Partial exemption and B2B services from overseas

Newsletter issue - November 2021

When a supply of services is from one business to another, i.e. a B2B supply, the general rule is that supply is treated as taking place wherever the customer is located, rather than the supplier. As an example, if a website design business is located in Belgium and they provide services to a VAT-registered business in the UK, it does not charge Belgian VAT as the supply takes place in the UK. This has always been the case, so the situation has not changed following Brexit, but some businesses may be making errors due to uncertainty - for example ignoring imported supplies altogether when it comes to the VAT returns.

The correct treatment for such supplies is for the UK business to account for VAT in Boxes 1 and 4 of the VAT return, i.e. making a reverse charge entry. This is a straightforward mechanism, and there is no net cost to a business that can fully recover input tax.

Certain services are subject to different place of supply rules, and these can be found in section 6.4 of VAT Notice 741a.

There can be further complications where the UK business is partially exempt. If the service imported relates to both taxable and exempt activities, the box 1 entry will include output tax at the standard rate, but the corresponding input tax entry in Box 4 will need to be restricted. If the service is wholly used for the taxable activities, no restriction will be required.

The value of the imported services should be excluded from the apportionment calculation for the residual input tax where the standard, or other output-based method, is being used.

As it is approaching one year since the end of the Brexit transition agreement, it is worth checking the reporting of imported services now, with errors corrected in the usual way, i.e. on the next return or by written disclosure as appropriate.