2010 is drawing near - is your business ready for the European VAT changes that will happen next year?

A number of important changes to the European Union (EU) VAT system will take effect from 1 January 2010 and beyond. What are the new rules and what should your business do now to prepare for the changes?.

Who will the changes effect?
The changes will effect any businesses involved in supplying or receiving cross-border services or reclaiming VAT incurred in other EU Member States.

What are the changes?

• The general place of supply rule for services in 'business to business' transactions will be where the recipient is established. This will mean that the recipient, rather than the supplier, will have to account for any VAT on his local VAT return. This concept, known as the 'reverse charge' mechanism, already applies to some services, but from next year it will be extended. There will however be some exceptions to this new rule, including services in relation to property, transport, and cultural/entertainment and other performance based services.
  
  
• Businesses involved in selling services across borders will need to comply with additional reporting requirements in the form of EC Sales Lists (ESLs) for services. Currently these are only required for business to business intra-EC supplies of goods, but from 1 January 2010 they will also be required for intra-EC supplies of services that are subject to the reverse charge. ESLs will not, however, be required for supplies which are exempt from VAT under the rules of the Member State from where the supply takes place; business to business supplies where the recipient is not VAT registered; or business to customer supplies.
  
  In addition to the introduction of ESLs for services, there will also be some changes to the ESL rules for goods with effect from 1 January next year. Most notably they will have to be submitted monthly, and within fourteen days of the month end.
  
  
•  The EC 8th Directive refund procedure enables businesses to reclaim VAT that they have incurred in other EU countries. From next year, the process will become more automated because claimants will use an electronic portal in their own Member State of establishment to make their claim and it will not be necessary to submit original invoices. In addition, the time limits for submitting claims is extended from 30 June to 30 September.
  
  
• Changes will also be made to the time of supply (the time when VAT has to be accounted for). Under the current rules, the time of supply for certain services received from overseas is when the consideration is paid to the supplier. From 1 January 2010, the time of supply for imported services with a definite completion date, ie a single supply, will be when the service is completed. For services supplied on a continuous basis, the time of supply will occur at the end of each billing or payment period (or 31 December where the supplies do not have billing or payment periods). Any payments received before these dates will create an earlier tax point.

What should businesses consider now?
These changes are bound to cause uncertainty and it is important that businesses take action now in order to minimise any disruption and ensure that they are able to comply with the new rules. They should be thinking about whether training will be required for key personnel and if the current systems they have in place will be able to deal with the new rules, especially invoicing and ESL reporting requirements.

Another important implication will arise for businesses that cannot recover all of the VAT that they incur. The reverse charge mechanism will apply to a greater number of services leading to increased VAT costs.

Andrea Sofield, VAT partner at Grant Thornton says: "It is important for businesses to take action now in order to ensure they are ready to comply with the new rules. In particular where new computer systems or software need to be put in place, it will be important to make sure these are up and running well before the changes come into effect. The new rules provide an excellent opportunity for businesses to review their current VAT arrangements to ensure that they are not only accounting for VAT correctly, but also that they are reclaiming the VAT which they are entitled to. This is more important than ever given the introduction of the new penalty regime in 2009".

Contact us if you would like further advice on any of the above