Cross-border VAT Compliance

Overview

Whilst Gibraltar does not have a VAT regime, the cross-border nature of many of the businesses based here means that traders, entrepreneurs and businesses need to be aware of how UK and EU VAT rules impact their supplies or purchases of goods and services.

Why Ramparts?

We advise large multi-nationals, owner-managed businesses and start-up ventures across the technology and financial services sectors. Our experience in regulation and taxation in the UK, Gibraltar, Ireland and the EU means that we can offer you unrivalled cross-border knowledge and expertise.

We have advised clients on UK and EU VAT issues including: the treatment of electronically supplied services, online gambling services, payments and payment processing, factoring and invoice discounting, architectural and project management services and the exports of goods from the UK (and UK VAT registration). 

Services

Licencing Applications

Compliance

Global Commercialisation

Crypto Casinos and Online Gambling

Standard VAT Tax Rates (2022)

Understanding Value Added Tax Across Europe

Introduction

VAT is intended to operate as a consumption tax on goods and services, with each EU member state required to implement national legislation adhering to the EU VAT code. This system is governed by a series of EU directives, with the primary legislation being Council Directive 2006/112/EC, commonly known as the EU VAT Directive. The directive aims to harmonize VAT across the EU VAT area, setting minimum VAT rates.

Despite leaving the EU, the UK still operates a VAT system. It is primarily governed by the Value Added Tax Act 1994. It was enacted to align with the EU’s VAT system, however he UK framework has undergone amendments, particularly following its exit from the European Union.

Gibraltar is not part of the EU VAT area, having been specifically excluded from the harmonisation of VAT legislation in the UK’s Act of Accession to the EEC. Consequently, for VAT purposes, Gibraltar is treated as a third country in relation to the EU. As Gibraltar does not levy VAT  Gibraltar businesses trading with the EU are considered non-EU businesses for VAT purposes.

Determining the ‘place of supply’ of goods and services is crucial for establishing which jurisdiction has the right to charge VAT and, given that the VAT charge obligation is placed on suppliers or consumers of goods and services, which business has the obligation to charge and remit VAT on a transaction.

Goods

The place of supply is where the goods are located at the time the supply takes place.

Intra-EU Supplies (Business to Business – B2B)

  • Place of supply: Where the dispatch or transport begins.

  • Effect: This is an intra-Community supply, which is zero-rated in the Member State of departure if:

    • The buyer is VAT-registered in another Member State, and

    • The supplier holds valid evidence of transport.

  • Customer: The buyer must account for VAT under the reverse charge mechanism in their own country (intra-Community acquisition).

Intra-EU Distance Selling (Business to Consumer – B2C)

  • Applies when goods are sold B2C and shipped across EU borders.

  • As of 1 July 2021, the One Stop Shop (OSS) scheme applies.

    • Place of supply: Where the customer is located (i.e., destination country), once the seller exceeds the EU-wide threshold of €10,000 in annual cross-border B2C sales.

    • Below the threshold: Seller can opt to apply the VAT rules of their own Member State.

    • Sellers can use the OSS portal to report and pay VAT due in other Member States.

Export of goods outside of the EU or UK

For goods, where there is a chain which involves a purchaser based in Gibraltar (or somewhere else that is outside of the VAT regime) it may be that the intermediaries within a country subject to VAT can reclaim their VAT on purchases made. The final supply to a Gibraltar business is not subject to VAT since goods exports are zero rated for VAT purposes (which is what enables the intermediary to recover any VAT paid on those goods).

Import of goods to the EU or UK

The purchaser will usually pay VAT on goods imported from outside of the EU or UK. VAT registered businesses will be able to recover this from their own taxable supplies.

Services

The place of supply rules for services in the EU and the UK are primarily determined by the status of the customer, distinguishing between B2B and B2C transactions.

  • The general rule for B2B supplies is that the place of supply is where the customer is based.
  • For B2C supplies, the general rule is that the place of supply is where the supplier is based.

These general rules are subject to numerous exceptions based on the nature of the service.

UK HMRC have published very helpful guidance on the place of supply of services in the VAT Guidance Note 741A.

Land

One significant exception to the general place of supply rules for services in both the EU and the UK pertains to land-related services. The principle is that VAT should be levied in the jurisdiction where the property is located, overriding the general B2B and B2C rules.

The place of supply for services connected with immovable property is the location where the property is situated.

This rule applies to a wide range of services directly linked to land or buildings, including those of estate agents, architects, lawyers, construction companies, and the provision of accommodation.

Note also that if a VAT-registered recipient receives land-related services on land from a  supplier that is not registered for VAT in that country, the reverse charge mechanism applies making the recipient of the services liable to pay the VAT.

Digital Services

Another crucial exception concerns electronically supplied services Electronically supplied services, defined as automated services delivered over the internet with minimal human intervention. Examples of electronically supplied services: web hosting, cloud services, SaaS, anti-virus software updates, online gaming, electronic books, music and other media.

The place of supply for these services is where the customer belongs, regardless of the supplier’s location.

  • For B2B supplies of these services, the reverse charge mechanism typically applies to make the business recipient liable for VAT.
  • For B2C supplies, VAT is charged based on the consumer’s location.

Non-EU suppliers selling digital services to EU consumers above a certain threshold (€10,000 annually) must register for VAT in the EU and can utilise the One-Stop Shop (OSS) scheme to simplify VAT obligations across member states. Non-EU suppliers use the Non-Union OSS to report VAT on digital B2C sales to EU consumers.

In the UK for B2B supplies, the general rule applies, with the place of supply being where the customer belongs, although a “use and enjoyment” rule can shift the place of supply based on where the service is effectively consumed.

Other Exceptions

Other notable exceptions to the general place of supply rules for services exist in both the EU and the UK.

These include specific rules for transport services, cultural, artistic, sporting, educational, and entertainment services, catering and restaurant services, and the hiring of means of transport.

Understanding the distinction between VAT exempt and VAT zero-rated supplies is crucial for businesses as it impacts your ability to recover input VAT.

Exempt

Exempt supplies are not subject to VAT, and businesses cannot reclaim any input VAT incurred on costs related to making these supplies. Examples of exempt supplies include medical care, education, financial services, and certain supplies of land and buildings. However, it should be noted that effective from 1 January 2025, private schools in the UK are no longer exempt from VAT on their fees and boarding charges; instead, these are now subject to the standard VAT rate of 20%.

Zero-rated

Conversely, zero-rated supplies are taxable at a 0% rate, which means no VAT is charged to the customer, but businesses can still reclaim the input VAT paid on related purchases. Examples of zero-rated supplies in the EU include exports and, under certain conditions, intra-EU supplies, as well as specific goods like books and some food products. The key difference is the treatment of input VAT; zero-rated supplies are still within the VAT system, allowing for input tax recovery, while exempt supplies are outside the scope for input tax recovery.

The EU

Under Article 135(1)(i) of the EU VAT Directive: “Betting, lotteries and other forms of gambling” are exempt from VAT, subject to conditions and limitations set by each Member State. However, although the exemption is required by the Directive, the exact application is flexible, allowing Member States to decide:

  • Which types of gambling qualify.

  • What conditions must be met (e.g. licensing).

  • Whether some gambling services (like unlicensed online gaming) fall outside the exemption and become taxable.

This leads to a somewhat patchwork approach to VAT on gambling services across the EU.

The UK

The UK retains the same treatment post-Brexit: gambling services are VAT exempt under VAT Act 1994, Schedule 9, Group 4. This includes:

  • Bookmaking

  • Gaming and lotteries

  • Online gambling

UK operators do not therefore charge VAT on gambling services, but they may be liable for Gambling Duty, Remote Gaming Duty, or Machine Games Duty instead.

The reverse charge mechanism is a significant feature of both the EU and UK VAT systems, primarily applied to B2B supplies. The reverse charge shifts the responsibility for accounting for VAT from the supplier to the VAT-registered customer.

The supplier issues an invoice without VAT. The customer then accounts for the VAT as both output tax (on their sale) and input tax (on their purchase) in their VAT return. 

This mechanism is commonly used for cross-border B2B supplies of services and for certain goods that are susceptible to VAT fraud. Some EU member states also apply the reverse charge to import VAT. The primary aim is to simplify VAT collection for cross-border transactions and to combat tax evasion.

A key issue in VAT compliance management is to determine where a business belongs for VAT purposes.

Unlike income tax, the test for VAT is not where a company is centrally controlled from or where it is incorporated.

For companies, this means the location and residence of the company directors is not determinative of whether a company is deemed to be based in a particular jurisdiction for VAT purposes. Where a business is deemed to supply or purchase goods or services from can therefore involve a factual assessment of where the company operates from rather than where it is incorporated.

Fixed Establishment

The concept of a fixed establishment is crucial for correctly applying the place of supply rules.  

  • In situations where the fixed establishment is involved in providing or receiving services, it can be considered the relevant place of supply, even if the main place of establishment is elsewhere.
  • This is to prevent businesses from artificially shifting their place of supply to avoid VAT obligations.
  • Therefore, even if the place of establishment is relevant, the fixed establishment can override it, if the fixed establishment is the one that is using or providing the service.

In the EU, a fixed establishment is defined in Article 11 of Implementing Regulation (EU) No 282/2011 as any place other than the place of establishment of a business, characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use services for its own needs or to provide services. The UK’s interpretation of a fixed establishment, as outlined in VAT Notice 741A, is similar.

The criteria of sufficient permanence implies a stable and lasting presence, not merely a temporary one. The suitable structure requires both human resources (personnel) and technical resources (infrastructure, equipment) that are necessary for the business’s activities that give rise to the VAT issue in question.

The human resources test  focuses on the availability of staff who are permanently present and necessary for the business’s operations. The business needs to have the right to use these resources as if they were its own. Similarly, the technical resources test requires the permanent availability of physical infrastructure, equipment, and technology essential for the business.

Ensuring supplies not subject to VAT are genuinely not subject to VAT

The question of whether a Gibraltar company should be treated as belonging in Gibraltar for VAT purposes is a crucial one.

If the establishment was considered to be lacking a suitable presence and resources it could invalidate the EU and UK VAT treatment for the Gibraltar business. Some businesses, such as online marketing for gambling services, may benefit from purchasing marketing and advertising services that are not always subject to VAT as the business is in Gibraltar. For these businesses, it is crucial that the actual operations in Gibraltar are defensible to support this position (if challenged).

The specific number of people or amount of equipment required to be controlled and available to the Gibraltar establishment is not rigidly defined. Instead, the focus is on whether these resources enable the business to operate with the necessary permanence and structure to make or receive supplies.

 

The post-Brexit arrangements between the UK and the EU did not include specific provisions addressing Gibraltar’s VAT relationship with the EU.

Ongoing negotiations between the UK, Spain, and the EU might lead to future agreements that could potentially impact VAT rules for Gibraltar and  Gibraltar might even implement a VAT regime as part of a potential Schengen deal with the EU and Spain.

Case Studies

  • Advising a client on the VAT treatment of factoring and invoice discounting services
  • Advising a Gibraltar online merchant on UK rules and registration for recover on zero rated supplies
  • Advising a gambling operate on the VAT treatment of gambling services under EU law
  • Advising a payment company on the difference between exempt supplies of financial services and VATable supplies related to those services

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Our Legal Team

Peter Howitt

Peter Howitt

Managing Director

peterhowitt@ramparts.gi
employment law, payments law, payroll, e-money and crypto assets

David Borge

Practice Director

davidborge@ramparts.gi
Ramparts are Legal & Regulatory Specialists

Andrew Tait

Head of Betting & Gaming

andrewtait@ramparts.gi
Steven De Lara

Steven De Lara

Head of Litigation, Trusts and Financial Services

stevendelara@ramparts.gi
Nicholas Borge

Nicholas Borge

Director

nicholasborge@ramparts.gi
company administration, fund administration, outsourced compliance

Tyrene Edwards

Trainee Lawyer

tyreneedwards@ramparts.gi
Michelle Byrne

Michelle Byrne

Practice Manager

michellebyrne@ramparts.gi
Joanne Camporese

Joanne Camporese

Executive Assistant

joannecamporese@ramparts.gi
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