On 1 January 2010, amendments to the VAT place of supply of services rules came into force. In general terms, a cross-border supply of services between two businesses will now be treated for VAT purposes as being supplied in the jurisdiction in which the recipient of the supply is located. Previously, the place of supply of a cross-border supply of services was the jurisdiction of the supplier, subject to a considerable list of exceptions. These amendments may have a significant impact on UK insurers which receive management services from offshore group companies (often, the headquarters company located in Bermuda).
Prior to 1 January 2010, certain management services, such as clerical or secretarial services, were treated as being supplied in the jurisdiction in which the supplier was established. If management services were supplied to a UK company by a group company established outside the EU, no VAT would be chargeable on those supplies. Following the recent changes, the place of supply of management services provided to a UK insurer by a non-UK group company will now be the UK, with the result that the UK company will have to account for UK VAT under the reverse charge mechanism; in other words, they will need to (so to speak) charge themselves VAT. These legislative amendments may cause UK insurers to suffer significant irrecoverable VAT costs, since they are generally unable to recover much of the VAT incurred on supplies they receive.
If you thought that these changes could be sidestepped by reducing management charges, think again – HMRC will apply transfer pricing rules to impose an arm’s length charge.