VAT implications of overseas projects for architects

Rob Janering, Associate Director of VAT consultancy Accordance, looks at the VAT implications of overseas projects for architects.

The global reputation of UK architecture has never been higher. The creative talents of the UK industry are in worldwide demand. But, when a practice is engaged to work on an overseas project, particularly in the EU, the VAT implications must be considered to make sure that registration and filing obligations are not overlooked.

Most of the UK’s architecture practices will be registered for VAT in the UK.  This is the case because they have offices and work on projects within the UK – the UK VAT registration therefore allows them to account for VAT on their income for this work and also just as importantly, recover UK VAT on associated costs.

However, if a client wants his architect to work on a project outside of the UK then a need to be VAT registered overseas may be crystallised.  Determining if this is the case must be a priority for the practice so that any obligations can be determined and then managed in a timely and efficient manner.  Not doing this can lead to financial penalties from tax authorities and, just as importantly, potentially difficult client conversations around pricing and reputation.

Tax authorities – particularly in the EU – are desperate for revenue and are increasingly aggressive about pursuing cross-border service providers for VAT owed. It is crucial to avoid any VAT-related project cost spike.  

What VAT rules apply?

On the whole architects are deemed to supply, for VAT purposes, services (i.e. not goods but intangibles).  Obviously sometimes it may be necessary to also provide goods but for the purposes of this article, we are focussing on the provision of services.

Generally, within the EU, a supply of services made on a B2B basis is deemed to be supplied (i.e. the country where VAT becomes due) where the customer belongs.  This means that local VAT is charged when the architect and customer are in the same country.  When they are in different Member States however, no VAT is charged by the supplier because the customer will account for the VAT by what is referred to as a reverse charge.

When services are supplied to a person who does not receive them for a business purpose (i.e. a B2C supply), then VAT is due in the country where the supplier is established.

These general rules are overridden however when a supply of services is connected with immovable property.  When this occurs, the place of supply becomes where the property is located.   This is the case whether the supply is made on a B2B or B2C basis and it is this rule that architects must heed because this is the one that will create many overseas risks.

Is my supply “connected”?

The key question to ask is whether a piece of work relates to a specific piece of immovable property.  The answer to this will be formed by reviewing exactly what the scope of the work involves.

For example, if a client asks for some inspirational drawing or very broad outline plans on a new build property project he is considering, but for which he doesn’t yet have any land or a location identified, the supply is likely to be not be connected with immovable property.   Instead it will fall within the general rule detailed above – this will not lead to any additional registration obligations.

This will not be the case, however, when a client asks for a property to be designed around a specific, designated piece of land, or work needs to be undertaken on an existing property.  If this occurs then almost inevitably the service will be deemed to be connected with immovable property and hence be subject to VAT in the country where the property is located.  The need to determine compliance obligations (i.e. registrations, does the reverse charge apply, and so on) will then follow.

EU Rules

It must be noted that at the present time there is no uniform definition of when a service is considered to be in relation to immovable property.  As a result, there are varying definitions across the EU (and globally) of when a supply is considered to be in respect of immovable property. This can lead to confusion and additional expense to taxpayers as they look to clarify the position.

However, there is EU legislation (already published) which must be applied by all member states from 1 January 2017.  These regulations provide guidance as to when a service will be considered to be in relation to immovable property and some specific examples including one that applies directly to architects’ services as detailed above.  Some countries have already adopted these rules but from the start of 2017 they will need to be applied uniformly.  This is good news as it will help to give businesses greater certainty when determining the type of supply they are making.

What does this all mean?

Once it is determined that the supply is related to immovable property which is located overseas, the next question to ask is whether a registration is required.  If the supply is being made to a private individual then the answer is probably yes – this is on the grounds that within the EU, there is either no, or only a minimal, VAT registration threshold for non-resident businesses.

If the supply is on a B2B basis though then it may be that the country where the property is located stipulates that the customer accounts for the VAT by way of an extended reverse charge.  This is a measure to minimise tax fraud but also to reduce the burden on non-resident suppliers.  Not all Member States have an extended reverse charge and where it is applied, the rules for its imposition differ.  If an extended reverse charge does apply, there will be no need to register for VAT locally but consideration will have to be given as to how to recover any VAT that may be incurred locally. If the extended reverse charge mechanism does not apply, then a registration will have to be obtained. 

Conclusion

Whenever a new piece of work involving overseas land or property is in the offing, some time should be spent determining what the project’s VAT implications could be.  It will be necessary to determine where VAT is due, what rate will apply and how that VAT is to be accounted for.  These are important points to consider because:

It will mean that VAT obligations are met which minimises the risk of penalties from tax authorities;

Where necessary, contracts can be drafted to inform customers of any obligations they might have (i.e. the need to apply a reverse charge);

VAT can be appropriately taken into account when determining the price to be charged for a project – if the applicable local VAT rate is 25% but it is assumed that the UK standard rate of 20% will apply, either the profit on the project will be reduced or there will be a difficult conversation in trying to increase the price the customer pays; and

The recovery of foreign VAT costs can be managed, which will again directly impact on profit margins.  If there is a need to register locally, VAT on costs can be recovered via the VAT return but if no registration is required, another means of recovery will need to be identified.  The VAT Refund Directive exists for this purpose but there are challenges in securing recovery which need to be carefully managed.  In addition, steps must be taken to ensure that local suppliers have charged VAT correctly as only correctly charged VAT can be recovered from the tax authorities.

As mentioned, the rules set out in this article are specific to the EU.  A number of countries outside of the EU have similar rules in place but specific advice should always be sought to determine exactly what obligations are created in these countries.