We take a look at the new VAT rules and what they will mean for businesses supplying digital services cross-border to customers in the EU.
What is the definition of digital services?
The new EU VAT rules affect digital services – so before we go any further let’s just define this term. ‘Digital services’ include the supply – for download via the internet – of images, music, movies/TV shows, software, games, and apps. Of course, this is a condensed version of services affected. Once a service requires access to the internet to be supplied, customers that download these digital services will be charged VAT.
Only business to customer (B2C) sales are affected by these new rules. Sales of physical goods are unaffected.
What changes on January 1, 2015?
The 2015 VAT Directive becomes law on this date. The major change is the way in which VAT is applied to the B2C sale of a digital service in the EU. The existing rule is that VAT is applied based on where the supplier of the service is located. This changes post-January 1, 2015, when VAT will have to be applied based on where the EU customer is located.
Who do the new rules apply to?
Any business that supplies software, images, music, films, games, and apps for download to customers in the EU will be affected.
Impacted businesses will have to identify where their customer is so that they can apply the correct VAT rate. Remember, there are 28 EU member states and the standard VAT rates range from 15% in Luxembourg to 27% in Hungary. These VAT rates are also subject to change so affected businesses will have to implement a system whereby their checkout page is regularly updated to reflect ‘live’ EU VAT rates.
Understood, but how will a business locate their customer?
First, it must be established if the sale is B2C or B2B: only B2C sales are affected. The 2015 VAT Directive clearly explains the process that a business must follow to prove where their end customer is located. They need to verify their customer’s EU location so that they can apply the correct VAT rate to their digital service. The business (and the burden by the way is squarely on the business here) must collect two pieces of ‘non-conflicting’ evidence.
Accepted pieces of evidence include:
- The billing address of the customer.
- Their IP address.
- A mobile phone SIM card country code.
- The customer’s bank details.
- Other commercially relevant information, i.e. loyalty cards.
And how will a business know what VAT rate to charge?
The nature of the digital economy is that a digital service can be downloaded anywhere and at anytime. Simply put: e-commerce systems will have to cater for all 28 EU member state VAT regimes.
Are all businesses that supply digital services affected?
If the service is supplied B2C to a customer in the EU then that business will have to comply with these new rules. Also, there is no minimum registration threshold for VAT. For example, in the UK a business does not have to register for VAT unless its turnover exceeds £85,000 – this rule does not apply when dealing with these new EU VAT rules. All businesses that have B2C sales of digital services to customers in the EU must register for VAT and comply.
- Supplies of images or text, such as photos, screensavers, e-books and other digitised documents
- Online magazines
- Website supply or web hosting services
- Supplies of software and software updates
- Downloads of pre-recorded videos
What doesn’t count?
- Supplies of goods, where the order and processing is done electronically
- Supplies of physical books, newsletters, newspapers or journals
- Services of lawyers and financial consultants who advise clients through email
- Booking services or tickets to entertainment events, hotel accommodation or car hire
- Professional courses; content is delivered by a teacher over the internet or an electronic network using a remote link
- Offline physical repair services of computer equipment
- Advertising services in newspapers, on posters and on television
Right, we’ve ticked all these boxes – how do affected businesses register?
There are two options available. The first one is to register for VAT is each EU member state where the business has sales. Potentially, this can mean registering with 28 tax authorities. For many this may prove problematic from a resources, language, and logistical point of view.
The other option is to register with a new system called the mini One-Stop Shop (MOSS). MOSS has been created by the VAT Directive to ease the administrative burden on businesses. With MOSS you can declare and pay VAT to a single elected EU Member State for all your EU sales, avoiding the need to register for VAT in multiple countries. You can register online with the VAT Mini One Stop Shop online service.
HMRC has also updated its guidance recently, saying now that if you who want to use MOSS and your turnover is below the UK’s £85,000 VAT threshold (2017/18) then there will be a “simplified” registration arrangement. This will allow you to register for UK VAT and MOSS, receive a UK VAT number, but NOT be liable to pay VAT on UK sales.
What can I do now?
You should find out whether these changes apply to you as soon as possible.
Can I reclaim VAT on expenses and purchases?
As you will not be charging VAT on your UK sales, any VAT you reclaim on your business expenses and purchases must either be wholly attributable to your cross-border EU sales, or split according to the proportion which is attributable to EU sales.
For example, if you buy a computer to use as part of your business: if 60% of sales are UK sales, and 40% cross-border EU sales, you will only be able to recover 40% of the VAT charged on the purchase of the computer.
Do I still need to complete UK VAT returns?
You will need to complete a UK VAT return each quarter, even if you aren't charging VAT on your UK sales.
Yes, actually. The EU has been hurt by the digital economy boom, the EU VAT digital services directive is the first step in their plan to reclaim a share of the revenue. Looking ahead there are technologies and technological developments that they also have their eye on, in terms of revenue generation.
These services/developments include:
- Cloud computing
- Big data
- Internet of things
- Advanced robotics
- Autonomous vehicles
- 3D printing
So, there you go, there is a lot to take in and if you'd like to talk to us about VAT MOSS and it's implications - please contact us anytime. A big thanks to our partner, Taxamo who contributed, they are a technology company that has developed a Software as a Service solution we recommend to enable affected merchants comply with the new EU VAT rules.