Increased VAT Liability Warning for European Shipping Companies

Moore Stephens warns that, under changes to the VAT international services rules which take effect on 1 January 2010, shipping companies in Europe could incur increased VAT liabilities and costs on certain services bought in from other countries.

Gwen Ryder, Head of VAT at Moore Stephens, explains, “The changes will widen the services which currently attract VAT under the ‘reverse charge mechanism’, so that, with a few limited exceptions, VAT will, in most business-to-business transactions, be payable in the country where the customer is based. Other changes to the place of supply rules for the short-term hire of a means of transport mean that owners may have to check their VAT obligations in the EU member state where vessels are put at the disposal of charterers.”

The point of the reverse charge mechanism is to put importers of certain services in the same position as they would be in had they contracted for those services in their own country. They must account for output tax on their VAT return at the rate of VAT applicable in their EU member state, but may recover a ‘contra’ amount of VAT on the same return to the extent allowed. The position for businesses that are ‘fully taxable’ is therefore revenue-neutral, but it is a real cost for businesses which are ‘partly exempt’ and which can therefore only recover a proportion of the VAT as input tax.

Ryder says, “The place of supply of the short-term (up to 90 days) hire of ‘a means of transport’, including commercial vessels, will be the member state where the vessel is put at the disposal of the charterer. This may be a different member state from where the charterer is based. Owners are therefore advised to check their VAT obligations in the member state concerned.

“Service providers involved in the transportation of goods will also follow the new rules, but the VAT rules for the transportation of passengers will remain unchanged.

“The new rules will also result in an increase in paperwork and administration, because 1 January 2010 also brings in the requirement to complete the likes of European Sales Lists to record relevant supplies to EU VAT-registered businesses. It is probable that many more non-VAT-registered businesses will find themselves caught in the VAT net.”

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping and insurance adviser.