Location, Location, Location: Untangling Place of Supply Rules for Online Service Provision

09 November 2023 - Daniel May

The invention of smartphones and other digital devices has led to a huge increase in the demand for the supply of digital services, such as:

  • Software, music, and film downloads
  • Webinars and training courses
  • e-books*
  • PDFs and other documents
  • Photographs and other images, etc.

This has not gone unnoticed by tax authorities around the world. Indeed, most countries have introduced rules which subject sales of digital services supplied by overseas providers to consumers, to indirect taxes in-country.

This can result in the need for multiple VAT (and other indirect taxes, such as Goods and Services Tax ‘GST’ in Australia) registrations across the world. Daniel May, VAT Manager, explores the place of supply where the supplier is established.

The UK place of supply rules

The general rule for the place of supply of services to a non-business consumer (business to consumer ‘B2C’) is where the supplier belongs. For general rules services, local VAT rates applicable to the supplier are used.

However, there are some exceptions to the general rule, such as services relating to land and to work on goods, which are subject to VAT where the land/goods are located.

Another exception is for the supply of digital services. Where a UK-based software publisher sells a download to a customer based in Ireland, the supply is outside of the scope of UK and the VAT rules in Ireland apply. Taking Ireland as an example, the supply would create a compulsory Irish VAT registration (see also, section about the One-Stop-Shop later) and would be subject to 23% Irish VAT.

Whilst these rules are part of UK legislation, they are similar worldwide. For example, a US tech firm supplying digital downloads to the UK would be liable to register for UK VAT and account for 20% UK VAT on its income.

Business to business (B2B) supplies

The B2C rules above relate to non-business consumers.

Different jurisdictions define ‘consumer’ in different ways. In the UK, proof of being in business (such as a document from Companies House or HMRC) is generally accepted, but in most EU Countries, a VAT number must be acquired to treat a supply as B2B.

Some countries (such as Russia, South Africa, Nigeria etc.) have chosen to interpret the digital services rules even wider and tax B2B supplies in-country too.

Supplies made through platforms

It is likely the responsibility for VAT on sales made through Google, Apple, Amazon etc are that of the platform. The terms and conditions of the agreement with the platform will confirm, but the rest of this article will assume sales are made in your own name, for example on your own website only.

So, what does this mean for me?

A provider of digital services making sales as principal will need to check the VAT and other indirect taxes requirements for each country to which they sell. Subject to any thresholds which may be present in legislation, the business may have to register in multiple countries across the globe.

There are likely to be slightly different classifications of what constitutes a digital service (such as the level of human intervention involved in the process) from country to country and different requirements for how to identify customer’s status – e.g. are they B2B or B2C?

The way in which a customer’s location is determined, especially for businesses using payment service providers such as Stripe to collect payments will also be key in identifying where potential VAT liabilities may arise.

If prices have been set without considering overseas VAT, an increase may have to be made, or future plans that are dependent on forecasted income may need to be pushed back.

The general approach by most providers is to keep the price charged the same to all customers regardless of location. Applicable indirect tax rates vary considerably (for example, 27% VAT in Hungary, 18% GST in India, 10% Consumption Tax in Japan, 7.7% VAT in Switzerland, etc.) so the view that the rates smooth themselves over in the long run is taken. Unfortunately, when selling to customers that cannot recover indirect taxes they are charged, it can be difficult to increase prices for this reason alone.

What can Scrutton Bland do to help?

As part of the Nexia Group, we have a proven record of ensuring clients are registered where needed and compliant with local indirect tax rules.

Our dedicated VAT team would be happy to review your registration obligations on a country-by-country basis and assist with ongoing compliance and penalty mitigation, if appropriate.

UK VAT registrations and compliance are our main specialty, but we are also well versed in assisting with One-Stop-Shop registrations which may be of use for sales made in the European Union (‘EU’).

Taking the Irish example from earlier, if the same supplier made sales to other EU Member States, it could create a One-Stop-Shop registration to declare VAT in each of the 27 Member States to which sales are made, rather than register individually in each one.

To get in touch with our dedicated VAT team, please contact Daniel by calling 0330 058 6559 or emailing hello@scruttonbland.co.uk

*Please note, the VAT liability of e-books was changed in the UK from the 20% standard rate to the zero rate with effect from 1st May 2020

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