Key takeaways
- Determining the place of supply for services involves understanding different rules and applying correct VAT rates.
- Who pays VAT is determined by the place of supply rules, although there are certain exceptions to this rule.
- Common exceptions to general rules include immovable property, passenger transport services, catering & restaurant services, and electronically supplied services.
In short: The place of supply of services decides which country's VAT applies to a service. For B2B services, it is usually where the business customer is established, and the customer accounts for the VAT. For B2C services, it is generally where the supplier is based. Exceptions cover immovable property, passenger transport, catering, and digital services.
How do VAT rules apply to the place of supply of services in cross-border deals? VAT rules are complex and can be hard to decode. But you need to understand the place of supply rules to meet your VAT compliance obligations. This guide explains how the place of supply for services is set, who pays VAT, and the common exceptions.
How is the place of supply for services determined?
The place of supply for services is determined by general rules that differ for business-to-business (B2B) and business-to-consumer (B2C) services. Applying VAT correctly to services is very important, especially in cross-border transactions.
You need to understand the different B2B and B2C place of supply rules to meet your VAT obligations and avoid penalties. When you set the place of supply correctly and apply the right VAT rates, you follow the right VAT rules in your cross-border transactions. Read more in our guide: Understanding VAT Place of Supply Goods Rules.
Business-to-Business (B2B) services
For B2B services, the general rule is that the place of supply is where the business receiving the services is established. This applies whether the business customer is based in the EU or not. The receiving business is responsible for paying the VAT.
You must issue a valid VAT invoice with all the necessary details, including the supplier's account information. This lets the receiving business, such as a French company, account for VAT correctly on its side.
For example, say Company A, based in Country X, provides consulting services to Company B in Country Y. The place of supply would be Country Y. Company B would account for the VAT on the services as if it were the supplier.
However, there are exceptions to the general B2B rules. Advertising services, for example, have specific rules for setting the place of supply.
Business-to-Consumer (B2C) services
For services supplied directly to consumers (B2C), the place of supply is generally based on where the supplier is. In this case, the supplier must charge and account for the VAT in its own country.
For example, if Company A provides digital marketing services to an individual in Country X, the place of supply would be Country X. Company A would then have to charge and pay over the VAT that applies in that country.
What are the common exceptions to the general rules?
The common exceptions to the general place of supply rules for services cover immovable property, passenger transport, catering services, and ancillary services. You should know them, especially when you deal with a non-business customer.
Each of these exceptions has its own place of supply rules, which we explore below.
How is VAT applied to immovable property services?
Immovable property services follow the place of supply rules of the country where the property is located. These are services related to land, buildings, and other structures. They include services from lawyers, auctioneers, architects, surveyors, and more.
These immovable property services are subject to VAT at the standard rate. Services involving the development of immovable goods are subject to VAT at the reduced rate, in line with the two-thirds rule.
How is VAT applied to passenger transport services?
Passenger transport services follow the place of supply rules of the jurisdiction where the transport takes place. These services include air, rail, and bus transport, as well as ancillary transport services.
In the UK, for example, passenger transport in any vehicle, ship, or aircraft designed or adapted to carry ten or more passengers is zero-rated. That is different from being exempt from VAT. Transport in a vehicle that carries fewer than ten passengers is subject to VAT at the standard rate.
How is VAT applied to catering and restaurant services?
Catering and restaurant services are subject to VAT in the country where the services are physically performed. Meal prices shown outside or inside a restaurant must include Value Added Tax, though the VAT does not have to appear on the menu. To comply, businesses in this industry must pay VAT accordingly.
How does the place of supply work for digital services?
Digitally supplied services are taxed in the country of their place of supply. These are services provided over the Internet or an electronic network, and they play a big role in today’s digital economy.
When the place of supply of digital services is in an EU country, VAT is due in that country. It is not due in any other country. Services supplied outside the EU are not liable to VAT in any EU country.
This matters for businesses and entrepreneurs working in the digital space. They must know the VAT rules in different jurisdictions and make sure they comply.
What are the use and enjoyment rules?
The use and enjoyment rules make sure specific services are taxed where they are used and enjoyed. This is instead of where the customer or supplier is based. These rules apply to hiring movable goods and to television and broadcasting services. They apply whether the customer is a business or a private customer. For a closer look, see Reduced application of ‘use and enjoyment rules’ in Spain from 2023.
The use and enjoyment rules help avoid double taxation, non-taxation, or unfair competition. They do this by making sure services are taxed where they are consumed. Know these rules and their effects so you can account for VAT correctly and stay compliant.
How do you handle VAT obligations for cross-border services?
You handle VAT obligations for cross-border services by understanding the reverse charge procedures and reporting requirements. These obligations can be challenging.
For B2B services, VAT is not applicable. However, the supplier must still include the sale in its VAT return. For B2C services, the VAT is charged at a rate of zero percent when the supplier is located outside the EU. The place of supply is where the supplier is established.
To help meet your VAT obligations, it's a good idea to consider other reporting obligations, such as the OSS (One Stop Shop) scheme. In that case, the relevant returns should include the necessary details of the supplies. Stay informed about VAT rules and reporting requirements to account for VAT correctly and avoid compliance issues.
Conclusion
Following the place of supply rules for services is crucial to apply VAT correctly, especially in cross-border transactions. Learn the general rules for B2B and B2C services. Also learn the exceptions for immovable property, passenger transport, and catering services. This will help you understand the complex world of VAT obligations.
The VAT landscape keeps changing, so stay informed about upcoming changes and how they may affect your business. That way, you can adapt your processes, stay compliant, and keep a competitive edge in the global marketplace.
Do you need help with your VAT compliance? Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.
How Taxually handles this
Taxually’s CrossTax handles VAT registration, VAT, OSS and IOSS returns and fiscal representation in the countries you sell into, and checks your sales data against 250+ validation rules before each filing. OneTax then pays every tax authority with one bulk payment in your chosen currency.
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Frequently asked questions
What is the B2B general rule for supplies of services?
In B2B transactions, the place of supply is generally determined by the recipient’s location, while for B2C transactions it's determined by the supplier’s location.
What does 'place of supply' mean for VAT?
The ‘place of supply’ is the place where a supply is made and VAT may be charged and paid. Generally, B2B services are supplied where the business customer belongs, while non-business customers are supplied where the supplier is based.
How do the use and enjoyment rules impact VAT obligations?
The use and enjoyment rules ensure fair taxation across jurisdictions, preventing double taxation, non-taxation, or imbalances in competition for VAT obligations.
These rules are designed to ensure that businesses are not unfairly disadvantaged by the taxation system, and that all businesses are paying their fair share of taxes.
The use and enjoyment rules are an important part of the overall taxation system.
