Do you have to pay VAT in Poland when providing services from the UK to a Polish client?

What was the problem?

The client didn't understand the complex rules regarding the place of supply of services and the obligations related to VAT settlement for services provided to foreign clients.

What does this mean for me?

To avoid errors and potential financial penalties, it's important to understand how VAT rules work in both countries, especially when you have clients outside the UK.

What can I learn from this article?

From the article, you will learn what specific exceptions apply in VAT regulations, where you should settle your VAT, and how to issue invoices.

How to issue a VAT invoice to a Polish client?

Our client, Jarek, who specializes in web design services, asked me a question regarding the correct issuance of VAT invoices for clients both in the UK and abroad. Due to the dynamic growth of his business and the expansion of his services into foreign markets, he wanted to know the rules regarding the place of supply of services and how he should settle VAT in an international context.

It's worth noting that the services Jarek offers can be classified as exports, which, in the UK, means the possibility of issuing invoices with a zero VAT rate. Therefore, when issuing an invoice abroad, Jarek can assume that his services are subject to zero VAT. However, we must remember that every rule can have exceptions - in this case, stemming from the regulations concerning the place of supply of services.

Basic rules regarding the place of supply of services

Understanding the place of supply of services is crucial for correct VAT settlement in the UK. These rules are defined in section 7a VAT Act 1994:

1. For services provided to VAT-registered businesses (B2B), the place of supply of services is usually the country, where our client is based.

2. For services provided to consumers not registered for VAT (B2C), the place of supply of services is usually the country, where the service provider is located.

VAT Invoice for Services - Exceptions

Do these rules, however, answer our question about where and who pays VAT? Unfortunately, no. This is because there are specific services that are exceptions to the above rules. According to HMRC Manual and the 1994 VAT Act, such services are treated as supplied in the recipient's country. This means that these services are not subject to VAT in the UK if the recipient is located outside its borders, i.e., in our case, in Poland.

Examples of services covered by these exceptions:

Consultants: Consulting services include market research, development, advisory services, written translations, software maintenance, and certain educational services provided internationally.

Engineers: This includes engineering design and advisory services, which cover both intellectual advice and implementation supervision.

Accountants and Lawyers: Professional legal and accounting services not directly related to real estate are provided where the client is located.

Data Processing: This includes operations such as modifying, supplementing, deleting, or processing data

Information Provision: This refers to services such as providing tourist information, stock market information, detective agency services, and online news services.

VAT on Web Design Services‍

Since Jarek's web design services are classified as taking place in Poland, it is important for our client to familiarize himself with the VAT settlement rules applicable in Poland.

In this case, if Jarek sells services to individual clients, he will be obliged to register for VAT in Poland and settle this tax within the country. Since his business is not registered in Poland, from the perspective of Polish law, his service is imported into Poland. And because his business is a foreign business, the applicable VAT registration threshold of PLN 200,000 in Poland does not apply to him. This means that Jarek should settle VAT in Poland from the very first zloty earned in the country.

Therefore, according to Polish law, foreign companies (i.e., those not registered in Poland and not operating there) must register for VAT in Poland if they sell goods or services within Poland.

However, it should be noted that Jarek is not obliged to register for VAT in Poland if he provides:

a. services and goods for which the Polish buyer is obliged to account for and pay tax under the reverse charge mechanism (reverse charge) - i.e., to companies registered for VAT in Poland

b. certain services that are subject to a zero VAT rate (for example, services provided in Polish seaports for international transport, air traffic control services provided to foreign air transport providers, and transport services related to the import of goods, if the cost of transport is included in the tax base of the goods).

Tax Representation in Poland

To further complicate the situation, Polish law requires that an individual like Jarek, who does not conduct business activities in Poland, cannot independently settle VAT. Instead, they must have a designated tax representative in Poland, who will be responsible for his tax filings.

Such a representative, often an accountant, assumes responsibility for the correctness and timeliness of Jarek's VAT settlements. In practice, this means that if Jarek fails to pay the due VAT, the tax representative will be jointly responsible for his liabilities. The Polish Tax Office then has the right to claim outstanding amounts not only from Jarek but also from his representative.

Choosing the right representative is therefore crucial. Such a person must not only be familiar with Polish tax regulations but also be prepared to assume the risk associated with potential tax arrears. For Jarek, this could be an accountant in Poland who agrees to act as a representative and ensures all formalities are completed in accordance with regulations.

The obligations of a tax representative include not only settling VAT but also filing appropriate declarations and maintaining tax documentation.

What to keep in mind when dealing with VAT for international services?

Jarek must remember that the issue of VAT settlement for services provided to foreign clients is complex due to diverse regulations concerning the place of supply of services. This requires a thorough understanding of the rules applicable in both the UK and Poland to avoid errors and potential financial penalties. For individuals who sell services similar to Jarek's to Polish clients, knowledge of these regulations is crucial.

Providing services outside the country involves considering specific exceptions in VAT regulations. For example, export services may be subject to a zero VAT rate in the UK, but it is also necessary to understand where the supply of these services is actually taxable. For Jarek, this means he must pay close attention to which country the services are actually provided in and how this affects his tax obligations.

An important aspect is VAT settlement in Poland, where the rules state that Jarek must register for VAT and settle this tax if his services are provided within Poland.

‍For B2B services, where the recipient is VAT-registered in Poland, the reverse charge mechanism applies ..

However for individual clients, Jarek must register for VAT from the very first zloty earned in Poland, because the PLN 200,000 registration threshold does not apply to foreign businesses.

Additionally, we established that Jarek must appoint a tax representative in Poland who will be responsible for his VAT settlements. The representative must be a competent person aware of their role, as they are jointly and severally liable for Jarek's tax obligations. Choosing the right representative will help Jarek avoid problems related to incorrect VAT settlements and ensure compliance with Polish tax regulations.