Online Consulting & professional services: tax issues



HighTech Software Consulting (HSC) wants to set up an online advisory service providing software consulting services to both businesses and consumers.  HSC wish to know the direct tax and VAT consequences of providing such a service.

Direct tax analysis

The customer obtains advice rather than any property from HSC.  Even if the customer obtains a report, it most likely will have been created specifically for him and was arguably owned by the customer from the moment of its creation.  If however, the customer acquires a valuable report or other property that was not created specifically for that customer, then the transaction could give rise to income from the sale of property.

For example the sale of the same report or high-value proprietary information to many customers should be treated as a sale of property rather than a service.  Even if the customer obtained the report electronically by downloading it from a database of reports maintained on the vendor’s website, the essential consideration would still be to acquire data transmitted in the form of a digital signal for the own use or enjoyment of the acquiror rather than to obtain a service.

VAT analysis

If HSC provides its advisory service by supplying tailor-made reports to its customers exclusively electronically via email then for VAT purposes what is the classification of the service?  Is it an “electronically supplied service” and therefore the subject of the e-Commerce directive?  The answer could have a very significant impact on HSC’s bottom line as the standard rate of VAT in EU member states is in the range between 15{e68217344b855fcd608ed2c4c41f83644da7cd41ea524fbfa2ad06c632d3255d} and 25{e68217344b855fcd608ed2c4c41f83644da7cd41ea524fbfa2ad06c632d3255d} of turnover. 

The answer depends upon how the advisory work is done and accessed by the customers.  Just because a consultancy service is delivered by email does not make it an “electronically supplied service” – e.g. the type of advice provided by lawyers and accountants by email.  However, if the service is fully automated and can only be delivered via the Internet or other electronic medium and does not rely on human intervention then that is a different matter. 

HSC should also be aware that for VAT purposes it matters whether its services are B2B or B2C in a cross-border context.  If HSC is an non-EU supplier (say a US corporation) it matters enormously whether HSC decides to set-up an office in the EU or remains a non-EU established supplier and therefore able to use the Special Scheme for VAT registration in the instance its services are electronically supplied services.  

The tax structuring for such a client can be complex because of various interacting tax rules and different jurisdictions involved.  RKG Consulting will be pleased to provide advice on both direct and indirect tax issues in such scenarios.