Ask an expert Where is my customer established for VAT purposes? My client provides consultancy services to her UK customers and earns approximately £50,000 per year. She is a small sole trader, residing in the UK and is not registered for VAT. She has just won a contract for £200,000 with a multinational company and will sign the contract next month. The company has its headquarters in London, but my client will be required to travel to China and assess market conditions there. She will spend a few months working in China itself and will meet with the officials at the multinational company’s office in China. She will produce the report in the UK, email it to the multinational’s office in London and payment will be received via the London headquarters (though this will come from the Chinese office’s budget). Is my client required to register for VAT in the UK? Q This is a difficult area, in which businesses are expected to make a judgement as to the place where their services are received, but where HMRC could take a different view. The taxpayer might decide that their service is supplied outside the scope of UK VAT, only for HMRC to conclude that the service had been used in the UK and VAT should have been charged. You should consider the issue step by step. Under VATA 1994 Sch 1 para 1, businesses are required to register for VAT in the UK when their taxable supplies exceed the VAT registration threshold (currently £81,000). However, supplies made outside the scope of UK VAT should not be included when assessing the business’ total taxable supplies. The important question in this instance is whether the services supplied under the £200,000 contract will be outside the scope of UK VAT. The European authorities have struggled to provide clear guidance in this area. The service is received by the customer at the establishment which receives the service (Principal VAT Directive 2006/112, article 44). This is reflected in UK legislation at VATA 1994 s 9, and HMRC’s guidance is contained in section 3 of Notice 741A, where the place of supply is the office most closely connected with the supply. However, none of this literature provides a definitive answer in this case. Articles 10 (and following) of the European Implementing Directive 282/2011 provides further interpretation on the country in which a business is established. The initial drafts for this directive referred to the contract, payment, daily correspondence and so on as indications of A Vaughn Chown Head of VAT, Gabelle Email: vaughn. chown@gabelletax. com Tel: 020 7182 4748. ‘Ask an expert’ provides expert answers to your tax queries. If you would like a second opinion on a tax issue, please contact the editor at paul.stainforth@ lexisnexis.co.uk and we will endeavour to commission an answer for you. All questions will be anonymised. Visit www.taxjournal.com for more ‘Ask an experts’, including on: ! Do my client’s children have to pay the non-dom remittance charge? ! Ensuring no disguised remuneration charge for a joint venture ! The tax issues on different options for structuring the purchase of freehold property ! Tax efficient disposal of a company with a UK-resident EBT holding a number of shares ! The IHT implications on a dividend waiver 20 the establishment receiving the supplies. Whilst these might be useful indications, the directive requires ‘a significant degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services for its own needs’. Applying these rules, the business’ consultancy services are supplied to a multinational company. If this company were only established in China, the supplies would have a place of supply in China and would fall outside the scope of UK VAT. The consultancy business would not be required to register for VAT, and it would not be required to charge VAT to its UK customers. However, the company’s headquarters are in London and it therefore appears to be established primarily in the UK. Although its headquarters are in the UK, is the company receiving the supplies at another establishment? The report is to be emailed to the UK office, but it appears to be the Chinese office which will use the services. The UK office is formally paying for the report, but it is the Chinese office which is arranging payment. Although the majority of the work is to be physically performed in China, this is largely irrelevant unless the Chinese office is using the report for its own needs. Meetings are to be held in China, rather than London. The legislation is therefore unclear. The contract will be important evidence. If the contract is with the London headquarters, this gives a strong appearance of services being supplied from the UK to the UK office under contract with the UK office, and being paid by the UK office, although the report concerns China. The supplies would be subject to VAT and UK VAT registration would be applicable. However, if the contract is with the Chinese office, this gives a strong indication of services being supplied to the Chinese office, with communication being with the Chinese office and payment arising from the Chinese budget. The supplies would be outside the scope of UK VAT and would not count towards the UK VAT registration threshold. Further investigation should focus on identifying as far as possible which office in the multinational will use the business’ services. If it is the China office, the business should retain as much evidence of this as possible, to justify its conclusion that its service falls outside the scope of VAT and that there is no requirement for VAT registration in the UK. It might be possible to negotiate the contract to reflect this reality. Could the contract be concluded with the office in China, could payment be made direct from China, and could the liaison with the Chinese office be stated to be the first point of contact? In conclusion, it is often unclear where a service is being supplied for VAT purposes, and it is important that the taxpayer retains documentary evidence to justify its conclusions as to where its service is supplied. ■ www.taxjournal.com ~ 10 October 2014