The VAT implications of Brexit for professional services firms

Much of the commentary on the VAT changes arising from the end of the Brexit withdrawal period relates to the movement of goods between the UK and EU and vice versa. While they are not extensive, there are also some changes to the VAT treatment of services provided by professional services firms.

The main area of change relates to the invoicing of international customers, but there are also some changes to certain VAT administrative obligations.

Invoicing international customers

Generally, most of the UK's VAT rules applicable to organisations providing services remain unchanged by the end of the Brexit withdrawal period. Specifically, there were no widespread changes to the place of supply provisions (rules that determine the country in which VAT is to be paid) or rates of VAT.

One area of change is in relation to supplies of services to individuals resident in the EU. From 1 January 2021, organisations should find getting the correct VAT treatment easier as there is no longer a need to distinguish between customers resident in the EU and outside of the EU. Whilst there remains exceptions (such as for services directly related to land), the general rule is that professional services (such as legal and consultancy services) supplied to customers outside of the UK will be outside the scope of UK VAT. For organisations working with private clients this is likely to be seen as a positive development as under the ‘old’ rules UK professional services firms charged UK VAT on these services, which would have been a cost to their clients.

There are no transitional rules, so the VAT treatment of the services is to be determined solely by whether the ‘tax point’ is before or after 1 January 2021. Note that care should be taken when invoicing for work that was completed in 2020 but only being invoiced for in 2021; in this situation the ‘new’ rules may not apply, meaning that UK VAT will be due because there may be a ‘tax point’ in 2020 when the work was completed. Professional advice to confirm the correct VAT treatment is recommended.

UK firms that operate through branches in the EU will need to identify whether it is the UK or EU establishment that is most closely connected with the services provided to the client. This will then determine whether the supply is subject to UK or EU VAT rules. The same is also true when establishing whether a purchase should be reported in the UK or EU VAT return and a reverse charge applied. Brexit does not impact on the ‘most closely connected’ principles, but it is perhaps more relevant now that the Brexit withdrawal period has ended and UK firms are assessing whether they need an EU presence.

Administrative changes

• Organisations based in Great Britain will no longer have to file EC Sales Lists. For professional services firms based in Northern Ireland the requirement to file these returns will continue.
• As the UK is no longer subject to the EU VAT directive, there is no longer a requirement to obtain the customer’s EU VAT registration number or to include wording on the invoice referring to the UK or EU law in relation to the reverse charge. Organisations may choose to continue with these practices anyway as, arguably, they are part of good governance and process, but they are technically no longer required.
• Note that there is no change to the requirement for UK firms to apply the VAT reverse charge when purchasing services from overseas suppliers.
• Organisations wanting to import goods into the UK will need an EORI number issued by HMRC which is in effect an import ID number. The firm will also need to appoint a customs agent to assist with the completion of the customs import declaration. As the ‘importer of record’ the UK professional services firm will be responsible for the payment of customs duty (if applicable) and import VAT. There are new postponed import VAT accounting measures which allow the organisation to defer paying the import VAT to its VAT return, at which point it will most likely also be able to reclaim the VAT in full, meaning a cash neutral entry on the VAT return.
• There are changes to the way in which UK organisations reclaim EU VAT in countries where they are not required to be VAT registered. Previously, such claims were made under a common EU VAT reclaim process. Going forwards, reclaims are still possible, but they will need to be made directly to the local overseas tax authority. There may be changes to the time limits of when claims can be made and different procedural requirements.