The VAT package — is your business ready for the January 2011 changes?

29 Noiembrie 2010

ERNST & YOUNG S.R.L.

From 1 January 2011, changes come into effect for the European Union (EU) value added tax (VAT) treatment of business-to-business supplies of cultural, artistic, sporting, scientific, educational, entertainment and similar services. This includes admission to shows, performances, concerts, sporting events, conferences and exhibitions and training events.

The change in rules will affect businesses in the entertainment, education and conference and exhibition sectors. It will also have an impact on businesses that deliver or receive these types of services as part of their general business activities (e.g., training courses).

Discussions continue at an EU level concerning the detailed implementation of these new rules. Furthermore, official guidance on how to interpret the new legislation has not been formally released. These changes apply across the EU and there may be increasing uncertainty for businesses about how the rules will apply in each EU country.

Nevertheless, if your business provides or receives services affected by the new rules, you should consider now how they will affect you and what actions you may need to take to comply with them across the EU, with effect from 1 January 2011. Given the lack of clarity regarding the implementation of the new rules, you should also consider how quickly your business can react to any changes that may be announced close to 1 January 2011.

 

What are the current rules?

Under current EU VAT rules, businesses that make supplies of cultural, artistic, sporting, scientific, educational, entertainment and similar services must register and account for VAT in the country where the event takes place. This rule applies to services supplied to both business customers and to private individuals and can result in multiple VAT registration requirements across the EU. The main exception is if the country concerned operates the reverse charge mechanism for these supplies, whereby responsibility for accounting for the VAT rests with the business customer, rather than the supplier. However, the reverse charge does not apply if sales are made to non-business customers or (usually) if the business customer is itself non-resident.

 

What are the changes?

With effect from 1 January 2011, supplies to private individuals will continue to be subject to the same place of supply rules but the position will change for business-to-business (B2B) transactions. Under the new B2B rules, only services in respect of admission to an event will be taxable where the event takes place. Most other supplies will be subject to VAT where the customer belongs (i.e., under the "basic rule" EU VAT for B2B services).

 

Definition of admission

The definition of “admission” is still unresolved. During early consultations, it had been understood that “admission” would be limited to events where anentrance/admission fee is charged at the door. Where there was an option for participants to pay at the door (whether all participants pay at the door, or only some do, with others pre-paying or having some alternative payment arrangement), it was envisaged that VAT would be due in the country where the event takes place. On the other hand, if there was no option for customers to pay at the door, the supply would fall under the basic rule (i.e., subject to VAT where the customer belongs and reverse charged). Moreover, participation, including the entry, in conferences and seminars for which prior registration of the participant is required would not be treated as admission to an event.

However, this initial approach has since been overtaken by draft Council Regulations which are expected to be implemented from 1 January 2011.

According to the latest publicly available draft Regulations (July 2010), admission covers the “right of entry” to shows, exhibitions and other cultural, sporting and educational events. Further, the exception for conferences and seminars for which prior registration is required has been dropped. While the Regulations remain in draft at the current time, no further substantial changes are expected and it is envisaged that final agreement will be reached in the near future. However, this broader definition of “admission” represents an important change from the original approach. It is believed that this issue is still being discussed with the European Commission and between EU Member States to try to achieve consistency in interpretation.

Although the purpose of the Regulations is to harmonize the interpretation of EU VAT legislation, in practice, some differences of interpretation may remain. Therefore, we advise you to consider the impact of the changes on your business on a country-by-country basis. Furthermore, there may be a different approach to the transition period in each country. For example, the UK tax administration has stated that the normal tax point rules will apply in the UK, whereas other countries may treat any payments for events which take place in 2011 as subject to the 2011 rules, regardless of the invoice or payment date.

 

What does this mean for your organization?

From 1 January 2011, EU business customers that receive services relating to events(which are not considered to be "admission" or land-related services) from a supplierin a different country will be required to account for VAT under the reverse charge.Suppliers, on the other hand, will have to account for domestic VAT on such services ifthe customer belongs in the same country, rather than VAT in the country of the event,if different.

You will need to consider and possibly seek advice in relation to the following main points (and there may be other issues depending on your precise fact pattern):

• The definition of “admission” has still to be finalized, and this may not happen until after some pre-bookings and payments for events in 2011 are processed. How should businesses account for VAT across the EU in the meantime?

• Systems will need to be changed so that VAT is accounted for correctly on supplies to business customers and to private individuals.

• If your business receives these services you will need to account for VAT under the reverse charge where appropriate.

• Land-related services (such as room hire or granting of exhibition space) are not affected by these changes and will continue to be taxed or exempted in the country where the land is situated. It is therefore necessary to recognize the different VAT treatment for such services and address any borderline issues between these and the extended application of the basic B2B services rule.

• EC Sales Lists will need to be completed if you provide “basic rule” services to EU VAT registered customers, and those services are taxed in the customer’s country under the reverse charge.

• EU customers’ VAT numbers will need to be obtained to enable completion of EC Sales Lists where appropriate.

• Your business may need to deregister in countries where you are currently VAT registered, but will have no local VAT liability from 1 January 2011. This may also impact the recovery of VAT on local costs.

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