Brexit VAT changes | A guide for law firms & small businesses

12/03/21

Leave? Remain? These discussions seem like ages ago don’t they?

Well, Brexit is now a reality. Many of our clients in the legal sector are asking what this means for UK VAT-registered businesses selling services to overseas customers.

We liaised with both Accounting and Legal VAT experts to help clarify some commonly asked questions, including:

  • What is changing with VAT on sales of legal services outside of the UK?

  • How do I report my EU sales and what are the EC sales list requirements?

  • Post-Brexit: what is changing with VAT reverse charges?

Note: What follows is our interpretation of these changes and should not be a substitute for taking specific VAT advice from your accountant.

What’s changing with VAT on sales of legal services outside of the UK?

Sales of legal services to customers outside the UK may not be applicable to you at this moment in time, but it is worth being aware of these changes.

When selling goods or services, the ‘Place of Supply’ of the sale will determine the way you treat the sale for VAT purposes.

The first step is establishing whether you are selling to a ‘business’ or ‘consumer (refer to VATPOSS01350 – VAT Place of Supply of Services – HMRC internal manual).

As a general rule of thumb, in relation to the sale of legal services, if you are selling directly to another business (B2B), then the place of supply is where the customer belongs.

Following Brexit, if you are selling to an individual that is a non-UK non-business customer (B2C), the services of lawyers and accountants are treated as supplied where the customer belongs, and outside of the scope of UK VAT*.

Pre-Brexit, these supplies would have been subject to UK VAT, so this is a change in VAT treatment.

The main exception to this general rule is if the sale of service directly relates to Land and Property, the place of supply is always where the Land is located, regardless of where the customer belongs, or whether they are in business or not.

  • Services supplied that are directly related to land: legal services such as conveyancing or drawing up contracts of sale or leases, including title searches and other due diligence on a specific property
  • Services supplied that are indirectly related to land: accountancy or tax advice (even when this relates to tax on rental income), general legal advice on contractual terms, legal services connected with fundraising for property acquisitions or in connection with the sale of shares in a company or units in a unit trust which owns the land

For example, if you are providing Legal Services that does not relate to Land or Property to a non-business customer who belongs outside of the UK, then the place of supply will be where the customer belongs and the sale would be classified as ‘Outside the Scope of UK VAT’. Thus no UK VAT would be charged on the invoice to your customer. The sale will still need to be reported on your UK VAT return and will be shown in Box 6 (Total Net Sales, excluding VAT).

If you were providing Legal Services to a non-business customer which resides outside of the UK, but it was in relation to a property located in England, this would be deemed as a UK domestic sale due to the property being in the UK. Therefore, 20% VAT would be charged on the invoice to your customer. Conversely, if you supply services relating to land in an EU member state, you may be liable to register for VAT in that member state.

Helpful links:

*It should be noted that, as it stands, B2C supplies of legal services are currently untaxed. This is an unintended implication of Brexit, that is likely to be rectified by the EU. It is important that you keep up-to-date on changes in this area to mitigate risk.

How do I report my EU sales and what are the EC sales list requirements?

From 1 January 2021, you no longer need to complete and submit an EC Sales List for supplies of services from the UK to EU VAT-registered customers.

Post-Brexit: what is changing with VAT reverse charges?

Although there have been slight changes to how UK Businesses charge VAT to customers outside of the UK, the requirement to process a Reverse Charge on purchasing services from a non-UK supplier still remains (where the services would be taxable if provided in the UK).

The Reverse Charge is where you act as if you’re both the Supplier and the Customer. You charge yourself the VAT (Output VAT) and then claim the VAT back (Input VAT) subject to the normal rules. Where you are able to recover all of the VAT you incur, both amounts will be the same and cancel each other out.

Currently, you may receive invoices from non-UK suppliers charging local VAT on their invoices as they assume that you are a non-business customer. Where the supplier has charged local VAT, this will not be UK VAT and therefore cannot be reclaimed on a UK VAT return.

We would suggest making contact with these businesses and provide them with your business details and VAT registration number where applicable. This will mean that they will not charge local VAT on the invoice, and subsequently, should only charge you the NET amount. A Reverse Charge would then be processed by you to account for the VAT due.

In some cases, a VAT charge would be appropriate, for example, if the supply was a land-related service.

Although there have been slight changes to how UK businesses charge VAT to customers outside of the UK, you still must process a Reverse Charge on purchasing services from a non-UK supplier (where the services would be taxable if provided in the UK).

The Reverse Charge is where you act as if you’re both the supplier and the customer. You charge yourself the VAT (output VAT) and then claim the VAT back (input VAT), subject to the normal rules. Where you are able to recover all of the VAT you incur, both amounts will be the same and cancel each other out.

Currently, you may receive invoices from non-UK suppliers charging local VAT on their invoices as they assume that you are a non-business customer. Where the supplier has charged VAT, this will not be UK VAT and therefore (in most cases) cannot be reclaimed on a UK VAT return.

Our recommendation is to contact these suppliers and share your business details and VAT registration number, where applicable. This will mean that they will not charge local VAT on the invoice, and subsequently, should only charge you the NET amount. A Reverse Charge would then be processed by you to account for the VAT due.

Note: In some cases, a VAT charge would be appropriate, such as if the supply was a land-related service.

As always, if you have any questions or would like help, do not hesitate to reach out to us at info@quill.co.uk

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