A little over 12 months ago the European Council published a new package of measures that will have a significant impact on certain elements of the VAT system in the Isle of Man over the next five years or so.
Many of the changes are aimed at the underlying desire that VAT should be accounted for where services are consumed rather than charged where the supplier is based.
This will mean, in many circumstances, that there may no longer be a VAT benefit to suppliers of certain services locating in low VAT jurisdictions, such as Luxembourg, the UK and of course the Isle of Man (although the other tax benefits remain).
The first of the changes are due to be introduced on January 1, 2010, and whilst the UK issued a consultation document to consider many of the changes in December 2008 the results of the consultation have still not been released and detailed legislation on the initial changes is not anticipated until later on this year.
The last change is anticipated to take effect on January 1, 2015, with other changes being implemented throughout the five year period.
The key business areas that will be affected by the changes are those that provide cross border supplies of services. As such it is likely that a substantial number of businesses based in the Isle of Man will be affected by the changes. Such changes are mandatory; failure to implement the EU changes would result in infraction proceedings, so it is likely that the Isle of Man will replicate the way in which the proposed changes are introduced in the UK.
There are four key areas of change, some wider reaching than others, but there is likely to be an impact on the administrative cost of VAT:
Change to the place of supply of services
As those of you involved in VAT will be aware there are currently many different rules applying to the treatment of services.
Whilst there will continue to be differences, an increased number of business to business (B2B) supplies will be liable to VAT where the customer is resident.
Those services that fall outside this basic position will include those services relating to land, passenger transport and various services relating to cultural, sporting and scientific activities.
There is currently no provision included to change the definition of a 'business' customer, so the use of foreign VAT registration numbers will not, at this time, be required.
The same evidence to support a business status will be required post January 1, 2010, but in their guidance HMRC have indicated that they will revisit their guidance to see if further clarification is required.
Initially, the provisions relating to business to customer ("B2C") supplies will not, generally, change, but in due course the rules relating to such supplies will change in certain circumstances.
The current provisions applying to passenger transport are not expected to change, although changes to the wording are to be introduced to align the UK working with EU legislation. However, the provisions relating to a hire of a means of transport are to change in both 2010 and 2013. From 2010 the place of supply of the short-term hire of a means of transport, e.g. car, yacht, aircraft etc. will be the country where the means of transport is put at the disposal of the customer, i.e. where the customer takes control of the yacht etc., rather than as now, the country of the supplier. Consequently it is possible that the VAT due on such supplies could require a registration in another EU country.
New intra-EU reporting
Currently an intra-EU supply of goods requires additional reporting, by way of an EC Sales List.
With effect from January 1, 2010, this requirement will be extended to the provision of taxable services supplied to VAT registered businesses in other EU jurisdictions. The current proposal from HMRC is that the same form (VAT 101) will be utilised and, whilst the original proposal was for monthly Sales Lists to be required for services this now seems to have been amended and the revised proposal is that quarterly Sales Lists will be required.
The proposal is that Sales Lists will be required for a supply of taxable services, to which the reverse charge provisions apply, but they will not be required for exempt supplies, B2C supplies or B2B supplies where the customer is not VAT registered.
Recovery of foreign VAT
The existing mechanism to recover VAT incurred in other EU jurisdictions (the eighth directive reclaim process) is currently laborious, cumbersome and often unsuccessful.
A change is proposed to this mechanism to permit businesses located in one EU jurisdiction to electronically file a reclaim of VAT incurred elsewhere within the EC.
Further details on this procedure are awaited, but the electronic filing of claims should speed up the claim process, give more certainty as to those items that are available for credit and will provide for interest to be added where refunds are delayed.
Supplies of electronically supplied services
The current position for this type of service provides for VAT to be charged based on the location of the supplier, where services are provided B2C.
The change, to be implemented in 2015, will mean that VAT is charged according to the location of the customer.
As the customer is not in business it is necessary for the supplier to account for VAT in that jurisdiction, but the changes will be accompanied by the so called 'one stop shop', which will facilitate the collection and payment of VAT in other EU jurisdictions. Consequently, suppliers consider their pricing as it will be necessary to account for VAT at rates that vary between 15 per cent and 25 per cent for EU customers.
In addition, it will be necessary to identify in which jurisdiction their customer is resident and to identify the VAT rate applying there.
What will these changes mean for the Isle of Man?
The revised eighth directive reclaim process is to be applauded, but the other changes will mean enhanced VAT compliance costs and potentially a reduction in VAT revenues for the Island.
The full impact of the electronic supplies changes won't be felt fully until 2019, but by that stage all revenues from such supplies will be charges to VAT according to where the customer is resident.
Whilst the introduction of Sales Lists for services will mean additional compliance they should not, at this time, impact the VAT liability of services industries based on the Island, especially the fiduciary services market, but for how long?
It is likely that these changes will have an impact on many businesses that are involved in intra-EU supply of services. Likely to be particularly affected will be the local yacht chartering businesses, as the new provisions more closely align passenger transport and hire of a means of transport.
SMP Accounting & Tax Limited are able to offer further advice and assistance in advising on the changes, how they may affect your business and what changes may be required to your accounting systems.