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Replies to Queries - 2 - International services

04 December 2002
Issue: 3886 / Categories:

Our client is establishing a consultancy business offering consultancy services to furniture manufacturers, both domestic and foreign. Fees from manufacturers are expected to be approximately £100,000 from the United Kingdom, £40,000 from European Community and £30,000 from non-Community manufacturers. Services would include visiting customers' factories, undertaking British Standard testing, advising on market opportunities, etc.

Our client is establishing a consultancy business offering consultancy services to furniture manufacturers, both domestic and foreign. Fees from manufacturers are expected to be approximately £100,000 from the United Kingdom, £40,000 from European Community and £30,000 from non-Community manufacturers. Services would include visiting customers' factories, undertaking British Standard testing, advising on market opportunities, etc.

Our client would also arrange for self-employed sales staff to visit United Kingdom retailers. These 'pseudo agents' would be self employed and paid on a percentage of sales achieved, and some may be VAT registered.

All sales contracts and deliveries would be conducted directly between the manufacturer and the retailer.

Our prospective client is contemplating the options of forming a registered limited company.

We believe that as fees are expected to be in excess of £100,000 per annum, our client should register for VAT immediately.

What rate(s) of VAT, if any, should apply to the consultancy fees to European Community and non-Community manufacturers, and will our client be entitled to reclaim the input VAT on commissions paid to those 'pseudo agents' who are VAT registered? Is the VAT situation further complicated (or indeed simplified) by the formation of a limited registered company to perform these services?

(Query T16,121) - Vatted.

To answer the last question first, whether services are provided through a limited company normally makes no difference and is unlikely to do so in this situation.

The standard-rated status of consultancy services to United Kingdom clients changes to outside the scope of United Kingdom VAT to any non-European Union client and to an European Union client who receives the supply for the purpose of a business carried on by him (Article 16, Place of Supply of Services Order SI 1992 No 3121). Presumably all the clients will be without doubt in business, but their VAT registration numbers should be obtained and put on the invoices - not a legal requirement at present but one which, I believe, may become so when the new European Union invoicing rules take effect from 1 January 2004.

In both cases, the outside the scope status will be with recovery of the associated input tax including that charged by any agent. Incidentally, 'pseudo' is a dangerous term to use when asking for any advice. It should be explained properly because agency is one of the more complicated aspects of VAT on which it is all too easy to make a mistake.

The advice to the client should also include that the place of supply of an agency commission is that of the main supply itself which will be the country of the European Union customer. The agent must be potentially liable to register there. However, that will change to the United Kingdom and the supply will therefore become standard rated if the client quotes his VAT number to the agent and that number is then shown on the latter's invoice (Articles 13 and 14, Place of Supply of Services Order). - John Price.

 

There seem to be four questions posed by 'Vatted', which I will attempt to answer briefly as follows.

Should the client register for VAT immediately?

Unless taxable supplies have so far exceeded £55,000 per annum, or there are reasonable grounds for believing that they will exceed £55,000 in the next 30 days, there is, strictly, no immediate need to register. However, on the basis that the business will be dealing mainly with either VAT-registered businesses in the United Kingdom or businesses abroad outside of the scope of United Kingdom VAT, there would not appear to be an advantage in deferring registration.

What rates of VAT apply to European Community and non-European Community manufacturers?

At this point the issues of 'agency' and 'place of supply' rear their ugly heads and what exactly is being supplied also becomes important. These are complicated areas and 'Vatted' would be well advised to spend some time on detailed research or to take specialist advice. Customs' Notice 741 Place of Supply of Services is a good starting point.

On the basis that sales contracts, etc. are made directly between the suppliers and retailers, it would seem that the client is not an 'undisclosed' agent and VAT will only be potentially chargeable on commission, not the total cost of the furniture sold.

The next question is where these services are carried out. As 'Vatted's' client belongs in the United Kingdom, under the basic rule, the place of supply for all the services would be the United Kingdom.

However, this 'basic rule' will not apply if the supply of services falls within some special rules. Space precludes a detailed consideration of these here, but Notice 741 gives details and examples. The 'consultancy type' services (i.e. other than the selling activities) would appear to fall within Schedule 5 to the VAT Act 1994 ('Services supplied where received'). Paragraphs 2 and 3 include 'advertising services' and 'consultancy bureaux ... and other similar services' and the description of these in Notice 741 (see especially paragraphs 12.3.1, 12.4.2 and 12.4.8) seem on a par with those of 'Vatted's' client. Article 16 of the VAT (Place of Supply of Services) Order SI 1992 No 3121 then treats such supplies, when made for the purposes of a business carried on by him (the recipient), as made in the country of the recipient.

It would therefore appear that, where a client (and thus the place of supply) is in a country that is not a Member State, there is no VAT liability. If the recipient of the services of 'Vatted's' client is in another Member State, then (subject to registration in that state by 'Vatted's' client, see below) the recipient will pay VAT at the local rate under the reverse charge rules. N.B. It is important to obtain the customer's VAT number to confirm that he is in business and registered. If the European Union customer is not VAT registered, and the agent's supplies to that country exceed the local VAT limit there, he is liable to register and account for the VAT there. This would seem unlikely in this case.If the recipient of the services is in the United Kingdom, VAT must be charged at the standard rate.

With regard to the 'selling' activities (carried on by 'Vatted's' client via its subcontractors), these would appear to fall within Article 13 of the VAT (Place of Supply of Services) Order. In the querist's circumstances, it seems likely that the selling activities will also be deemed to take place in the country of the supplier of the underlying goods. If that is the United Kingdom, VAT should be charged; if it is outside the European Community, the supply will be outside the scope, and if in another Community country, the reverse charging provisions will apply. 'Vatted' should refer to section 10 of Notice 741 which provides several examples of the various possible permutations.

Can input tax on agents' commissions be reclaimed?

I am not sure if the expression 'pseudo agents' is helpful here. In relation to the selling activities, it would seem that 'Vatted's' client is the agent here, acting on behalf of manufacturers to promote sales to United Kingdom retailers. The 'pseudo agents' will therefore be self-employed subcontractors, who will invoice 'Vatted's' client by reference to the sales achieved. If they are VAT registered, they will of course charge tax - their supply is clearly within the United Kingdom. As the supplies made by 'Vatted's' client appear to be chargeable to VAT (or would be chargeable if made in the United Kingdom), then this input tax can be recovered. Alternatively, the 'pseudo agents' are agents and their activities also fall within Article 13 of VAT (Place of Supply of Services) Order and their VAT obligations would be as outlined above, unless Vatted's client had provided his VAT number, in which case the supply would be deemed to be in the United Kingdom under Article 14.

Will a limited registered company affect the VAT position?

In most circumstances, it is envisaged that other tax considerations will probably be more relevant to the trading format than VAT. If the client is already carrying on another business, say as a sole trader, the new consultancy (if also carried on as a sole trader) would be part of the same registration for VAT purposes. This could cause problems if the existing business was not fully taxable and might also cause administrative problems.

In view of the level of turnover compared to likely commitments, one would suspect that the protection of a limited company would be desirable. - Southern Man.

Issue: 3886 / Categories:
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