The COVID-19 pandemic has fundamentally changed the way people work and do business. Travel restrictions and closed office spaces have led to an increase in remote employment. In my recent contribution to Tax Notes International, I examined some income tax risks that remote working may cause for companies that will choose not to revert to the pre-crisis situation. In this article, I will look at some VAT implications of remote working: home office expenses, remote service delivery and non-refundable payments.
Home office expenses
Many employees need additional equipment to enable them to work from home. Such equipment is either provided by the employer or purchased by the employee who will ask the employer for expense reimbursement. The first VAT question to examine is whether the employer is entitled to an input VAT deduction on items purchased by its staff.
The general principle is that input VAT is deductible on purchases that were made for business purposes and are linked to taxable activities. If an expense is linked to private use, an input tax deduction cannot be claimed. With respect to items purchased for mixed use, the employer may claim part of the input tax that is attributable to business activities. To exercise the right to deduct, the employer must be in possession of an invoice meeting all the prescribed legislative requirements. An invoice is generally supposed to mention the name of the person who is claiming the input tax deduction. However, the tax authorities of some countries accept invoices addressed to an employee as enough evidence that allows the employer to deduct input VAT.
Remote service delivery
Another situation that is likely to happen in the COVID-19 period is that employees who would normally host an event or deliver a training will provide these services remotely. A change in the mode of service delivery has important VAT consequences as the place of taxation depends on the type and nature of the services provided. The place of supply of services in respect of admission to live events is the event location. This means that the event organizer must register for VAT purposes in the country where the event is held. The provision of training services (that are not considered an event) follows the general place-of-supply rules and takes place where the supplier is established (for B2C transactions) or where the customer is located (for B2B supplies). If the above-mentioned services are delivered digitally, they may be taxable in a different country.
An event or a training with remote participation is not likely to qualify as an electronically supplied service as the latter require minimum human intervention. Thus, it will follow the general place of supply rules. However, if the training/event is pre-recorded, it may be considered an electronically supplied service. For B2B transactions, the VAT treatment of electronically supplies services is relatively simple: the seller does not charge VAT and the customer must account for VAT under the reverse charge mechanism. However, things may get more complex for B2C transactions as the VAT of the country of non-taxable customer must be charged. To simplify VAT remittance, the seller may opt to use the One Stop Shop and remit all VAT due on electronically supplied services to one tax administration.
Employees who are forced to remain in home quarantine must cancel their business travel or event attendance. Depending on the contractual terms, the employer may have to pay a cancellation fee or may not be able to obtain a refund of the amounts paid. Non-refundable payments and cancellation fees may attract VAT if they constitute a remuneration for a supply of services. However, if they represent compensation for the losses suffered by the supplier as a result of the cancellation, they are not subject to VAT.
The Court of Justice of the European Union (CJEU) discussed cancellation fees and non-refundable payments in its several judgements: Société thermale d’Eugénie-les-Bains (C-277/05), Air France-KLM (C-250/14), MEO (C-295/17) and Vodafone Portugal (C-43/19). The CJEU held that VAT may be charged if: (1) the cancellation charge represents consideration for an identifiable service supplied in the context of a legal relationship; and (2) the cancellation charge does not aim to provide fixed compensation to the supplier for any loss that may be suffered as a result of the cancellation. The CJEU pointed out that if the amount of the cancellation charge corresponds to the amount that would be due if the services were provided, there is no actual loss suffered by the supplier that needs to be compensated and VAT may be levied on the amount in question. A fixed contractual termination payment (not equivalent to the amounts that the supplier would receive if the customer did not terminate the contract early) may also be seen as the part of the consideration agreed by the customer for the supply of services and subject to VAT. Thus, the answer to the question whether a payment constitutes consideration for a supply of services or an out-of-scope compensation depends on the circumstances of an individual case.