Question re: VAT on exported service (as opposed to goods)

[GavinClark]

I have a question that you clever people might be able to answer for me.

I run a company that tests computer software for developers. Last year we did some work for a company in Italy. I got the client's VAT number and since they were in another country I zero rated the work and entered it in 'Box 8' on the VAT return.

Question 1. Given that we have exported a SERVICE, rather than a physical PRODUCT, was it okay to do that? (zero rate it and enter it in 'Box 8')

I thought it was all okay until this morning when a 'EC Sales List' form arrived asking me for the VAT number of the client. The notes that came with the form say "Only supplies of goods and their related services should be shown. Related services are services, which form part of the price of the goods, such as freight and transport charges.". Have I buggered it up? Or does the 'EC Sales List' apply to services that were exported as well as goods?

Thanks in advance for any help.

 

[winelight]

No, the EC Sales List only applies to goods. The "related services" are those that would typically be included in the sales price and on the same invoice, such as freight for the goods.

As to whether or not you zero-rate a service, that's a different story. You need to read the notice on Place of Supply Services. Basically, it depends on the service and where it was performed (or deemed to have been performed). I can't get onto the HMRC site at the moment so can't give you the Notice number. 741 from memory, but my memory is useless.

 

[Kevin Hall]

I have a question that you clever people might be able to answer for me.

I run a company that tests computer software for developers. Last year we did some work for a company in Italy. I got the client's VAT number and since they were in another country I zero rated the work and entered it in 'Box 8' on the VAT return.

Question 1. Given that we have exported a SERVICE, rather than a physical PRODUCT, was it okay to do that? (zero rate it and enter it in 'Box 8')

I thought it was all okay until this morning when a 'EC Sales List' form arrived asking me for the VAT number of the client. The notes that came with the form say "Only supplies of goods and their related services should be shown. Related services are services, which form part of the price of the goods, such as freight and transport charges.". Have I buggered it up? Or does the 'EC Sales List' apply to services that were exported as well as goods?

Winelight is correct. Given that you were working on goods, the error is understandable.

If the goods were transported to the UK and then returned whence they came (Italy) once you had finished working on them, then you should indeed "zero-rate" your supply of services. But, despite the movement of goods, you do not enter the total in Box 8: only enter the sale in Box 6 of your VAT return.

If you went to Italy to perform your services, you risk having to register for (and charge) Italian VAT on your work there. But that is a whole other can of worms, best left aside while we deal with your UK issues.

So. Having "buggered it up", how do you extricate yourself? Most of HMRC's methods of amending errors will probably not make it clear to HMRC that you should not be receiving ECSLs. In your position, I would write a letter to HMRC explaining the error (service not goods), giving the new Box 8 total for the erroneous VAT return and asking to be removed from the list of taxpayers to whom ECSLs are sent.

Hope it helps?
______________
VAT Notice 741: Place of Supply of Services is here: http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcise_ShowContent&propertyType=document&columns=1&id=HMCE_CL_000346

 

[GavinClark]

Cheers for your help.

Regarding "zero rating" the services, the client gave me their VAT details and advised me that I should zero-rate it. Do you think that's right?

The client in Italy makes computer software. We are in England and we download the software from the internet, test it in England and provide feedback to them via the internet.

So as far as I can tell the services are supplied in the UK to another EU member state. Hence we zero-rate it and let them do the VAT over there.
Does that sound correct? (I realise it's not easy to answer based on that limited info!)

Thanks again.

 

[Kevin Hall]

Yup, now it gets complicated. Hold on to your hats. Put simply, yes it "sounds" right. However.

I had envisaged that you would need to test their software on their own systems in Italy - an erroneous assumption on my part. I now understand that you have to download the Italian software in the UK and test it out in the UK.

Software are "services" if bespoke (i.e. designed specifically for someone) and "goods" if off-the-shelf. So the first question is: are you providing "work on goods" or "work on services"?

Then VAT Notice 741 sort of contradicts itself a little (this is extremely rare). At Section 13.5.2, testing goods is a service supplied where the customer belongs (i.e. Italy) and Reverse Charged in the way you describe ("let them do the VAT over there"). But at Section 7.1.1, technicians carrying out tests or experiments in order to obtain data is a service supplied where the tests are physically performed (i.e. UK) and subject to VAT in that country (i.e. you would charge UK VAT).

I would be inclined to believe that Section 7.1.1 is more for work of a scientific nature, purely providing a string of results and records; whereas, for the service you might be providing, not only data but also a conclusion and a series of recommendations might be required. Only you can answer that. But if this is the case, your services might be consultancy in nature and the "Reverse Charge" again applies.

In any event, it seems that your customer is expecting to account for EC VAT in its own country, so there should be no VAT lost to the EC as a whole. But if you want a conclusion that says more than "yes it sounds right", you would be best advised to call HMRC's National Advice Service (or even write in for a legally-binding ruling).

Hope it helps a little ...

 

[winelight]

It really does sound to me as if 13.5.2 was intended to apply to "products" (rather than simply goods as stated) and that your interpretation viz. 7.1.1. applying to scientific work is probably correct.

Unfortunately errors in VAT Notices are all too common but I have yet to find one in 741. However it could be clearer in this instance.

 

[Kevin Hall]

Certainly, much of VAT law and guidance still does not envisage the use of the internet as it happens today. But the difficulty is that, if the services do not fall within a VAT category, the "basic rule" will apply and 15% UK VAT must be charged to the French customer. Yet, without more details from Mr Clark, all options are open - even the technical argument for "work on goods" if the software is "off-the-shelf" ...

Having said all that, I still imagine (as I noted earlier) that a conclusion is drawn by Mr Clark and advice is given to the French customer, so an ordinary VAT Officer would probably interpret the services as "consultancy" which would be Reverse Charged in these circumstances.

Does that make sense?

 

[winelight]

Let's look at the legislation.

Schedule 5 of the VAT Act: services supplied where received: Services of consultants, engineers, and other similar services

Schedule 8 Group 7 (international zero-rated services) services of work carried out on goods which, for that purpose, have been obtained or acquired in, or imported into, any of the member States and which are intended to be, and in fact are, subsequently exported to a place outside the member States

Does that help us at all?

 

[Kevin Hall]

In my opinion, it does not help us in this particular query. My concerns focus on the nature of the supply and the definitions of the potentially relevant VAT categories. I chose VAT Notice 741 as it also gives a series of examples which usually help to pin down what is going on.

In this case, for example, the law provides no definitions of these services, and you are left with the question: "Is what I have supplied an X?". However, even VAT Notice 741 does not help us much for "software testing" and I wanted to show Mr Clark that the issue is not clear-cut.

I am sure you would proceed in your own way, but where I have doubt I want to examine all the options. For example: as you know, HMRC treat off-the-shelf software as goods, so HMRC might want us to consider all the rules relating to work on goods. You would have to consider the question of where the "goods" are when they are worked on and what happens to them afterwards (i.e. would HMRC consider that they entered the UK and remained in the UK? or were they then removed from the UK? or are they removed to Italy or to a non-EC territory? etc.). In my opinion the "goods" are unlikely to be removed from the EC.

Another concern is: how can you be certain that "software testing" deals with off-the-shelf software? If not, it would seem to me to be part of the software design process, which does not seem problematic.

But even if the "software testing" does deal with off-the-shelf software (i.e. "goods" from HMRC's point of view), how can you even be certain that "software testing" is "work on goods"? What is the definition? What if I claimed it was consultancy? What is the definition of consultancy? If the service produces a conclusion and yields advice rather than just "data", in my opinion it is not mere "testing", but consultancy. But there is no definition in the law, only guidance in VAT Notice 741.

Of course, the final concern when advising Mr Clark is the small chance that HMRC might conclude that "software testing" does not really fit any of these VAT categories. If not, the "basic rule" applies to the service and VAT must be charged in the country where the supplier belongs (i.e. UK VAT must be charged by Mr Clark's business). Yes, the applicability of the "basic rule" is arguable with HMRC, but the issue must be considered as it would be a potentially stressful experience for Mr Clark if HMRC were to challenge any zero-rating in a future VAT Inspection. Without the detailed facts of the supply, I think it would be difficult to close off for certain any of the above options and your comments would be filled with warnings and caveats that a view is being taken - much as mine have been.

 

[winelight]

I think Mr Clark needs to write in for a clearance but I suspect it's going to be consultancy, the more I think about it.

 

[Kevin Hall]

I think Mr Clark simply needs to look to the facts of what his services are, facts which we do not have. As I say above, it seems to me likely that his service involves drawing a conclusion and reporting with advisory comments on the results he generates from his tests. If not, what exactly is he doing? If so, then - as I say above:

Having said all that, I still imagine (as I noted earlier) that a conclusion is drawn by Mr Clark and advice is given to the French customer, so an ordinary VAT Officer would probably interpret the services as "consultancy" which would be Reverse Charged in these circumstances.

As always with VAT, the answer depends heavily on the facts, and in this case we simply do not have enough of them.

 

[yorkshirejames]

French? Thought we'd mentioned Italy earlier?

Agree that on the basic information it appears that this could be consulting - but as Kevin has said there are is more information required.

 

[Kevin Hall]

French? Thought we'd mentioned Italy earlier?

My error - apologies. I was probably working on a French scenario when I broke off to give that posting. The country is unimportant and my comments stand (with Italy substituted for France of course!).