News

HMRC action aids humanitarian charities - 2010-03-30

Changes to the place of supply rules introduced on 1 January 2010 resulted in a difference in the VAT treatment of international freight services giving rise to unforeseen VAT liabilities for charities and similar organisations in some EU member states.  This left UK-based disaster relief charities hit by unexpected VAT bills.  However, HMRC has come to their aid and given a temporary reprieve from the legislation under special provisions - the so called "use and enjoyment" provisions - enabling services to be taxed where used.  The change, made on 19 March, was made with immediate effect, pending a permanent legislative change. 

On 1 January 2010 the basic rule for the place of supply of services for business to business transactions for most services changed from where the supplier is established to where the business customer is established. This means that where a supplier supplies:

• a customer in the same EU member state then the supplier applies the domestic VAT rules and charges VAT to the customer as appropriate.
• a customer in a different EU member state, then the customer accounts for VAT due on the supply in its own member state under the "reverse charge" rules, i.e. the customer charges itself the VAT due on the supply and recovers it under the normal rules.
• a customer outside the EU, then no VAT is charged.

The position for freight transport gets more complicated. EU legislation allows for freight services relating to the import or export of goods to and from the EU to be exempt from VAT - in the UK such services are zero rated by way of UK legislation. Prior to 1 January 2010 the non-EU transport of freight provided to UK businesses did not attract VAT, but the effect of the change as implemented in the UK and some other EU member states made such supplies subject to VAT which many charities would not be able to recover.

Other EU member states such as Italy, Austria, Belgium and Finland adopted the UK's initial approach and VAT is chargeable on such transactions in those member states; Germany, Denmark, Malta and the Netherlands have legislation enacting the discretionary measure exempting such transactions from VAT. Furthermore, countries that adopted the UK's initial position will expect businesses to apply the reverse charge to such services received from overseas suppliers, both EU and non-EU.

HMRC acted quickly to address this anomaly.  It is hoped similar pragmatism will be demonstrated by other EU member states.

For advice contact VAT Partner, Bob Jones on 020 75162295 or email rjones@littlejohnllp.com