Temporary easement to freight transport VAT rules

The new place of supply rules introduced on 1 January 2010 has caused difficulties for businesses supplying freight transport services (or closely related services) to other businesses, where they are physically performed outside the EU. 

Under the old rules, the place of supply of such services was the country in which they physically took place, to the extent they took place in that country.

In other words, to the extent services were physically performed outside the EU, they were outside the scope of UK VAT, but it was common for services to take place partly within the EU and partly outside, meaning the VAT treatment was a mixture of zero-rated and outside the scope.

The new place of supply rules make the place of supply where the customer's establishment most closely connected with the service is situated, i.e. the place of physical performance is now irrelevant.

In practice, zero-rating can only apply with reference to EU imports and exports, meaning supplies wholly outside the EU are now standard rated, requiring UK-based suppliers to account for VAT and UK-based customers to account for it via the reverse charge mechanism.

HMRC now accept this change is a significant administrative burden on affected businesses, whereas there is no UK revenue benefit and sometimes a loss. Also, the same transactions might be taxed in the UK and in the country of physical performance.

Consequently, but only for a temporary period until a definitive solution is found, HMRC will not require UK VAT on a supply which would be treated as made in the UK under the new rules, but where the use and enjoyment of the services is outside the EU.

The change applies from 15 March 2010 onwards. Changes cannot be made to relevant transactions before that date.