Alert: VAT imposed on services supplied online,
and broadcasting services supplied, to EU customers

Introduction

Value Added Tax ("VAT") is the consumption tax levied in and across the European Union (the "EU")¹. In 2002, the EU issued a "VAT on E-Commerce" Directive² (the "Directive"). The provisions of the Directive will take effect from 1 July 2003.

The main impact of the Directive will be that "electronically-supplied services" which are provided:

1. by persons based in and acting out of non-EU countries ("Non-EU Suppliers");
2. to non-business organisations or private individuals (or other non-VAT registrable persons) within the EU ("EU Non-Business Customers"),

will be subject to VAT in the EU member state where the customer is based.

As a result of these changes, such Non-EU Suppliers will be required to register and account for EU VAT (as discussed further in the section below entitled "New Rules Applicable from 1 July 2003").

The Directive also contains new VAT rules relating to radio and television broadcasting services. These are discussed briefly in the section below entitled "Broadcasting Services".

"Electronically-Supplied Services"

Despite the imminent effective date, at the time of writing, there is still no comprehensive EU-wide definition of "electronically-supplied services". The Directive contains an illustrative but non-exhaustive list of the types of services falling within the definition. These include:

1. the supply of a website, web-hosting and the distance maintenance of programs and equipment;
2. the supply and updating via download of software;
3. the supply via download of images, text and information (for example, electronic publications), and making databases available;
4. the supply via download of music, films and games (including games of chance and gambling games), and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events; and
5. the supply of distance learning via the Internet.

The expectation is that each EU member state will produce more detailed guidance as the Directive comes into effect. In the United Kingdom, for example, the tax authority responsible for administering VAT (H M Customs & Excise) has defined an "electronically-supplied service" as a service delivered over the Internet or an electronic network (i.e. a service which is reliant on the Internet or a similar network for its provision), the nature of which is heavily dependent on information technology for its supply (being essentially an automated service, involving minimal human intervention; a service which does not have viability in the absence of information technology).

It should be noted that a service does not become an "electronically-supplied service" purely by virtue of the method of communication used by supplier and recipient. For example, the fact that a professional advisor may communicate advice to his or her client via e-mail (as an alternative to fax or telephone communication) does not of itself mean that the services provided are "electronically-supplied". However, there are also instances where the medium makes a difference - one example is the sale of software, where the supply of electronic data via CD-ROM (a supply of goods) is treated differently for VAT purposes from the supply of the same data via download (an "electronically-supplied service").

Care should be taken when dealing with the finance sector, where a customer (such as an investment fund) may be regarded generally as a business but not for VAT purposes³. Where the Internet is involved in the provision of a service, the question of whether the service provided may amount to an "electronically-supplied service" should be considered. Where the service concerned is the provision of financial advice, the mere fact that the advice is communicated via e-mail will not of itself result in the service being treated as "electronically-supplied". The provision of an online exchange could amount to an "electronically-supplied service", but even if it did, it needs to be considered whether, on analysing the precise nature of the service, an exemption (such as the exemption applicable to securities and stock brokers) may apply to result in no EU VAT being payable.

New Rules Applicable from 1 July 2003

From 1 July 2003, "electronically-supplied services" will generally be supplied in the EU member state where the recipient of the services is situated. Whether this will impact on a Non-EU Supplier will depend on whether the services are supplied (i) to a business or (ii) to an EU Non-Business Person (i.e. a non-business organisation or private individual or other non-VAT registrable person).

1. Supplies by Non-EU Suppliers to Businesses within the EU
   
   Non-EU Suppliers supplying "electronically-supplied services" to an EU recipient who receives the services for the purposes of its business will not have to charge EU VAT on the supply. Instead, the EU recipient will itself account for the VAT (if any) that may be chargeable on the supply.
   
   In such circumstances, the Non-EU Supplier should obtain evidence from its customer to support the claim by the customer that it is receiving the supply for business purposes. In many cases, such evidence will include the customer's VAT registration number.
    
2. Supplies by Non-EU Suppliers to EU Non-Business Customers
   
   Non-EU Suppliers supplying "electronically-supplied services" to EU Non-Business Customers will be making supplies of services within the EU. Assuming that no applicable exemption (such as the exemption applicable to securities and stock brokers) applies, the Non-EU Supplier will be required to register and account for VAT in each EU member state in which it has an EU Non-Business Customer.
   
   This is a potentially huge administrative burden for the Non-EU Supplier. To relieve this, the Directive provides for a special registration regime under which it is possible for a Non-EU Supplier with no presence in the EU to register for VAT electronically in one EU member state only.
   
   However, in certain circumstances, it may be more advantageous, either in the short or long term, for a Non-EU Supplier not to avail itself of this special registration regime and instead seek to establish itself in one or more EU member state(s) of its choosing. Careful consideration needs to be given to the question of whether or not to avail oneself of the special registration regime, and to the consequences of either choice.

Broadcasting Services

Broadcasting services include, for VAT purposes, the broadcasting of material by means of audio or video signals (such as via a cable or satellite link).

However, a person providing only the means to broadcast someone else's material is not themselves supplying broadcasting services. For example, company A transmits the television programmes of company B via satellite. Company A is supplying "telecommunications services" to company B; company B is supplying broadcasting services to its viewers.

The provisions of the Directive applicable to broadcasting services are broadly similar to those for "electronically-supplied services": Non-EU Suppliers supplying broadcasting services to EU Non-Business Customers will be required to register and account for VAT in each EU member state where it has an EU Non-Business Customer. However, there are certain differences - for example, the special registration regime is not available for suppliers of broadcasting services.

2. Council Directive 2002/38/EC of 7 May 2002. [back]

3. It should be noted that, although VAT is a EU tax, there may in practice be significant differences in its application between the various EU member states (for example, the question whether a person, such as an investment fund, is a business or not for VAT purposes may be answered differently in different EU member states). [back]