In an increasingly globalized world, and with an influx of foreign investment into the UK in recent times, it is important for UK based businesses to be aware of their VAT obligations when invoicing for supplies to customers outside of the EU. For an international law firm or any businesses with cross-jurisdictional operations, it is important to know the rules of foreign supplies. Failing to properly account for VAT on supplies can be a costly mistake.
A value-added tax (VAT) is a consumption tax (i.e. it is a tax paid on purchases rather than income) placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed. More than 160 countries around the world use value-added taxation, and it is most commonly found in the European Union.
VAT must be charged on the supply of all goods and services within EU, unless they are exempt or non-standard rated, in which case different rules shall apply.
If a supply is a Non EU Supply, i.e. to a Non EU customer, VAT is not chargeable on services supplied to non EU customers, save for any services directly linked to UK based land. In order to know whether a service is directly linked to UK based land, HMRC provides the following definitions:
“Land” means any:
- specific part of the earth, on, above or below its surface, over which title or possession can be created
- building or structure fixed to or in the ground above or below sea level which can’t be easily dismantled or moved
- item making up part of a building or construction and without which it is incomplete (such as doors, windows, roofs, staircases and lifts)
- item, equipment or machine permanently installed in a building or construction which can’t be moved without destroying or altering the building or construction
Services directly linked to UK based land includes:
- construction or demolition of a building or permanent structure (such as pipelines for gas, water or sewage)
- surveying and assessing property
- valuing property, including for insurance or loan purposes, even if carried out remotely
- providing accommodation in hotels, holiday camps, camping sites or timeshare accommodation
- maintenance, renovation and repair of a building (including work such as cleaning and decorating) or permanent structure
- property management services carried out on behalf of the owner (but not the management of a property investment portfolio)
- arranging the sale or lease of land or property
- drawing up of plans for a building or part of a building designated for a particular site
- services relating to the obtaining of planning consent for a specific site
- on-site security services, even if provided remotely
- agricultural work on land (including tillage, sowing, watering and fertilization)
- installation and assembly of machines which, when installed, will form a fixture of the property that can’t be easily dismantled or moved
- the granting of rights to use all or part of a property (such as fishing or hunting rights and access to airport lounges)
- legal services such as conveyancing and drawing up of contracts of sale or leases, including title searches and other due diligence on a specific property
- bridge or tunnel toll fees
- the supply of space for the use of advertising bill boards – for example the leasing of a plot of land or the side of a building to allow a billboard to be erected
- the supply of plant and equipment together with an operator, where the supplier has responsibility for the execution of the work to the land or property
- the supply of specific stand space at an exhibition or fair without any related services
In summary services directly linked to land are those where the land is a central and essential part of the service or where the service is intended to legally or physically alter a property. It doesn’t apply if a supply of services has only an indirect connection with land, or if the land related service is only an incidental component of a more comprehensive supply of services.
Of particular interest to those law firms instructed by non-EU clients, according to the European Parliament Regulations, whilst services that directly impact upon a title to UK land, such as conveyancing services or lease matters, do attract VAT, litigation services relating to or involving land not dealing with the transfer of title are not deemed to directly relate to land and no VAT is chargeable.
-Article 31a, paragraph 3(h), in Chapter V of the European Parliament Regulations.
-HMRC VAT NOTICE 741A