New VAT rules: a checklist for any business selling digital services in the EU

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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If you run a business selling ‘digital services’ (i.e., eBooks, pdf content, music, films, games, hosting and software services, or if you run a blog or website that sells advertising space) to consumers, you will now be subject to new VAT liabilities on sales in EU countries. What do you need to do to stay on the right side of recent EC regulation? (And remember, returns are due on July 20 (Q2), October 20 (Q3) and January 20, 2016 (Q4)).

The key problem you have as a business-to-consumer (B2C) exporter of digital services is that now, VAT is applied on the location in which those services are delivered, rather than the country from which they originate. As a UK exporter you still keep your £82,000 VAT threshold and so will retain your exemption on any sales made in the UK, but you are now required to do two things. In order to retain your UK VAT exemption you must prove where sales have been made within the UK. You are also now required to account for VAT (at the rate currently in force in that jurisdiction) for sales in every other EU country you sell into (you will find a list of VAT rates currently in force throughout the EU here).

The ‘VAT Mini One-Stop Shop’ (VATMOSS) facility is intended to make life a bit easier, however, allowing businesses to register in a single EU Member State (your ‘Member State of Identification’ or ‘MSI’) and to submit a single return covering all VAT due on digital services sold into any country throughout the EU. If your MSI is the UK then returns must be submitted in sterling. The new rules apply to exporters both within the EU and outside it, but exporters operating outside of the EU – who would previously have submitted returns under the precursor of the non-Union MOSS (VoeS, in operation since 1 July 2003) – can select a country as their MSI and submit returns on that basis as ‘Non-Union’ returns. A UK- or EC-based exporter, of course, will be submitting ‘Union’ returns.

HMRC have published information on completing and submitting Union VATMOSS returns here. You will be asked to confirm whether you have supplied digital services to consumers in the EU this quarter, before selecting the appropriate country from the ‘Member State of Consumption’ drop-down list, selecting the applicable VAT rate from a further drop-down list, and entering the value of the digital services supplied.

The new rules do not apply if you are selling to another business. But you’ll need to prove it.

Remember, this new regulation applies only to B2C and not B2B sales. So if you are selling digital services to another business you will not be required to apply VAT. So long as you can prove it. Which you would normally do by citing that business’s VAT registration number. But what if you are selling to a below-threshold business – in the UK or the EU? You will need to supply ‘alternative evidence’, which HMRC suggests might include ‘certificates from fiscal authorities, business letterheads or other commercial documents indicating the nature of the customer’s activities’ (find more detailed information here, scroll down to paragraph 27). If you are in any doubt, however, you are required to treat the customer as a consumer and not a business client.

If you decide to treat the customer as a business client that customer will be responsible for accounting for any VAT due to the tax authorities in that Member State. While you will have no liabilities in respect of VAT due you will, however, need to return a quarterly ‘European Community Sales List’ declaration to HMRC (information on the EC Sales List (ESL) online service is available here).

Not sure whether or not yours is a ‘digital services’ business?
HMRC have supplied general guidelines on the new rules here, with a useful flow-chart here.

Below the UK VAT threshold but selling into the EU?

You will still need to register for VATMOSS. Which means that you will need a VAT registration in the UK. Even if your turnover is below £82,000. Your accountant can take care of this for you, but if you want to register independently then start here. You will need a UK Government Gateway business account number, which you can get here.

But won’t PayPal take care of all this for me?

As outlined above, while HMRC have now indicated that they will accept data from PayPal transactions as evidence of customer location for the purposes of VATMOSS returns, remember that PayPal act only as an on line payment processor. As such, it remains the responsibility of the seller to register for VATMOSS and charge the correct amount of VAT based on the country of the customer.

But PayPal and other merchants charge too much. I sell direct. How should I amend my website?

If you are going the direct route you will need to adjust your website to capture the data now required under VATMOSS. This will include validating business customers’ VAT registration numbers where applicable (to ensure VAT is not applied); recording each customer’s purchaser IP address, postal address and country; and producing VAT sales reports for each EU country code. Note also that the new regulations require data to be retained for a period of 10 years. If you do decide to handle VATMOSS compliance independently, remember it isn’t actually necessary to charge the ‘correct’ amount of VAT, but only to ‘account’ for it. The average rate of VAT across the EU is in the region of 21.5 percent: many micro-businesses have resolved this issue by reserving an amount of approximately 21.5 percent as VAT (and adjusting their prices accordingly). On that basis, in some countries they will ‘win’ and in others they will ‘lose’; depending on the demographics of their customer base they will be a little up or down.

Got views on the VATMOSS VATMESS? HMRC want to know. E-mail comments, problems and feedback to vat2015.contact@hmrc.gsi.gov.uk