I’m trying to clarify the VAT treatment of transactions in relation to our purchase of digital services (software) for resale outside of the UK. I’d very much appreciate your comment on our thinking and interpretation of the VAT treatment on the purchase of sales of Purchase of Digital Services (Software) between two UK entities where the digital services are entirely for "resale outside of the UK". Its our view that the purchase of the digital services by the reseller from the vendor should be outside of the scope of UK VAT as should the resale of the digital services to end users outside of the uk.
Background
We are a solution provider for digital transformation which involves “resale” of Digital Services (Software) and services “professional services”. Our original arrangement was simple, however, after the Vendor was acquired their VAT treatment of transations has changed.
Our purchase of their digital services (software) is for direct resale to a named “End User”. We do this under the terms of a Reseller Agreement. The reseller agreement obliges us to:
- Disclosure of End User Details: Reseller must disclose to Vendor the End User details (including the customer entity and address) in the order form to Vendor
- Territorial Restrictions on Software Distribution: Reseller is obligated not to distribute or make the Software available for use or deployment on a server located outside the Territory, or allow an End User to transfer the Service or the originally licensed server to a location outside the Territory.
Previously, the Vendor was based in Israel. Following M&A, the Vendor is now owned by another US based software Vendor. The US Vendor has a UK legal entity which they now use as the ordering and billing entity for our purchase of Digital Services. The purchase following the below process:
1. Quote request from Reseller to Vendor disclosing End User details (Entity + Address for supply)
2. Purchase order from Reseller to Vendor identifying the Quote and End User details (Entity + Address for supply)
3. End User downloads software from a publicly hosted website (we have no knowledge of what specific location this is hosted)
4. Vendor provides a Licence Key to Reseller in email, Reseller provides the Licence Key to End User in email for them to activate the software.
5. Reseller invoices End User
6. End user pays Reseller
7. Vendor invoices Reseller
8. Reseller pays Vendor
We are UK based and registered for VAT. I’m fine with the treatment of VAT in relation to Digital Services provided for Resale in the UK. My issue is that due to the change in their billing entity to a UK based business, the Vendor is treating the supply to the Reseller under the VAT General Rule.
The sale of software by Vendor to Reseller for resale: where Reseller has, under its obligations provided evidence that the end user is located in outside of the UK, and the software is to be effectively used and enjoyed in a location outside of the UK, should be treated as a supply outside the UK. Consequently, this transaction should considered out of scope for UK VAT under the VAT Act 1994 and the guidelines provided in Notice 741A.
Legal Framework and VAT Act Provisions
- Under Section 7A of the VAT Act 1994, the general rule is that the place of supply of services to relevant business persons (B2B transactions) is where the recipient belongs. However, this general rule is subject to exceptions as outlined in Schedule 4A of the VAT Act 1994 which must be considered, before application of the general rule.
Relevant Exception: Electronically Supplied Services
- According to Part 2, Paragraph 9(1) of Schedule 4A, there is a specific exception for electronically supplied services to a relevant business person. If services are effectively used and enjoyed outside the UK, they should be treated as being supplied outside the UK for VAT purposes.
In the specific case of this and similar transactions, the software provided by Vendor to Reseller is to be used by Resellers “End Users” who are business entities in a place outside of the UK, and the software will be effectively used and enjoyed outside the UK hence referring to Notice 741A: Place of Supply Rules.
Notice 741A: Place of Supply Rules
Further guidance is provided by HMRC’s Notice 741A. This notice clarifies that for services like electronically supplied software, the place of effective use and enjoyment determines the VAT treatment. Per sections 13.1 and 13.2 of Notice 741A, if the service is effectively used and enjoyed outside the UK, UK VAT should not apply to the portion of the service that is used outside the UK. In our scenario, the entire software service is intended for use in a location outside of the UK, and thus, the entire supply should be outside the scope of UK VAT.
References:
1. https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a#overview
2. https://www.gov.uk/hmrc-internal-manuals/vat-place-of-supply-services/vatposs06100#:~:text=Section%207A%20of%20the%20VAT,to%20as%20the%20general%20rule.
3. https://www.legislation.gov.uk/ukpga/1994/23/schedule/4A
4. https://www.gov.uk/hmrc-internal-manuals/vat-place-of-supply-services/vatposs01350
5. https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a#sec6
6. https://www.legislation.gov.uk/ukpga/1994/23/section/7A
