VAT changes from 1 January 2010

The changes to the VAT (“VAT package”) adopted by the European Council are expected to come into force from 1 January 2010. These changes primarily involve change in the rules for the supply of services, the VAT refund procedure and additional VAT reporting in an effort to minimise the administrative burden and simplify the procedures for companies engaged in cross-border operations and prevent distortions of competition between member states operating different VAT rates.

Who will be affected?
1. Businesses supplying services to overseas businesses
2. Businesses receiving services from overseas businesses
3. Businesses supplying goods to other EU countries
4. Businesses wishing to reclaim VAT incurred in another EU country

Change in the supply of services rules
The basic rule relating to the supply of services being that services are subject to VAT in the country of residence of the supplier is now changing. As from 1 January 2010, when services are provided by business to business within EU the place of supply is considered to be the place of residence of the recipient (customer). Consequently the customer will have to account VAT in his country of residence via the “reverse charge” mechanism. Whereas business-to-consumer (individual) supplies of services (where the customer is the end user) will, in principle, continue to be taxed where the supplier is located.
Exception to the new rule is made for certain services (such as restaurant services, services linked to cultural, sports, scientific and educational events, short term hire of means of transport) which will in all cases be taxable in the country of consumption.
Additionally due to the above changes; a business that receives both VAT taxable and VAT exempt services will have to account for VAT via the reverse charge even if the service received is in connection with its non-taxable activity.

Altered VAT refund procedure
As from 2010 it will be possible for companies to reclaim foreign VAT electronically in their own member state. A company will no longer be obliged to file a VAT refund claim in each member state where it incurred VAT. The resident member state will forward the VAT refund claims electronically to the member states concerned.

Additional reporting
As a consequence of the new rules relating to the change of place of supply of services, business providing services to other member states will be required to register to the VAT and submit the VIES (VAT Information Exchange System). The VIES will have to be submitted electronically on a monthly basis on the 10th day of the month following the month to which it relates while previously the VIES was submitted quarterly only by businesses supplying goods.