Contractors' Questions: Is contracting in the US VAT-free?

Contractor’s Question: I recently started independent consulting. One of the first jobs is some consultancy work for a company in the US. All the work has been via e-mail / phone and is advice on data integration.

I'm about to invoice the company. My understanding is that this work is UK VAT free, as the service / goods are in effect for export. Is that right?

However will I need to pay any tax in the US? The amount is for several thousand pounds, the state is NY in the US.

Expert’s Answer: The rules relating to VAT on the supply of internationally supplied services changed on January 1st 2010. They now rely on the fundamental question of where the supply is made and as a consequence, where VAT may be charged and paid.

However, in the case of services (as compared to ‘goods’), deciding the place of supply can be more complicated than you may think. There are various rules that apply, depending on:

  • whether you have more than one business location
  • the kind of service you provide
  • the place where your business or your business customer 'belongs'

If you are based in the UK and your customer is also based in the UK, then VAT will be chargeable on your service (assuming of course that your business is VAT registered).  But if the place of supply of your service is not in the UK (or EU), then your supply of services is outside the scope of VAT. You do not have to charge VAT on your service or include the sale on your VAT Return.

In case you think that I am only stating the obvious, the question of where your customer “belongs” is not quite as straightforward as it may appear.  Just because your customer is in the USA, you need to make sure that for VAT purposes, they are not considered “belonging” to the UK.  The rules for belonging are quite complicated and almost certainly do not apply in your case, but just make sure that you are not dealing with a USA branch of a UK company that falls fouls of the belonging tests.

Who ever said that VAT was a simple tax?! I hope this answers you question; however further information can be found in this section of the HMRC website.

The expert was Barry Roback, FCA, director at Privilege Accounts, a tax and accountancy specialist for freelancers, contractors and the self-employed.

Thursday 8th December 2011