Unless you’ve been hiding under a rock someplace, you will have heard the screeches of uproar regarding the new VAT rules introduced from 1 January 2015 in relation to the supply of ‘electronic services’.
Coined a #VATMESS on Twitter, this is all part of an exercise to ‘harmonise’ EU VAT rules to prevent unfair competition where some companies may be selling from lower VAT jurisdictions – if only harmonisation could be so simple!
Given that the changes apply to the supply of ‘electronic services’, the key companies and businesses that have been hit by these changes are tech companies. Simon Briton has written a good summary on the impact of the VAT MOSS rules for tech companies.
In summary, the new rules require businesses to determine whether their customers are businesses themselves (B2B) or ‘consumers’ (B2C) – if its the latter, sellers are required to apply VAT at the consumer’s local rate of VAT…. yes, you read that right: businesses that are exporting their electronic services (e.g. software as as service (SaaS), apps, plugins, downloads, ebooks etc) are required to identify the status of each customer and then apply local rate VAT to the sale if it is to a non-business customer (B2C).
Now it would be too much to expect businesses to register for local VAT in each country so the UK – and other EU territories – are offering a Mini One Stop Shop (MOSS for short) whereby you can register with HMRC and file (yet) another VAT return for MOSS on a quarterly basis and HMRC will distribute the cash to the relevant territories.
What about small businesses that are not registered for VAT because they fall under the VAT threshold? There was a minor climb down by the UK Government in allowing such companies to side-step paying VAT on UK sales but this is only a half way house. Don’t forget, it is not just EU companies that are impacted by these new rules – here is the view of a US digital services provider who is having to change his business model following the advent of these new VAT rules.
Before we get mired in the admin burden of VAT MOSS, we need to know whether or not our customers are in fact businesses? Identification and evidence of their VAT registration number (or local equivalent) is the primary determinant (to give seller’s ‘certainty’) although the rules afford some flexibility – at the seller’s risk – if the customer can prove in other ways that they are a business. There are penalties that can be levied by the local countries and can be applied over a 10 year period….
Even if you establish that they are consumers (B2C), the fun doesn’t stop there as you need to know which country’s local VAT rate to apply – what if the customer is using a mobile device when they purchase whilst on their travels…?
Some think that we are making too much fuss over the #VATMESS and think that more could be made of the carve-out for ‘human intervention’ but this surely loses scalability and requires potentially uncommercial changes in business practices which cannot be a good thing.
There are some emerging technologies to help companies address these changes, however, many companies will have to view this as part of a wider process to ensure they are correctly identifying existing as well as new customers.
Are you still with me….? If so, well done.
If you wish to dive deeper, these resources should help:
Rachel Andrew provides an excellent summary of the horrible implications
Excellent Github summary of new VAT rules (with links to further info) started by Rachel Andrew
Enterprise Nation have championed small businesses on this issue – here is a webinar recording
EU guidance – pour yourself a large, strong coffee
Useful HMRC flowchart
For specific VAT MOSS queries contact HMRC on their dedicated 2015 EU VAT email: firstname.lastname@example.org
I don’t think we’ve heard the end of this and I expect further refinements and (hopefully) relaxations as the UK Government realises the negative impact on enterprise and export by UK smaller companies – the exact things they want to encourage…