Is your business ready for the 2010 changes in VAT legislation?

The issue

On 12 February 2008 the Commission of the European Union (EU) agreed to modernise VAT, aiming to simplify the current place of supply rules for services, as well as the way intra-European VAT is recovered.  Whilst most businesses with operations in the EU have welcomed these changes, getting the VAT treatment, invoicing and reporting requirements right before the changes become effective will be crucial to successfully manage this change. In this article we look at the changes taking effect from 1 January 2010, as well as providing guidance on what you can do now to get ready and avoid the pitfalls of erroneous VAT reporting.

The changes at a glance

Broadly, the changes will affect the following four key areas:

1. The general place of supply rule for services in business to business (‘B2B’) transactions will be where the recipient is established.  Therefore VAT will be due in the recipient’s country (there will be exceptions to this rule e.g. services in relation to property or transport - see below)
2. The 8th Directive European VAT refund process will become more automated through applicants using an electronic portal in their Member State of establishment.
3. Businesses involved in selling or purchasing services across EU borders will need to comply with additional reporting requirements in the form of European Community sales lists for services
4. An extension of the special one-stop-shop mechanism for electronically supplied services will come into effect  from 1 January 2015

The exceptions

There will never be a one-size-fits-all VAT legislation, and even with the move towards a destination-based VAT system, the following services will be subject to different place of supply rules:

1. Services in relation to immovable property
2. Passenger transport services
3. Short-term hiring of means of transport
4. Restaurant and catering services
5. Event organisation and related services, e.g. admission services
   

Examples

What could it all mean in practice? Let us consider the following common scenarios (using a UK entity as an example, but the same will apply wherever in the EU the entity is based):

1.    Management fees

If you are invoicing your foreign subsidiaries for management services from a UK holding company from 1 January 2010 under the new rules, UK VAT will no longer apply. Therefore, your subsidiaries will no longer suffer "foreign" VAT. The UK business must now report these transactions in their EC sales lists for services.

2.    Outsourced services, e.g. Call-Centre services

A UK insurance provider is procuring call-centre services from Bangalore in India. Currently, the UK business does not suffer irrecoverable VAT, if the service "exporter" does not charge local CENVAT on their supplies. With the introduction of the mandatory reverse charge mechanism, the insurer must self-account for UK VAT on the receipt of the services, with no or limited input VAT recovery to balance the output VAT due.

3.    Stock held outside the UK

Where a UK business holds stock in another Member State and uses the services of a warehouse manager, it will currently incur foreign VAT on these services. With effect from 1 January 2010, foreign VAT will no longer be charged. The warehouse keeper will report this transaction in his EC sales list for services.

What you potentially need to do now

• If you cannot recover your input VAT in full, consider if and how the new reverse charge mechanism may impact on your partial exemption method
• If you have registered in another Member State as a result of previous place of supply rules for services, consider if you can potentially deregister for VAT purposes
• Consider your IT capabilities - are you able to:
• Produce EC sales lists for services in the required format:
• Apply the correct VAT treatment and invoicing requirements to your sales invoice?
• Consider changes to your 8th Directive refund process to ensure that you do not miss out on foreign VAT recovery opportunities
• Are you affected by the exceptions to the main rule - how will the VAT treatment potentially change?
• Do you have the systems in place to ensure you can verify your customer's VAT identification numbers?
• Training on the new rules for your key personnel
• If you are not sure, seek professional advice to ensure your business is ready for 1 January 2010 to avoid potential VAT issues arising

Why should I take action now?

It is important to take action now, as many IT systems require a certain amount of lead time to allow for reprogramming and testing phases.

Applying the wrong VAT treatment can result in increased administrative burdens, such as credit notes, refunds of incorrectly charged VAT to your customers, voluntary disclosures, etc.

Where your businesses is restricted regarding the amount of VAT it can recover, an assessment of the economic impact at the early stages, with possible reorganisation of outsourced services should be considered.

And finally, where your staff accepts an invoice with foreign VAT charged, where it was incorrectly applied, there is a potential recovery issue, as this VAT is not recoverable from the  VAT authorities, but from your supplier.

Who should I contact for assistance?

If you would like any further information on this subject, or any other aspect of EU VAT, GST or other Australian indirect taxes, please contact your local Grant Thornton office.

Krish Patel
Partner - Tax
T  +61 2 8297 2400
E  krish.patel@au.gt.com