VAT in Europe John Voyez john.voyez@smith.williamson.co.uk 00 44 (0)20 7131 4285

1. VAT in Europe John Voyez john.voyez@smith.williamson.co.uk 00 44 (0)20 7131 4285

2. VAT basics (1) What is Value Added Tax (VAT)? • VAT is a European tax • VAT, TVA, IVA (goods and services tax) all means the same. • VAT is a turnover tax with a distinction between goods and services, and this principle applies throughout the EU. Basic concept of VAT VAT is charged at each stage in the supply of goods and services (output tax). If the customer or client is registered for VAT and uses supplies received for business purposes, credit for the VAT incurred can be received (input tax) in part or full. The exception to this is businesses which are exempt from VAT eg banks, insurance companies, schools etc. who are unable to recover VAT. VAT “sticks” with the end consumer.

3. VAT basics (2) Goods: • Goods sold within an EU member state - VAT is charged by the supplier eg a UK seller to a UK purchaser. • Goods moving from one member state to another member state (despatch) to VAT registered business – the supplier does not charge VAT, and the acquirer accounts for VAT by “reverse charge”, ie. the acquirer accounts for VAT on the value of the goods eg UK seller to German purchaser. • Goods leaving one member state for another member state to a non-VAT registered person - VAT is charged by the supplier of the goods eg UK seller to German purchaser not in business. • Goods leaving the EU (export) to countries such as America, Australia, Asia etc - no VAT charged is charged by the supplier. Tax may be payable in the country of destination eg UK seller to US purchaser. • Goods entering the EU (import) from countries such as America, Australia, Asia etc - VAT is due at the point of import eg US seller to UK purchaser. Note also that import duties may be payable. Unlike VAT paid by a business purchaser, custom duties are not recoverable and represent a cost. Services: • Services provided within a particular EU member state - VAT is due by the provider of the service eg UK service provider to a UK customer. • Services provided to VAT registered businesses in another member state or outside EU - special rules apply which depend on the nature of the service. NOTE – there are exceptions to the above rules depending on specific circumstances.

4. VAT special rules for services (1) For different types of services there are different rules so understanding the nature of the service is important. For VAT purposes, the “place of supply” is the place where a supply is deemed to be made, and this dictates the VAT liability. If the place of supply is: • In an EU member state, then VAT is accounted for in that member state. • Outside the EU, no VAT is due. Such supplies are ‘outside the scope’ of EU VAT (but may of course be within the scope of a turnover tax elsewhere). So how do we decide where the place of supply is?

5. VAT special rules for services (2) Basic rule for supply of services is that the “place of supply” is where the supplier belongs. Examples of services that fall under this rule: • Some management services • Clerical/ secretarial • Archiving/ maintenance of documents • Veterinary services Thus an EU business providing clerical services in the EU would charge VAT on the value of its services to a non EU client eg a French business providing clerical administration services for an Australian business should charge French VAT. The basic rules only apply if the service is not covered by one of the special place of supply rules.

6. VAT special rules for services (3) Exceptions to the basic rule: • Services relating to land and property, place of supply is where the land is situated • Services supplied where performed, place of supply is where the service is physically carried out. e.g. entertaining, exhibitions, conferences and meetings. etc • Passenger/ Freight transport, place of supply is the country in which the transportation takes place. e.g. domestic/ international freight transport. Etc • Service of Intermediaries, place of supply generally is where the customer belongs. e.g. agents arranging a supply between customer and supplier • Services covering rights, legal services, accounting services, financial services, marketing, advertising, supplies of staff, hiring out transport place of supply is where the business customer belongs. • Electronic and telecommunication services, place of supply is where the customer belongs, but further “use and enjoyment rules” may apply. e.g. E-commerce and broadcasting.

7. VAT special rules for services (4) How do these rules affect EU inbound businesses? Examples of services relating to real estate • Any transaction which relates to an interest in property (real estate) • The construction, demolition or repair etc of a building or civil engineering work • Services of estate agents, auctioneers, architects or surveyors etc relating to land. • Legal work such as conveyancing, dealing with planning permission etc. Scenario; Co.A in USA sells land that is situated in France to Co. B in the USA. VAT may be payable in France on the sale of the property, and also French VAT will be incurred on the costs related to the sale eg. agents fees. If the land was situated outside the EU, the sale would have been outside the scope of EU VAT. In general the above rule applies to all services where some performance is required, or physical work is undertaken eg. sports competition, exhibition etc. If however legal, marketing, advertising, accounting etc services are performed by an EU business for a non EU customer, no VAT should be charged eg a US business should not be charged VAT by a UK lawyer for legal advice (unless it is UK property related).

8. VAT special rules on the right to deduct VAT on costs A VAT registered business in the EU generally has the right to set off VAT incurred on business costs against VAT due on supplies made. There are exceptions eg. VAT on entertaining cannot be recovered, but there are also restrictions for business that do not charge VAT on all supplies. This is referred to as partial exemption. Partial Exemption • Input tax which relates wholly to exempt supplies is not recoverable. Examples of exempt supplies: • certain supplies of property (real estate) • financial services • insurance services • educational services • The EU member states all have the same general approach to partial exemption, so as a principle a business which makes both taxable and exempt supplies will only be able to recover a proportion of the VAT it incurs on costs. • The actual method of calculating the recoverable amount of VAT is subject to different rules in the member states, and may differ between member states.

9. Other special rules for VAT in the EU Although the same general principles of VAT apply throughout the EU, the administration of VAT is delegated to the individual states. Therefore there are a number of national differences in the way in which VAT is administered within the EU. Examples • Option to tax: Certain member states allow businesses to convert supplies which may be exempt from VAT into taxable supplies eg. supplies related to real estate, financial services etc. This allows the supplier to recover VAT on costs incurred. • Cash accounting scheme: subject to conditions and turnover limits, businesses may account for VAT only on payments received rather than invoices issued. This avoids bad debts and helps cash flow. • Annual accounting scheme: generally VAT returns are submitted monthly or quarterly, however subject to conditions and turnover limits, businesses may make annual VAT returns only. Note the rules for VAT returns differ in the member states. • Retail schemes: different schemes exist to suit different types of retail businesses. • Second-hand schemes: subject to conditions, VAT may be charged on the profit margin only rather than the full value of goods eg. car dealers. There are a number of special arrangements within the member states.

10. VAT rates vary across the EU from 0% to 25%. The tables show the current VAT rates in each member state: VAT rates

11. VAT rates The average standard rate of VAT within the EU is 19.5%

12. Other indirect taxes There are a number of other indirect taxes within the EU which businesses should be aware of • Property tax – many EU member states have a stamp tax on the acquisition of an interest in property eg in the UK Stamp Duty Land Tax is 4% on properties over £500,000 • Other indirect taxes include • customs duty on import of goods • excise duty for alcohol, petrol, oils etc • air passenger duty • aggregates tax • climate change levies • insurance premium tax

13. VAT registration The VAT registration threshold beyond which a business must register varies within the EU member states. For example, registration for VAT is only required when taxable supplies made; • in UK > £64,000 • to UK >£70,000 • in Estonia >EEK 250,000 • to Estonia >EEK 160,000 etc However, as a general principle, as long as a business is involved in an economic activity within the EU, there will be a requirement to consider VAT registration. The above thresholds are much lower in most member states. There are a number of circumstances which may give rise to a non resident business having to register for VAT in the EU: • For example, selling goods from stock held in the EU, or supplying services from a subsidiary or branch in the EU. • Receiving goods or services into the EU eg putting on an exhibition in the EU or a sports event. • Distance selling eg. mail order business • Making supplies of e commerce into the EU. Note there is a special regime for non EU resident suppliers of ecommerce Note that many member states operate “simplification rules” where the client accounts for VAT on behalf of the supplier. This avoids the need for non resident businesses to register in every EU member state. Check with the Nexia advisor in each country for the rules. There may also be circumstances where voluntary registration should be considered eg a representative office incurring VAT on local costs may wish to register to recover VAT subject to local rules.

14. VAT reclaims EU 8th & 13th Directive claims • Businesses registered for VAT in the EU may recover VAT on costs incurred through their VAT returns. However this is not possible for non registered businesses. • Non resident business incurring VAT for business purposes with the EU may recover the VAT through a reclaim procedure. • EU 8th Directive – this allows an EU business in one member state to recover VAT from another member state where it is not registered. • EU 13th Directive – this allows a non EU business to recover VAT incurred within the EU eg. as US business may recover VAT it incurs on business expenses in Spain. • The cost must have been incurred for a business purpose. • The business must not otherwise be required to register for VAT in the EU member state where the claim is made. • VAT on certain costs is not recoverable eg. entertaining. • There are strict time limits for claims. • Strict administrative procedures for the claims must be followed. • Repayment can take from 6 months to 6 years!

15. VAT accounting • VAT returnsand repayment claims differ in each member state. Returns may be monthly, quarterly or yearly. Some member states allow repayments for VAT and some insist on a carry forward. • Yearly statements required by some member states. • EU sales listings must be submitted on a regular basis showing the value of supplies of goods within the EU. The VAT number of the customer and supplier should be declared along with value of supplies. • Intrastat is asystem that collects statistics on the trade of goods between EU member states where the level of despatches and or arrivals is above certain thresholds. • Record keeping procedures are strict and allinvoices/records to be kept for a minimum number of years. NOTE – The authorities within the EU have considerable powers to investigate and review accounting records, and where appropriate assess for errors and charge penalties. “Carousel fraud” is a major problem in the EU for businesses involved in mobile phones, computer parts etc. Inbound businesses in this sector will be strictly reviewed.

16. VAT in Europe