VAT – electronically supplied services

Electronically supplied services (ESS) are those services which are automated and not reliant upon humans for delivery to customers; common examples being software products and web hosting.

Since July 2003, ESS have been subject to the 1992 place of supply of services regulations (SI 1992/3121) but supplemented with consumption rules intended to remove the potential distortion to the single market through ESS being supplied by providers located outside of the EC.

Determining the place of supply, and thus the VAT liability of ESS, provided by a UK based trader to a non-UK customer demands a two stage approach.

Firstly, the place of supply is established under the 1992 regulations and, secondly, that place is to be tested under the consumption rules.

The 1992 regulations hold that the services shall be treated as supplied in the country of the customer, where the customer is elsewhere in the EC (i.e., not in the UK) and using the supplies for business purposes, or where the customer is based outside of the EC (whether a business or private customer).

Where, however, a customer of the UK based trader is a non-EC business, the consumption rules need to be considered and may override the place of supply determined under the 1992 regulations.

The consumption rules state that the place of supply is the place of the effective use and enjoyment of the ESS. Where the place of consumption by a non-UK business is in the UK, the UK trader will be required to charge standard rated VAT to the supply of ESS.

Effective use and enjoyment is not statutorily defined, but concerns the consumption of the ESS as a matter of fact and regardless of contractual and payment arrangements. Some guidance and examples can be found in HM Revenue & Customs Information Sheet 1/03.