VAT on overseas digital services

Question, “I run a small UK limited company which is VAT registered and we pay for a monthly software subscription to a business based in the Republic of Ireland. The invoice they send me shows VAT being charged at 20%, but with an Irish VAT number. Is this correct and can I claim this VAT back?”


VAT on overseas services

Answer, November 2016:

As of January 2015 the rules changed around charging VAT in the EU for the provision of digital services from businesses to consumers – this is also known as VAT MOSS.

For consumers the customer is now charged VAT based on where they are located, rather than where the supplier is based.

In your example, the software provider is charging you 20% VAT because that is the VAT rate for the country where you are based, even though the supplier is based in Ireland.

Although this might look like normal UK VAT, it isn’t, and you won’t be able to claim this VAT back.

However if these digital services are provided to a business rather than a consumer then the VAT MOSS rules do not apply and instead the old VAT place of supply of services legislation come in to play.

These rules basically say that if you are a UK business receiving general services from a non-UK supplier then you should not be charged VAT in the first place.

You will usually need to provide your VAT number to the supplier as proof that you are a business.

Therefore we would advise that you get in touch with your software supplier and tell them you are a business not a consumer, let them know your VAT number and ask that they stop charging you VAT.

You may also want to ask them if they will issue a VAT refund for previously charged VAT – you may need to provide a copy of your VAT registration certificate to them to show how long you have been VAT registered.

When it comes to your future VAT returns you will need to account for these overseas ‘Business-to-Business’ services through something called the ‘reverse charge’ mechanism – this is a strange process which doesn’t result in any change to the overall amount of VAT on your VAT return, as you account for the VAT on both your input and output fields of the VAT return.

HMRC explain this process in section 5 of VAT notice 741A.

We recommend that when you are buying any general services from an EU supplier then, at the outset, you need to tell them you are business and not a consumer to ensure that you are not charged local VAT.