Under current rules, where services are provided by one business
to another, the place of supply for VAT purposes is generally
deemed to be the country where the supplier is based. If the
services are supplied from outside the EU, no VAT will be payable,
reducing the overall cost of the supply considerably.
The provision of finance-related services, such as banking and
insurance, is largely VAT exempt. The default "place of supply"
rule, however, applies to many outsourcing situations where
back-office administration is provided outside the UK.
But the rule has been reversed by the Finance Act 2009. As from
1st January 2010, the place of supply in a business-to-business
context will be deemed to be the country where the recipient is
based.
This means that a UK company outsourcing functions abroad will
usually be responsible for paying the VAT under the "reverse charge
mechanism". Under this mechanism, the recipient company effectively
acts as both supplier and customer, accounting for the VAT as if it
were the supplier and then recovering the VAT (to the extent that
it can) as the customer.
The rule change is likely to have little practical impact on
insurers and financial service providers in relation to their own
services, which remain VAT exempt. But they may find themselves
having to account for VAT for the first time on the costs of
administrative work outsourced outside the EU.
Eloise
Walker, a tax specialist in Pinsent Masons, the law firm behind
OUT-LAW.COM, warned companies to prepare for the change now.
"Financial services companies who outsource work abroad need to
carry out a review of their supply agreements in light of the new
place of supply rule and consider restructuring arrangements where
possible," she said.
"This change is looming large and companies should be seriously
considering how to minimise their potential irrecoverable VAT bill
going forward," said Walker.
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