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Fundamental change to VAT rules

On 1 January 2010 a number of measures were introduced that will affect almost all businesses and organisations that supply to, or receive services from, overseas businesses. It is essential that those affected take advice now as to how the changes impact them.

The fundamental change is that for most business-to-business (B2B) supplies of services, VAT is now due in the Member State where the actual consumption of the service takes place. The old rule whereby B2B services are generally taxed where the supplier is established no longer exists. This means that, generally speaking, VAT is now due where the overseas recipient is established.

If a UK business or charitable organisation (that undertakes some business activity) receives services from overseas, it will need to account for VAT in the UK using the reverse charge mechanism. If the UK recipient is not VAT registered the value of the supplies received from overseas may breach the VAT-registration threshold.

There remain a number of exceptions to this new rule. For example, services relating to land and conference and exhibition organisation are subject to VAT where the land is situated or the event takes place. Further changes in 2011, 2013 and 2015 are likely to add further complication to the place-of-supply rules.

EC Sales List for services


Prior to 1 January 2010, only UK businesses supplying goods to businesses in other Member States were obliged to submit a quarterly form known as an EC Sales List (ESL) to HMRC.

This requirement has now been extended to cover services supplied to VAT-registered recipients in other Member States. There are strict deadlines to which the taxpayer must adhere for the submission of these quarterly forms. For example, if the taxpayer wishes to submit the form in paper format it must be with HMRC within 14 days of the period end, otherwise penalties are likely to be charged.

A further change to ESLs from 1 January 2010 is the requirement to move to monthly ESLs if the value of goods supplied to EU VAT-registered businesses exceeds £70,000 per quarter. This is a little-known change and businesses supplying goods overseas in these volumes should note the much-increased administrative burden.

New system for reclaiming foreign VAT


UK and EU businesses can claim back VAT they have incurred in Member States where they are not registered for VAT (nor liable to be registered) by submitting an ‘8th Directive claim’.

With effect from 1 January 2010 the ‘8th Directive’ refund system was overhauled by reforming the way in which claims are submitted, and introducing strict time limits for Member States to action the claims they receive.

Baker Tilly’s VAT specialists can provide advice on how the changes affect you and the action you should be taking now to ensure full compliance with the new rules.