Confused by the EU's VAT rules
WH writes: I am a PR consultant and one of my clients is a law firm in Hungary. My accountant has informed me that, as I supply services outside the UK, I must charge VAT payable locally in Hungary at 20%. My client in Hungary disagrees with my accountant and says there should be no VAT charge. Who is correct?
The VAT rules for the place of supply of services changed on January 1, 2010, writes Adrian Houstoun, VAT partner at Kingston Smith LLP. As part of these changes, the place of supply of your PR services now depends on the location of your client and whether it is in business. The usual indication of being in business is the production of a VAT number.
If your customer is a business customer within the EU, the place of supply of your services is where your customer is based (Hungary). In such situations, the recipient of the service has to account for Hungarian VAT on its own VAT return. This is what is known as the “reverse charge”. If, however, you supply the same services to a non-business customer within the EU, the place of supply is where you are based (the UK), and your services are subject to UK VAT.
A law firm would be a business customer, and you do not therefore need to charge or show VAT on your invoices, as your services are outside the scope of UK VAT.
You must, however, obtain your Hungarian customer’s VAT number and include this on the invoice, along with some narrative to explain that it is a reverse charge supply. The law firm will declare Hungarian VAT on these services on its VAT return, but is likely to also reclaim this amount, resulting in no net liability, which is why your client objected to your intended treatment.