From 1 January 2015, the VAT place of supply rules for cross-border business to consumer (B2C) broadcasting services, telecommunication services and electronically supplied services will change.
Under the new rules, the place of supply will be where the customer, rather than the supplier, is located.
The rules for business to business (B2B) services will remain the same.
The purpose of these changes is to move taxation to the place of consumption in an attempt to prevent distortion of competition in markets where cross-border trade is regular practice and to ensure VAT is accounted for in the right place.
Service and supply
The definition of electronically supplied services (ESS) is not prescriptive and there is not a complete list of the services included within this term.
The overriding principle is that ESS are those requiring minimal human intervention, that are largely automated, which are delivered electronically and where delivery would be impossible in the absence of technology.
Where a B2C service could fall within the scope of ESS, suppliers need to check in each European Union member state where they have non-business customers: whether the tax authorities in that member state consider the service supplied is an ESS; and whether that service is taxable for VAT purposes.
If that business is not already VAT-registered in that member state – or does not utilise the Mini One Stop Shop, a simplification allowing providers of taxable ESS to avoid having to register in multiple member states – this could result in the supplier having to VAT-register in that member state, potentially even in cases where the supplies made are minimal in value, as not all member states make use of VAT registration thresholds.
In addition, if those supplies to consumers are ongoing, there may be a requirement for that registration to be maintained and for regular VAT returns to be prepared and submitted.
Under the microscope
The consequence for businesses operating in the financial services industry is that while it may not have been the original intention of the European Commission in introducing this legislation, certain financial services could fall within the scope of ESS, in particular, electronic exchanges, trading and investment platforms and electronic banking.
Banking services, for example, would be expected to fall within the scope of the VAT exemption but the VAT treatment of services provided by investment platforms is not uniform across Europe.
Consequently, businesses could be required to check the VAT treatment of their services in every jurisdiction where they have non-business customers.
There is not likely to be a significant number of instances for businesses where they will be required to register in another member state and charge local VAT but the increased administrative burden of having to check in the first place is of great concern.
Mere use of the internet to deliver an underlying service should not bring an activity within these rules.
For example, recent discussions have suggested HM Revenue & Customs (HMRC) considers the provision of services to buy and sell securities on an investment platform should not fall within the scope of an ESS.
However, it has noted the provision of access to a platform could fall within the ESS definition, where it is supplied separately.
In addition, it suggested that if a business charges specifically for a service delivered electronically, that service could fall within the definition of ESS.
However, HMRC predicts that few financial services will fall within the scope of an ESS and it expects other member states to follow suit.
However, as referred to above, the VAT treatment of financial services is not uniform across Europe.
While there is an ongoing review into the VAT treatment of financial services in the European Union, there is currently no set deadline for when this review will be reignited and completed.
Be prepared
So where does this leave financial services providers?
The introduction of these rules means that, in principle, a UK financial services provider with non-business customers in other EU member states will need to determine whether the services provided are considered to be ESS and the VAT treatment of its supplies in those member states.
Consequently, those businesses could then be required to register for VAT accordingly.
It is imperative that businesses start to prepare in advance of these changes taking effect from 1 January 2015.
