like there is a cost benefit for the US business over the UK business. Not so.

You need to read this lengthy post s.l.o.w.l.y (or twice) as its a tough sell to explain this one in a forum post.

Two things you need to consider. Firstly, reverse charge.

Certain services when a UK business buys them in from non-EU (and EU) suppliers, the UK buyer has to treat the purchase as a self-supply. In other words, they treat as a sale to themselves.

If the UK buyer is VAT registered, they would calculate VAT on the US invoice and declare it as output tax in Box 1 (as if they'd made a sale themselves). They would then also reclaim the input tax in Box 4 as if it was a normal purchase with VAT on it - assuming the UK business can reclaim all its input tax as normal.

Overall effect is UK buyer, if they buy from UK it costs £100 (buyer reclaims VAT) or if it buys from US then pays £110 (buyer reclaims VAT it charged to itself). USA business is £10 dearer.

If the UK buyer is not VAT registered, they would do the same as above and calculate the VAT on the US invoice and treat this purchase as a sale. The 'sale' therefore counts towards the UK buyers VAT registration threshold and they may have to register for VAT as a result. For example, UK business sells insurance (exempt from VAT, no need to register for VAT and cannot reclaim VAT if it was registered).

If it buys in US 'software services' then it avoids having to incur VAT so is cheaper to buy from US than local UK supplier. It still has to record the value of those purchases as sales. If the value of those 'sales'/purchases exceeds the UK VAT registration threshold of £77k then the UK insurer will now need to register for VAT, even though it only makes exempt insurance sales!

Once it is VAT registered, it does the same as a VAT registered business and declares the purchase as a sale and pays output tax in Box 1. However, as the majority of its sales are actually exempt insurance, it is prevented from reclaiming input tax, so the insurer cannot reclaim the input tax. Thus there is no benefit for the UK insurance business to buy fom the US as it ends up having to pay VAT in the UK and cannot reclaim it. in your example, it'd be £110 + VAT and VAT not reclaimable, so USA supplier will be a lot dearer.

Of course, if the value of purchases is less than £77k then the UK insurer can get away with it and there is some VAT advantage for a non-VAT registered entity in buying from overseas, but only on a smallish scale.

The other thing by the way is that from 01 Decemer 2012, all non-UK traders (ie, USA businesses) making sales into the UK will be obliged to register for VAT as the VAT registration threshold for such entities will be Nil from that date, forcing any US business with no UK presence, to register for VAT. If the US fbusiness has a UK presence then these rules don't apply.

Still difficult to spot/pin down overall, but generally governments expect small level of leakage across this type of thing, not worth getting stressed about as a country.

I think you've missed the point.

If we are talking about a business buying services, as long as they are VAT registered, they wouldn't pay the 20% any way since they can claim it back.

What I am talking about mainly are individual consumers.

For example! If you buy hosting services from an EU supplier, VAT is applicable.

If buy buy hosting services from a non EU supplier, VAT is not applicable.

As an individual, it is cheaper to buy NON EU.

Okay, so let us say that the customer really wants an EU hosting provider.

If you buy from a US supplier, who happens to have a server in the EU, they could sell EU based hosting free of VAT. What's more is that the US supplier would have been able to purchase that server from the EU data centre free of VAT too. So overall, it can be more profitable for businesses based overseas to sell to EU customers because they can offer a better price!

John_Pierpoint

John_Pierpoint wrote: »

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?

So there you have it. If a supplier sends you an invoice with £100 on it and you are any sort of business, you have to up the purchase price to £120 and send the extra to HMRC.
Can one now put £120 against one's profits, if below the VAT registration threshold and claw back £4, £8 or £10 depending on marginal tax rate?
No wonder the £15 exemption for low value consignments from the Channel Islands has (in theory) ended - If you are a postie let us know how this one is working out?
Automatic 20% on all Ebay sales?

Randvegeta

John_Pierpoint wrote: »

So there you have it. If a supplier sends you an invoice with £100 on it and you are any sort of business, you have to up the purchase price to £120 and send the extra to HMRC.
Can one now put £120 against one's profits, if below the VAT registration threshold and claw back £4, £8 or £10 depending on marginal tax rate?
No wonder the £15 exemption for low value consignments from the Channel Islands has (in theory) ended - If you are a postie let us know how this one is working out?
Automatic 20% on all Ebay sales?

I am confused by your post... Seems needlessly complicated.

In the end, what end user will voluntarily pay the 20%, and how would it ever be enforced without voluntary payment?

But back to my original question. Is the end user (the individual) obliged to pay this 20%?