Reticularium

I have just found where that Rackspace decision to add VAT to the price resulted from. First I wanted to edit the previous article, but then decided to leave it as is. It’s still correct except a couple of details.

These details are as follows.

There are new EU VAT regulations forthcoming. The best explanation I’ve found is the so-called Notice 741A from UK HMRC website.

The most important moments there are:

“From 1 January 2010 there are two general rules for the place of supply of services, one for business to business (B2B) and one for business to consumer (B2C) supplies.”

“The B2B general rule for supplies of services is that the supply is made where the customer belongs”

“The B2C general rule for supplies of services is that the supply is made where the supplier belongs”

Thus, starting from 2010, Rackspace will have to pay VAT if they supply their services to non-business customer (private individual or any body with no business activities or any body who receives a supply wholly for private purposes).

So, I agree that Rackspace did have a good reason to add VAT to the price for non-business customers. And the VAT they add should be the UK VAT, this is correct too in accordance to the new regulations.

But still two important questions left:

Notice: I am talking about Rackspace only because they were the first (as I know) who were kind enough to warn about these changes. I am afraid there going to be others.

The first question is how Rackspace is going to tell business from non-business customers. Notice 741A explains possible options:

“VAT registration numbers are the best evidence that the supply is not received for a wholly private purpose and should be requested. If your customer is unable to provide a VAT number, you can accept alternative evidence. This includes certificates from fiscal authorities, business letterheads or other commercial documents indicating the nature of the customer’s activities. Such evidence should be kept as part of your records. Where VAT numbers are available, they should be shown on your invoice.”

Rackspace in their message and on their website mentions VAT number only. This affects sole traders and small businesses that are not registered for VAT. I am sure there are plenty of such customers. This affects me too since I operate as a sole proprietorship and I am not registered for VAT. So I will have to get a clear answer from Rackspace regarding this, follow the updates.

The second question is more complicated. Why Rackspace is going to add VAT instead of deducting it? Let me explain.

There are 7 possible Rackspace/customer relationship combinations. Look at the table:

¹ I am not sure (I assume nobody is), the rule of “where it is used and enjoyed” applies here, and telecommunications services is a pretty specific case. I think that I am correct here, because e.g. TV broadcasting is used and enjoyed where customer is located but servers hosting logically is rather used and enjoyed where datacenter or supplier is located.

I would assume that non-EC customers will be supplied from US office, so it’s not the case. But this may be the case if related to other service providers established in Europe and their non-EC customers.

One obvious moment is notable: UK non-business customers that are currently paying prices without VAT will be paying price + VAT despite of new regulations don’t affect them!

And finally this comes to the main question: why VAT should be added to the prices? My vision is that prices should remain the same except prices for business customers, where VAT should be deducted—because business customers pay it themselves (you may want to google about the “reverse charge” or “tax shift” procedure).

I know that there is no VAT in the USA, so it looks kind of logical to add it to the price that USA customers pay. This fact is always confusing European customers and they agree to pay extra money. But it’s wrong. I have USA clients and I don’t have corporate tax. Should I add US corporate tax to my usual prices for my USA clients?

OK, another calculation. According to Wikipedia, in the US the average combined federal and state corporate tax rate is estimated at 39.3%. In the UK corporate tax is 21 to 28% and VAT is 17.5% which totals to 38.5 to 45.5%. I know that this is quite inaccurate, but accurate enough to give an idea: operating from Europe, US companies have less tax burden if they claim that their usual prices don’t include VAT. They like this situation of course, so, when they are forced to pay VAT, they want to add it to the price to maintain status quo.

As I mentioned on Slicehost forum, it’s not about the price. I inderstand, there may be higher business and operational expenses in Europe, so if they simply had separate prices for USA and Europe, I would understand. But I feel like me and all European customers are being fooled with that VAT trick. Correct me if I am wrong..