On 1st January 2010 the rules for cross-border charging of VAT (IVA) across the EU came into force. The rules and the background to them from a UK perspective are described here on the HMRC website:
This article takes a brief look at how the rules affect suppliers and buyers of services who invoice to or from Spain. We also take a look at some of the problems that have come to our attention dealing with real client situations.
The rules and practical application of these rules can get complicated. Our tax & accounting packages for autonomos and small businesses include unlimited advice on these issues.
You may also be interested in these related articles and services:
Autonomo guide ~ Accounting Services for Businesses ~ Starting a Business in Spain
The new rules in brief
The package of changes brought in a variety of reforms including:
- changes to the Place of Supply rules
- changes to the Time of Supply rules
- requirement to submit EU Sales Lists
- new VAT refund scheme
We are mainly concerned here with the first point which will affect most businesses with cross-border transactions. To briefly explain the other changes:
Time of Supply rules are intended to determine when VAT becomes chargeable on a transaction and the new agreement harmonises these rules across Europe.
EU Sales Lists ("ESLs") are lists of all VATable crossborder transactions between businesses. Previously there was a requirement that lists of all goods sold to VAT-registered businesses in another EU country were submitted. Now this requirement has been extended to services but if you yourself are not VAT-registered then it doesn't apply.
If you have suffered VAT in another EU country and wish to reclaim it then you previously had to submit a claim to the other country's tax authority. Now there is an electronic refund scheme in operation which requires you to have the counterparty's national VAT number.
Place of Supply Rules
Most businesses with any cross-border activity are affected by these changes. To understand what is going on you have to consider why rules on the place of supply are needed in the first place. If you are supplying a service to someone in another country, where does the service take place? In the country of the service provider, of the receiver, or a third country where the service activity took place?
EXAMPLE a graphic designer based in Spain works for a European wide agency based in Germany but most of the assignments are for American companies. Is this a German, a Spanish or an American service?
The rules that govern this question matter because they determine the rate and treatment of VAT. There is "a general rule" and a lot of exceptions. If for example it was decided that in the above example the supply was in America because that's where the work was used, then it would not attract VAT because it is a supply outside the EU.
The general rule changed on 1st January 2010, as did some of the exceptions.
The old general rule was that the place of supply was where the supplier was. In my example therefore, Spain. That means that the designer in Spain invoices charging Spanish IVA. The new rule is the opposite: it is assumed that the place of supply is where the receiving business is based.
When a business is invoicing a consumer (i.e. not a VAT registered business) then the rule stays as before: the place of supply is where the supplier is and they should include local VAT on the invoice.
Operation of the new rule
Note that elsewhere on this site you can find a guide to invoicing in general - Spanish Invoice Requirements
1. invoicing businesses FROM Spain
If you are registered for IVA in Spain and are invoicing aÂ business customer in another EU country you should include an IVA line at 0% on your invoice and give your EU VAT number (this is your CIF with the country code ES in front) and the EU VAT number of your customer. Also include an explanation of why IVA has not been charged, for example: "This supply is subject to reverse charge in the country of receipt".
Invoices for sales outside the EU entirely are outside the scope of IVA and the reverse charge system does not apply.
Not all services fall under this new rule - see next section.
(Note that if the customer is a consumer and not a business you should include IVA as normal.)
2. invoicing businesses IN Spain
If you are based outside of Spain but have business customers in Spain then the new general rule means that supplies of services to them do not have VAT added to them (but see exceptions). Â If you are based within the EU the Spanish business customers will need to account for IVA on the transactions using the reverse charge method so will want your VAT number to allow this.
3. invoices received from another EU country without VAT
From the point of view of businesses in Spain who are customers for services supplied from other EU countries the invoices will not show VAT but must be accounted for as if IVA is due on them. This is the reverse charge mechanism.
In practice this involves including two lots of IVA on your quarterly return. IVA payable to the Agencia Tributaria on the service that is deemed to have been performed in Spain and IVA recoverable on the payment for that service (if it is an allowable cost). In most cases the amounts will cancel out and there will be no net cost to the business but it will require you to have the VAT number of the EU suppliers.
Important obligations for EU traders
If you are selling to businesses outside of Spain but within the EU or have suppliers within the EU, then you are involved in "intra-community" trade and need to register as such with the Agencia Tributaria (we deal with this on behalf of our clients as part of our registration service). There is also an additional report that needs to be submitted quarterly showing all your intra-community transactions. Â This has always been the case for intra-community goods trading but now extends to services. Â The additional declaration is modelo 349 (DeclaraciÃ³n recapitulativa de operaciones intracomunitarias) and is equivalent to the EU Sales Lists in the UK.
Another obligation when trading within the EU is to be sure you are dealing with registered businesses when it comes to invoices being issued without VAT. Â For example if you supply a service to a UK company and do not charge IVA, you need to be sure that they are VAT-registered and accounting for Â VAT on the reverse charge basis. Â If they are not and are simply avoiding VAT then you may be liable to pay the VAT when the problem is uncovered.
Exceptions to the rule
Some types of services are not covered by the general rule and the VAT treatment is different to that described above. Here are some examples:
Services relating to land/immovable property - an example would be a hotel invoicing a foreign business for accommodation or a conference held at the hotel. Local VAT would still be applied even though it is a supply to a foreign business.
Restaurant/catering services/passenger transport/carhire - VAT is charged wherever they are performed not where the business customer is based.
Certain events such as concerts and exhibitions attract VAT wherever they are performed although from January 1st 2011 businesses who supply the services of organising and performing at these events to businesses will fall under the general rules.
Issues with the new rules
One client is autonomo in Spain and regularly invoices a small company in the UK. The company is not VAT registered in the UK and thus does not fall under the definition of business for this purpose. The client had to treat the transactions as if they were to a consumer and charge VAT.
Another client is self-employed in the UK but has Spanish business customers. In the past she has not charged VAT because her business is below the VAT registration threshold in Britain. She was surprised this year when the Spanish business customers demanded her UK VAT number and of course she was unable to give it to them. They want the number so they can account for the VAT on her invoices using the reverse charge procedure. In Spain this is only possible if they have the VAT number of the service provider. The client is now faced with the choice of either registering for IVA in Spain or VAT in the UK.
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