IT contractors must plan for VAT changes
Last year a package of measures was announced that will affect IT contractors that supply and/or receive services to and/or from overseas businesses, as well as those that incur foreign VAT. The changes will place a greater administrative burden on IT contractors.
There are a number of reforms, effective from 1 January 2010, but the most relevant changes, effective across all of the European Union, to IT contractors can be summarised as follows:
Change to place of supply
The principal change is that, when making supplies to an overseas business customer, VAT is due by the customer in the place where it is established, subject to a few exceptions.
IT contractors supplying services to overseas business customers are already accustomed to this rule. This is because where IT consultancy or project management services are concerned, these are subject to VAT where the overseas business customer is established or, if provided to a non-VAT registered customer, VAT is due where the contractor has established its business. These rules will continue to apply after 1 January 2010.
However, there is one change that will affect contractors which has arisen as a result of a European VAT case. Currently, when deciding whether to charge VAT to a business customer in another Member State, a contractor must check whether the supply will be used for the customer's business activities (rather than for non-business/private use). This will not be necessary from 1 Jan - the contractor need only be satisfied that the customer is in business (a VAT registration number is usually the best evidence of this) to enable it to make a VAT-free supply. It is irrelevant to what use the customer puts the service received.
Any IT contractor that makes supplies of services to EU-based business customers (where VAT is due in the customer's Member State) will have to complete Sales Lists from next year. The lists must show the value of supplies to each customer along with the customer's VAT number. For example, a contractor supplying IT consultancy services to a business in Germany will have to complete a quarterly form showing the value of supplies and the customer's VAT number. In addition, for those submitting in paper format, HMRC will only allow 14 days from the period (quarter) end for the forms to be submitted, otherwise penalties are likely to be payable.
We strongly urge affected IT contractors to obtain VAT numbers from their customers as soon as possible to avoid any delays in submitting the required documentation to HMRC.
Obtaining refunds of foreign VAT
It is often the case that an IT contractor is only registered for VAT in one Member State (e.g. UK) but works abroad at client sites. The contractor is likely to incur foreign VAT on hotel and food expenses that cannot be recovered via the UK VAT return. The current procedure for reclaiming this foreign VAT involves submitting a written application to the tax authorities of the Member State concerned. This can be a lengthy process and, depending on the Member State involved, can take up to three years and even longer to receive a refund.
From 1 January 2010, the procedure will become much simpler. Contractors wishing to receive a refund of foreign VAT will simply need to submit their claim via an electronic portal that will be operated by HMRC. It will be HMRC's responsibility to pass the refund application onto the relevant Member State. That Member State will then be required to repay the money to the contractor within 4 months, or 8 months if they require further information. After this time, the applicant is entitled to receive interest from the Member State until the money is finally refunded.
Guidance by Steve Hodgetts, a partner at Baker Tilly Tax and Accounting Limited