Contractors' Questions: Do I need a VAT number for EU clients?

Contractor's Question: My invoice has been sent back from a Spanish company, which I have a contract for services with, and they say that due to changes in cross-border VAT rules at the start of this year, they can't pay me without a VAT number. However, I'm not VAT-registered and have never had this problem before.

That said, I'm unsure about the new regulations, introduced in January 2010, and whether they affect me or not. Moreover, is it true that I need a VAT number to invoice in Europe? I have lots of work in the EU so I really need to know definitively.

Expert's Answer: There is not a requirement for you to have a VAT number when supplying services to a client company in another EU Member State. From 1 January 2010, the general rule is that the place of your supply is where it is received, in this case Spain. As a result, it is outside the scope of UK VAT when supplied to a client in another Member State in the course of that client's business.

Your Spanish client will have to apply the Reverse Charge procedure in Spain which really means that he/she is supplying the service to themselves, and it is then their responsibility to account for VAT - 'IVA' for them.

By way of example, assume the value of your supply is £1000, and the rate of IVA in Spain is 20%. This would mean that the Spanish client would account for output tax of £200 on his Spanish IVA return. And, if able to do so, would recover the same amount as input tax. In other words, it would be a totally neutral paper transaction.

So in conclusion, as the service is supplied where received and outside the scope of UK VAT, there is no requirement for you to register for VAT in the UK and, as a result, there is no requirement for you to show a VAT number on your invoice to the Spanish client.

The Spanish client is liable to account for IVA on his IVA returns and recover the same as input tax. If the Spanish client believes he is not able to recover the IVA accounted for under the Reverse Charge procedure as input tax, I suggest they contact their own tax authority for further advice.

The expert was Nick Stevenson, compliance advisor at Freelance World, a tax and accountancy specialist for freelancers..