Electronically Supplied Services

Rob Janering, Partner, VAT and Customs Duty Services

An ongoing and speeding change seen across industries is that of businesses opting to deliver their content and services via the internet. This easily accessible format, allowing for wider visibility and access to customers worldwide, is here to stay. It is very much a case now of seeing what ‘traditional’ services and goods can be converted to a new model.

However, from experience, this is also one of the most overlooked areas of VAT which has complex rules and hence outcomes to manage. This means businesses often get their treatment of sales and compliance obligations wrong. To help avoid this, we have shared some guidance and insights below.

What do we mean by electronically supplied services?

Electronically supplied services (ESS) are, for VAT purposes, broadly those which are delivered either via the internet or an electronic network which result in minimal or no human intervention to deliver that service to the end consumer. For example, online magazines, the purchase of digital images, music, digital games and computer software all fall into this category, as consumers can simply click ‘buy now’ and receive their purchase automatically.

While many of these supplies can be characterised with relative ease, some undertakings can be more difficult to manage. For example, educational services can be subject to different VAT rules, due to the various methods in which tuition and training can be provided. Very often you will find the supply made via a pre-recorded session, which can be accessed online at any point by a student. That would be an electronically supplied service. This is as opposed to a course delivered online and live by a tutor which is not an electronic supply, because there is an overly significant amount of human intervention.

Understanding what is being supplied and to whom, along with capturing the relevant income streams for them, is critical to getting the VAT treatment right.

Why are these important to differentiate?

It’s crucial that businesses identify when a supply may fall into the scope of ESS on the basis that these supplies do not follow the standard place of supply rules. They are subject to special and specific rules that come along with their own compliance obligations as well.

As a recap, the standard place of supply rules for services state that supplies made on a B2B basis, are deemed to be made where the customer is based. For supplies made on B2C basis, the place of supply is where the supplier is established. That means for supplies of B2C services made to a UK consumer from a UK established business, UK VAT would be due.

These rules change for ESS, which fall under the broader category of digital services. While B2B supplies are still subject to the general place of supply rules, B2C supplies of digital services are generally taxed where the customer is resident (this is the case in the EU, the UK and in almost 100 countries worldwide).

This means supplies made to:

consumers outside the UK are not subject to UK VAT
UK consumers by overseas entities are subject to UK VAT.

Both of the positions set out above can result in new obligations for suppliers, who will very likely face having to account for local VAT in territories outside of their home establishments.

What should businesses do?

Although HMRC provides examples of services covered by the ESS rules, it should be noted that use of the internet to make a supply, does not always mean that a supply falls under these rules. We have seen that there is very often a lack of certainty as to whether a specific supply is caught by the rules and when HMRC are asked about it, they will state that there is no comprehensive and definitive list of what is considered a digital supply. With this being a fast-changing area, getting the treatment correct and understanding the obligations before making supplies can be crucial.

As an example of this and to why it is so important to be aware of the supplies made, the EU’s position on supplies of live educational services is set to change from 2025. Currently, the UK and EU share the same position that live tuition is not caught within the scope of ESS and therefore VAT is due where the supplier is established. For most UK suppliers this means they charge UK VAT at 20%, subject to the educational exemption applying. However, the EU’s position will change in 2025, with it making supplies of live online education taxable where the consumer is based. This will (without movement or change from HMRC) result in double taxation for UK businesses making these sorts of supplies to EU consumers.

Any businesses making supplies to customers based overseas need as a matter of practice to establish the local rules where that customer is resident in order to know what their obligations will be. For example, where customers in the EU are supplied that will mean VAT being due in each different Member State that they reside in. There are simplifications though, such as the One-Stop Shop (OSS) that allows a single return to be submitted that covers all countries within the EU and the VAT due in them. It prevents numerous registrations for a business being required. Understanding this before starting to make supplies will vastly ease the stress that is acquired around confirming the VAT to charge, and also having to declare and pay it.

For overseas businesses supplying consumers in the UK, simplifications have been removed as a result of Brexit. This ultimately leads to one outcome, that being a need for a UK VAT registration, and because non-UK established businesses do not have a threshold to exceed for UK sales before registering, it is almost mandatory. That is unless sales are made via online marketplaces where in some instances, they can instead become liable for the VAT due.

Therefore, all businesses involved with making ESS need to take care to characterise their supplies, understand the relevant rules, gather evidence to support the VAT treatment applied and then ensure the right information can be captured to calculate the tax due and allow it to be declared. Being able to do this as far ahead of time as possible will help to minimise issues as much as possible and enable businesses to concentrate on what they do best, rather than worry about tax compliance.