When two parties to a transaction are in different EU countries, it is essential that each person knows where that transaction is subject to VAT and who is responsible for accounting for VAT to the responsible tax authority. On 1 January 2010, radical changes to the harmonised 'place of supply rules for services' occurred.
Previously, the default place of supply of a service was where the supplier was established. However, from 1 January 2010, the default place of supply depends on whether the customer is a 'relevant businessperson'.
- When the customer is not a relevant businessperson - ie, a business-to-customer supply (B2C) - the default place of supply will be 'where the supplier belongs'.
- When the customer is a relevant businessperson - ie, a business-to-business supply (B2B) - the default place of supply will become'where the customer belongs'.
As with the previous rules, there will continue to be exceptions to the default position.
The first step is to question whether the supply falls within the definitions of the General Exceptions.
- Services directly relating to land continue to be taxed where the land is located.
- Passenger transport continues to be taxed where the journey takes place, proportionate to the distances travelled.
- Hiring a means of transport is subject to VAT, where the means of transport is placed at the customer's disposal if it is a 'short-term' hire, which is a continuous period of 90 days or less for a vessel, or 30 days or less for any other means of transport.
A long-term hire of a means of transport will, until 1 January 2013, continue to be treated as made under the default place of supply rule but will also be subject to an override under the 'use and enjoyment' provisions set out in more detail below.
Supplies of cultural, artistic, sporting, scientific, educational, entertainment and similar services (including fairs and exhibitions, and ancillary services relating to such activities will, until 1 January 2011, be taxed where the service is physically carried out as a General Exception to the default place of supply. From 1 January 2011, a similar B2C Exception and a more limited B2B
Exception will replace this General Exception.
Restaurant and catering services will be treated as supplied where the service is physically carried out, except where provided in the course of an EU passenger transport operation.
A provision of catering or restaurant services during an EU passenger transport operation (a journey between two EU member states that does not include a stop at a non-EU location at which passengers may embark or disembark) is supplied in the country of departure.
Hiring of goods and telecommunication and broadcasting services are subject to a 'use and enjoyment' General Exception.
Enjoyment as an Exception
The essence of the 'use and enjoyment' rule is that, where under the default place of supply, a transaction either:
- Escapes VAT, but the service is 'used and enjoyed' in the EU; or
- Is subject to EU VAT, but use and enjoyment occurs outside the EU.
In those circumstances, the transaction should be treated as made where use and enjoyment occurs.
A non-EU business hiring goods to an EU customer should not have a commercial advantage over an EU supplier simply because his business is established outside the EU and the supply would escape VAT under the default place of supply.
General Exceptions apply to all customers, regardless of their status as a relevant businessperson. However, if the service provided is not within a General Exception, the next step is to identify whether the customer is a relevant businessperson, which is a person who carries out an economic activity in any location, or is registered for VAT anywhere within the EU.
With the knowledge of the customer's status, it is then necessary to consider whether a B2B Exception or B2C Exception applies.
Electronically supplied services, such as website supply, web-hosting, updating of software, images, text and making available of databases, are treated as supplied where they are used and enjoyed if this is in the EU and the service would otherwise escape VAT, or vice versa.
Admissions to cultural, educational and entertainment activities etc, and ancillary services relating to admission to such events, are to be treated as made in the country in which the events in question actually take place. This B2B Exception will apply from 1 January 2011.
Supplies by an intermediary arranging a transaction are treated as supplied where that underlying transaction occurs.
The service of transport of goods between different EU territories is treated as supplied where the transport begins.
Transport of goods (other than between two EU territories as described above) is subject to VAT where the transportation physically occurs.
Ancillary transport services take place where the service is physically performed.
From 1 January 2013, long-term hiring of means of transport is to be treated as supplied in the country in which the recipient belongs, unless it is made available to the customer in the territory in which the supplier is established, in which case the place of supply is where the supplier belongs.
The use and enjoyment General Exception applying to the hire of a means of transport (see above) will continue to apply in similar activities (including fairs and exhibitions), and ancillary services relating to such activities, including services of organisers of such activities.
Electronic services supplied to non-business customers in the EU by a non-EU supplier are treated as supplied where the customer belongs.