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When providing services to another country, it is important to be clear on which country’s VAT rules apply to the transaction in question, as this can have a major impact on how much VAT you owe.

A recent legal case has demonstrated just how important it is to stay on the right side of the government’s place of supply rules for services, and highlights the significant financial consequences of getting this right.

How determining the place of supply changes how much VAT you owe

The Upper Tribunal hearing focused on the activities of Finmeccania Group Services SpA (FGS), a group service organisation supplying security services to sister Italian companies. FGS is also established in Italy and sought the repayment of UK VAT charged to them in relation to the provision and arrangement of enclosures at Farnborough International Airshow, the use of which was part of their marketing strategy.

Generally speaking, if a supplier of services and the recipient are located in two different countries, it is necessary to determine the “place of supply” for VAT purposes. In this instance, the view of HM Revenue & Customs was that FGS was making a supply within the UK and was therefore not eligible for the tax refund.

However, FSG contended this, and the court determined that the general rule for determining the place of supply should apply in this case. This meant that the VAT treatment should be calculated with reference to the country where the recipient of the service is established - which, for FGS, was Italy.

As a result, the Upper Tribunal ruled in favour of FGS, which was judged to be entitled to the refund, as they did not make any taxable supplies in the UK.

The lesson for businesses

In this instance, the basic place of supply rules for services were upheld in favour of FGS; however, there are many exceptions and overrides that may affect where a supply of services is deemed to have taken place. As such, if you supply services to customers in different countries, it is important to know which VAT rules will apply.

If you are involved in a transaction of this nature as the supplier or the customer and wish to obtain clarity in relation to your VAT position, you can consult the official GOV.UK guidance. You can also speak to one of our expert VAT consultants on our free helpline by calling 0333 3638 012.

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