2015 changes to VAT ‘place of supply rules’: what you need to know

Article posted by Peter Duchars Director of VAT Services SMP Partners (a member firm of Russell Bedford International), on behalf of Russell Bedford International

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Are you an ‘invisible’? Are you fully abreast of the 2015 changes to VAT ‘place of supply rules’ – and what they mean for your business? Peter Duchars, Director of VAT Services at SMP Partners, a member firm of the Russell Bedford International accounting network, outlines the latest regulation, the potential impacts for exporters, and what you need to do.

The new rules

New rules introduced by the EC from January 2015 mean that certain ‘digital services’ sold in the EU are now subject to VAT in the country in which they are consumed, rather than the country from which they were supplied. The new rules (announced in 2008 but effective from 1 January 2015) relate to business-to-consumer (B2C) sales of ‘broadcasting, telecommunications and electronic (BTE) services’.

The rationale for these changes can be traced back to the well-publicised cross-border tax anomalies exploited by Amazon (eBooks), Apple (iTunes), Microsoft (Xbox) and other sellers of online services operating through subsidiary companies in Luxembourg to benefit from that country’s lower standard VAT rate. In one sense, the EC is to be commended for attempting to level the playing field here. But while the new rules apply only to B2C sellers of digital services, that category does include a multitude of micro-exporters in the ‘invisibles’ sector, supplying digitised documents (eBooks, pdf content), music, films, games, hosting and software services, or any ‘blogger’ selling advertising space. Meaning that the new rules impact a number of micro-businesses that, with turnover well below the UK VAT threshold, might otherwise have expected to remain exempt.

Previously, a business selling e-books abroad through a website, for example, would have been required only to apply VAT at the rate in force in the seller’s own country. In the UK, this would have meant a rate of 20 percent – but only if the seller had a turnover in excess of the £82,000 UK VAT threshold. Now, the sale of a single 99p eBook to a consumer in another EU country is enough to trigger full VAT registration and compliance requirements: with implications that regulators have only recently begun to address.

The VATMOSS VATMESS: serious impacts for micro-businesses

The EC had attempted to make life simple for small businesses through the introduction of a VAT ‘Mini One-Stop Shop’ (VATMOSS), allowing the filing of a single return every quarter from a business’s home jurisdiction, reporting all VAT collected throughout the other 27 countries of the EU. HMRC also made clear that registering for VATMOSS would not result in micro-businesses losing their threshold exemption on UK revenue, making clear that no VAT would be liable provided that businesses could separate their UK and EU sales. What regulators failed to address, however, was how feasible it would be for sellers to provide that information.

Digital producers are now required to provide two pieces of information confirming the location of delivery (three in the event of any conflict or dispute arising). Such information may include the customer’s billing address, IP address, bank location, or the national code of any SIM card used in mobile transactions. Small businesses, however, were quick to point out that data collected by PayPal and others concerns the customer’s billing address and residence at the time of their registration and does not, necessarily, guarantee their location at the time of purchase. Quite apart from the vexed issues of proxy servers, virtual private networks (VPNs) and international SIM cards. In response to this, Apple, Google and Facebook announced changes to their policies, repositioning themselves as ‘content providers’ rather than ‘collection agents’, with responsibility for accounting for VAT on B2C sales falling on them rather than on the digital producers. Many micro-entrepreneurs, however, proved reluctant to pay the 30-percent-plus transaction fees imposed by Google and others: perhaps one reason behind campaigners’ claims that new registrations under the VATMOSS facility are currently below 10,000, in contrast to the hundreds of thousands anticipated. All of which suggests that many micro-entrepreneurs are either failing to comply, or have been forced to cease trading in Europe.

HMRC had initially announced a six-month grace period (from 1 January 2015) allowing businesses to rely on data from payment service providers (e.g., PayPal) as proof of a buyer’s location. That original concession had been due to expire on 30 June 2015; however, further guidance from HMRC on 24 March 2015 appears to indicate that this concession will now apply indefinitely, and that ‘UK micro-businesses, that are below the current UK VAT registration threshold and are registered for the VAT Mini One Stop Shop (VAT MOSS), may base their ‘customer location’ VAT taxation and accounting decisions on information provided to them by their payment service provider’ (full details here).

The EC responds: a universal €100,000 threshold – the solution to the VATMOSS VATMESS?

An EC strategy document of May 6 suggests that Commissioners may be considering a solution to the current VATMOSS VATMESS. This document, A Digital Single Market Strategy for Europe, recognises the additional compliance burden on micro-businesses, recommending a common EU-wide VAT threshold to help small start-up e-commerce businesses (mooted to be in the order of €100,000). This is unlikely to see the statute books before 2016, however. It should be noted, also, that implementation of VATMOSS appears to have focussed EC attention on the possibility of extending this to include intra-EU and third-country online sales of tangible goods – ‘distance selling’ – which could have implications for exporters, in the long term.