Is it correct for my client to claim the VAT charged on his UK VAT return?
A digital download of software is an electronically supplied service. The supplies both to businesses (B2B) and consumers (B2C) are treated as supplied where the customer belongs. The responsibility for accounting for any VAT due in the customer’s Member State or in the UK depends on whether it is a B2B or a B2C supply.
For B2B supplies, where the supplier belongs outside the UK, the UK customer accounts for the VAT due on the supply under the reverse charge mechanism. The reverse charge is to put a purchaser in the same VAT position as if they had bought the services in the UK and should be accounted on the VAT return as entries in boxes 1 & 4(subject to normal input tax rules) and the net values in Boxes 6 & 7.
For B2C supplies (which include supplies to unregistered businesses) it would be the supplier’s responsibility to account for the UK VAT. It appears that, in this case, the supplier in Ireland is treating the software as a B2C supply to a UK consumer and is charging and accounting for UK VAT through their own UK VAT registration.
As your client is a VAT registered business, UK VAT has been incorrectly charged by the Irish supplier and as such there is no right of recovery. The VAT charged on the invoice should not be recovered on your client’s UK VAT return. Instead, your client should inform the supplier that this is a B2B transaction and provide their UK VAT number to confirm this. They should also request that the VAT originally charged be credited.
The supplier, having treated the supply as B2C, must amend and treat it as a B2B transaction provided that the customer’s VAT number was valid at the time of supply.
Notice 741A section 5 covers reverse charges:
https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a#sec5
Section 6.3 and section 13 provide details of B2B electronically supplied services.
Information on B2C digitally supplied services can be found at:
https://www.gov.uk/guidance/the-vat-rules-if-you-supply-digital-services-to-private-consumers
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