VAT Outsourcing

Value added tax in outsourcing is the consumption tax deciding who accounts for tax when a service crosses a border. Business services are taxed where the customer belongs, so the buyer self-accounts under the reverse charge and the provider invoices nothing.

The rule sounds administrative and is not. It decides whether a provider’s invoice carries twenty percent on top, and whether the buyer can recover it.

Value added tax operates across the European Union, the United Kingdom, the Philippines and roughly 175 other jurisdictions, with the same architecture and different rates.

For an outsourcing contract the question is rarely the rate — it is which party accounts for the tax, and what evidence supports that treatment.

Key takeaways

• The general business-to-business rule puts the place of supply where the customer belongs.
• The reverse charge makes the business customer account for the tax rather than the supplier.
• A supply outside the scope of domestic tax can still preserve the supplier’s input tax recovery.
• Customer status and location have to be evidenced, not assumed from a billing address.

How it works

Two questions decide the treatment. First, is the customer a business receiving the service for business purposes? Second, in which country does that customer belong? The answers determine where the supply happens and who pays.

United Kingdom law states the rule directly. A supply of services is made, in a case where the recipient is a relevant business person, “in the country in which the recipient belongs”, and otherwise in the country of the supplier.

The guidance restates it in plainer words. “The B2B general rule for supplies of services is that the supply is made where the customer belongs”, which puts consumption rather than production at the centre.

The reverse charge is the mechanism that makes this work without forcing every foreign supplier to register. The customer credits its account with output tax and debits the same amount as input tax, so a fully taxable business ends up neutral.

The European Union runs the same architecture under Articles 44 and 196 of its VAT Directive — which is why a Warsaw provider billing a Frankfurt client issues an invoice with no tax and a reverse-charge reference on it.

Examples

Place-of-supply questions surface in ordinary billing rather than in exotic structures, which is why they get missed. The four arrangements below are the ones outsourcing buyers meet most often, and the last two are where the simple version stops working.

A Kraków provider invoices a Berlin manufacturer for finance processing. The customer belongs in Germany, so the invoice carries no Polish tax and the German business accounts for it under the reverse charge.

A Manila operator bills a London retailer for customer support. The supply falls outside United Kingdom value added tax in the provider’s hands, and the retailer self-accounts, recovering the same amount if it is fully taxable.

A partly exempt insurer buys the same service and cannot recover all of the reverse-charge input tax. The tax becomes a real cost, which is why exempt sectors price outsourcing differently.

A provider invoices a client’s overseas branch rather than its head office. Belonging is determined by the establishment most directly using the service, not by whichever entity signed.

Related terms

Indirect tax on outsourced services touches finance functions more than legal ones. The entries below cover the processes that generate the invoices and the teams that have to get the treatment right.

• Tax outsourcing: contracting out the tax function, indirect tax included.
• Offshore accounting: the delivery model where these invoices originate.
• Accounts payable outsourcing: the process that has to apply the reverse charge correctly.
• Finance and accounting outsourcing: the broader function this sits inside.
• Shared services: intra-group billing, where belonging questions get hardest.
• Procure to pay (P2P): the cycle where supplier tax status gets captured or missed.
• Compliance outsourcing: the function that reviews whether the treatment holds.

FAQ

Who charges the tax on an offshore service?

Usually nobody, on the invoice. The overseas provider bills without tax and the business customer accounts for it through the reverse charge in its own return.

Does the reverse charge cost anything?

Not for a fully taxable business, because output and input tax cancel. A partly exempt or exempt business cannot recover it all and bears a real cost.

How is customer status evidenced?

By a valid tax registration number where one exists, or other commercial evidence that the customer is in business. The supplier has to hold that evidence.

What does “belongs” mean?

The place of business establishment, or the fixed establishment most directly concerned with the supply. Where a group has several, the one actually using the service governs.

Is the Philippine treatment the same?

Broadly. The Philippines levies value added tax and zero-rates qualifying service exports, which achieves the same result by a different route.

Do the rules apply to intra-group billing?

Yes, wherever the entities are separately registered.

Understand how tax treatment shapes offshore delivery economics at Outsource Accelerator.