VAT or value-added tax is a type of consumption-oriented tax charged on a product by its suppliers, typically in its final stages of production and which eventually reflects on the final price of the product. The rates of VAT charged vary for different products.
For a digital business, the rules for charging VAT differ starkly from those of regular businesses supplying physical goods. The digital product's definition in this regard covers a broad spectrum ranging from telecommunication services and radio and television broadcasting services to electronically provided services (e-services).
In 2015, the European Union (EU) changed the VAT rules for digital products in favour of making the place of taxation determined by the customer's location. The effect of this development was to make the suppliers of digital services supplied on a business-to-customer basis liable for accounting for VAT to the tax authority of their country as well as to the consumer’s EU member state.
These rules, however, only apply under three conditions
- The supply of digital services is from the UK to an EU member state
- The customer is a private citizen of an EU member state (businesses do not apply)
- The service provider charges the services.
If you aren't supplying a digital service (i.e. some intervention is taking place, see separate page on VAT MOSS for what counts as a digital service) then if the sale is made to a non-business customer you will treat it as a UK sale.
When your company makes a business-to-business sale, the sale from the supplier is not subject to VAT instead the VAT registered business who is purchasing the service will account for the VAT under the reverse charge rule, i.e. treat the supply as both a sale and a purchase, it is therefore taxable in their local jurisdiction not the suppliers.
Whether selling digital services to private customers or EU businesses, it is important that a company makes a thorough assessment of their customers to charge the correct VAT and not infringe on these new harmonised rules.
For more information on this, contact us. At the Accountancy Cloud we have the professionals you need to provide you with the necessary tax help from tax registration to VAT MOSS to tax planning.