Whether you have gone over the VAT compulsory registration threshold (£85,000) or decide to voluntarily register for VAT, you have now entered an area with some complexity attached to it.
Though VAT can be a complex area to understand, by wrapping your head around the important bits of information early on, such as understanding the different VAT rates, you can make sure you are atop of your business’ VAT affairs.
This guide will provide the useful information when it comes to VAT in relation to businesses providing a service. The rules may be different for businesses selling physical goods, so please check before making any assumptions.
Disclaimer: Please use this post as a guide and refer to any links throughout, or at the end of, this guide. Note that the information contained in this guide is provided solely for information purposes and should not be taken as legal advice. Although we try to keep everything up to date, the tax system is ever-changing and it is best to consult a professional regarding your own personal circumstances.
Last updated: 31st January 2021
Contents:
– What’s with the jargon?
– VAT Rates Summary
– Are there any special rules?
What’s with the jargon?
First and foremost, let’s go over some unavoidable jargon which HMRC likes to use and which unfortunately follows you around when dealing with VAT.
Bear in mind these definitions are used when dealing with VAT but may mean something else when put in a different context or in relation to a different tax.
B2B – this means a Business-to-Business transaction. Typically, this is a commercial transaction between two business entities. In regards to the UK and EU, this means two VAT registered business who both have a record
of their respective VAT numbers, otherwise it is treated as a B2C transaction.
B2C – this means a Business-to-Consumer transaction. Typically, this is a ‘finished product/service’ sale to all natural persons/private individuals.
UK Customer – this is a customer who has a place of establishment in the UK and to whom the service is provided in the UK. Be extra mindful to check the place of supply when working with clients who have multiple establishments around the world and know which one you are working with.
EU Customer – this is a customer who is established or situated in a European Union member state. Again, keep in mind clients with multiple establishments around the world.
Third Country Customer – this is a customer who is established outside of the UK and also isn’t situated in a European Union member state. I.e. a client based in the United States of America. Here, care should also be taken in regards to clients with multiple establishments around the world.
VAT Rates on Sales
| Type of Client | VAT Rate | |
|---|---|---|
|
UK Customer |
Under scope of UK VAT. VAT rate depends on type of supply. |
20% VAT on Income 5% VAT on Income Exempt Income Zero Rated Income |
|
EU Customer (B2B) |
The business customer is responsible for paying VAT in their country. Must get their VAT number or you treat this as a B2C transaction. |
Zero Rated Income |
|
EU Customer (B2C) |
The rule for B2C transactions is that place of supply is where the supplier belongs, irrespective of the location of their customer. Some exceptions apply. |
20% VAT on Income 5% VAT on Income Exempt Income Zero Rated Income |
|
Third Country Customer (B2B) |
Outside of scope of UK VAT and so no VAT is charged. |
Zero Rated Income |
|
Third Country Customer (B2C) |
The rule for B2C transactions is that place of supply is where the supplier belongs, irrespective of the location of their customer. Some exceptions apply. |
20% VAT on Income 5% VAT on Income Exempt Income Zero Rated Income |
Special Rules
There are special rules for certain services depending on their type or who you are dealing with and the nature of the transaction as well as place of provision. You can read the full guidance on HMRC’s publication or refer to some that we have covered briefly below.
Supplies of Digital Services to Consumers in the EU
When supplying cross-border digital services to non-business consumers in the EU, you need to check:
- the place of supply;
- whether it is a digital service;
- whether the customer is a business or a private consumer;
- where the supply is not made in the UK, whether it must be taxed at the EU member state’s standard or reduced VAT rate, or whether the supply is eligible for any VAT exemptions.
For cross-border supplies of digital services on a business-to-consumer basis, the place of supply will be the UK on or after 1 January 2019 if:
- your business is not established in any other EU member state
- the total value of the cross-border digital sales is less than £8,818 in the current year and previous calendar year
The place of supply of any digital services made before 1 January 2019 will be where the consumer is located.
To work out the value of your digital sales, you must use the figures before VAT is added.
The digital supplies threshold is £8,818. If the annual value of your total cross-border supplies of digital services to consumers in the EU in the current year and previous year is:
- below the threshold, the place of supply is the UK
- over the threshold, the place of supply is where the consumer is located
B2B Services of a Professional, Technical, Financial, Intellectual or Other Intangible Nature Supplied to Customers Outside the UK or EU
If a B2C customer is located outside of the UK and EU, typically you would use the general rule and charge them UK VAT. However, the below services may be outside the scope of VAT:
- transfers and assignments of copyright, patents, licences, trademarks and similar rights
- acceptance of any obligation to refrain from pursuing or exercising a business activity
- advertising services
- services of consultants, engineers, consultancy bureaux, lawyers, accountants, and other similar services – data processing and provision of information, other than any services relating to land
- banking, financial and insurance services
- the provision of access to, or transmission or distribution through, natural gas and electricity systems and heat or cooling networks and the provision of other directly linked services
- supply of staff
- letting on hire of goods other than means of transport
- emissions allowances
