As we move into a world marketplace enabled by electronic communication, the rules of business are s...
As we move into a world marketplace enabled by electronic communication, the rules of business are shifting. Transactions occur anywhere and without warning. The traditional notions of time and space are defied. In fact, commerce in the 21st century is becoming increasingly dematerialised and, as such, has created unfamiliar opportunities and risks.
For businesses, the exponential growth of electronic commerce and the internet have turned taxation into an international minefield - particularly in the area of Value Added Tax (VAT).
Let us look at what it means today to buy the latest blockbuster by our favourite author in digitised format. I am sitting at my desk at home in, say, Manchester and have tracked down the book on the internet. The website belongs to an American wholesaler. The book has been acquired from a South African publisher. The author lives in Italy where she receives commission for the sale of her work. A specialist company based in Hong Kong operates the website, but the server on which it runs is based in Australia. I pay for the item via my international credit card company which, of course, extracts a commission from the wholesaler.
This is a complicated matrix of transactions and because many of the administrative rules that govern VAT are based on the notion of place, we can see that negotiating the tax minefield is not an easy matter. However, a simple rule of thumb - what, where and who (WWW) - will allow us to identify some of the key issues.
Let us look at the first of our VAT WWW questions - WHAT?
It is important in VAT to distinguish between goods and services as they are treated differently for tax purposes. Looking at the above example, have I bought goods or services? If I go into a bookshop and purchase a book I clearly have a tangible product in my hands. It can be categorised as goods. But when I download my book in digital form it has undergone a metamorphosis into a service.
So why does this matter? Firstly, there are different rules for determining the place of supply of goods and services. Generally the place of supply for goods is said to be where the goods are physically located when the customer buys them. The place of supply for a service, on the other hand, is not nearly so simple and there are special rules depending on the nature of the service. Then there is the question of the time of supply, which is also important, as we need to know the tax point, which tells us when the VAT payable is due. Again there are differing rules for goods and services.
Our WHERE? question poses far more problems. The VAT Place of Supply rules are set out in European legislation under the Sixth Directive. They outline a complex method for regulating trade in goods and services between the EU member states and between the EU and the rest of the world. The position for goods is relatively straightforward as their physical nature allows their movements to be easily identified. They are taxed on importation into the EU and are taxed on an acquisition basis when they are moved across borders within the EU.
The arrangements for services are much more complex. The general position is that every service used or consumed in the EU is taxed in the appropriate place. But there is enormous scope for a double or nothing situation when it comes to being taxed. The basic rules set the place of supply as being where the supplier is based. This should normally be the place from which the business is operated. However, there are further rules for certain types of services that fix the place of supply differently.
Supplies relating to land, for example, may be treated as being where the land is situated, while supplies of transport services are where they take place and are in relation to the journeys made. But supplies of services of entertainers, sportspeople, teaching, conferences, valuation and work on goods take place where they are performed.
For supplies of 'Schedule 5 services', such as consultancy, advertising, data processing, copyright, and finance, insurance, (telecommunications and others come under a special category), to an EU business customer or anyone who is outside the EU the supplies are treated as taking place where the customer is situated.
So we can see that a UK supplier of services may be viewed as making supplies in another EU country. If so, he or she may need to consider registering for VAT in the appropriate EU country. For those supplies known in the trade as 'Schedule 5 services', businesses can avoid having to register if they are dealing with another EU business. This is a kind of tax shift, or relief, called the 'reverse charge mechanism'. This means that the customer business can account for the EU VAT due in the member state.
This creates the possibility of stepping on another landmine. It may be that the customer business is not VAT registered, perhaps because it is a small business, or it trades with services that are not taxable under VAT, such as insurance. If this is the case, the 'import of services' may then lead the customer to need to be VAT registered. In some countries the reverse charge mechanism has been extended to cover not only the 'Schedule 5 services' but all services that cross EU borders. Not all EU member states have adopted this simplification measure so businesses need to do their homework before treating their charges as outside the scope of VAT.
Where a business provides services to someone outside the EU - be it a business or private customer - the supply is completely outside the scope of UK / EU VAT. However, the business can still recover VAT on related costs provided that it is VAT registered.
The most difficult category to deal with is the private EU customer. The provision of, say, accountancy services to an individual in France may mean the service provider has to register for VAT, which is known as TVA, in France. It is important
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till