HMRC vows to challenge ISPs' cosmetic moves abroad to save on VAT

Her Majesty's Revenue and Customs (HMRC) has said that it will take action against phone; internet service provider (ISP); and broadcasting companies which move some functions abroad to take advantage of lower VAT rates but in practice still operate from the UK.

HMRC said that companies in the telecoms and broadcast businesses are increasingly seeking to save on VAT by moving abroad but still serving UK  markets.

"HMRC are aware that some businesses within the telecommunications, internet service provision and broadcasting sectors have implemented arrangements that claim to move the place of supply of their services from the UK to another [European Union] Member State in order to take advantage of more favourable VAT rates," said an HMRC statement.

EU law says that for consumer services the 'place of supply' is where the supplier is based, not where the customer is located. So by changing, or appearing to change, location, retail businesses can change their VAT regime.

"Some suppliers to the UK market claim to have reorganised their businesses so that the place of supply is no longer in the UK but another Member State," said HMRC.

"HMRC accepts that businesses have the freedom to choose where to locate and to enjoy any resultant benefits. However, HMRC will carefully examine all such arrangements," it said.

The tax and customs authority said that it would analyse the companies involved to determine whether there was a case to be made that they were still based in the UK after all.

"Where HMRC considers that there are sufficient human and technical resources in the UK to form a fixed establishment from which the services are supplied, or where the entity purporting to make the supplies does not have a sufficient presence in the other Member State to be established there, HMRC will mount a robust challenge," it said.

Tax law expert Liz Morgan of Pinsent Masons, the law firm behind OUT-LAW.COM, said that companies which are considering changing their tax status need to ensure that their claims match the reality of their business.

"Businesses who are intending to move their operations offshore to reduce VAT costs need to make sure the reality of what happens in the business supports the VAT position and that they can demonstrate this if HMRC seeks to challenge the arrangements," she said.

"Businesses who get it wrong will not achieve the VAT savings but will also be left with interest and penalties and the costs and disruption of a dispute with HMRC," said Morgan.