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January 6, 2015
This reform was primarily put in place to address the tax strategy of large companies who utilise the relatively low VAT rates of EU member states such as Luxembourg by supplying their digitised services from these jurisdictions. But, the changes have significant implications for small and medium sized businesses whether or not they are registered for VAT. The current VAT place of supply rules for B2B supplies will remain unaffected.
What are “digitised services”?
The term “digitised services” broadly means services which are automatically delivered over the internet with little or no human intervention. This encompasses a broad range of services relating to the broadcast, telecoms and e-services industries, including:
- Transmitting radio and TV programmes.
- Selling music, software, films, e-books, distance learning, apps and games (including gambling) over the internet.
- Providing communication via telephones, fax and the internet.
HMRC has made it clear that the provision of goods over the internet is not considered to be a supply of “digitised services”. Therefore the following online transactions are excluded:
- The supply of physical books, DVDs, videogames etc. over the internet.
- Booking services for entertainment events.
Additionally, businesses are not liable under the new rules where they are supplying digitised services through a platform where the platform is liable for VAT (for example, selling an app through the Apple store).
What is the change?
On 1 January 2015, the rules changed so that VAT on digitised services is charged where the customer is based. This means that if the same transaction set out above were to take place on 1 January 2015, the UK company would account for VAT at the Hungarian rate (currently 27%). The UK company will be able to register in each state in which their supplies of digitised services are received or can register electronically in the member state of their choice (see “MOSS” below).
How do I prove my customer is in the EU?
The legislation requires the two non-conflicting pieces of evidence to be produced by the supplier. Examples include the billing address of the customer; their IP address; their mobile phone SIM country code and their bank details.
HMRC has suggested that where businesses use a payment service provider then the following two step test should determine where the customer is located:
Step 1: When the customer places their order, ask them to confirm either:
- the EU member state they usually live in; or
- their billing address.
Step 2: When the customer pays for the product using a payment service provider, arrange for that provider to transmit the following two pieces of information to you:
- the customer’s billing address; and
- the country code of the customer’s bank or registered credit card.
What rate should I charge?
The VAT rate is based on the location of the customer. This is the key change in the new rules.
How do I declare this VAT?
The VAT Mini One Stop Shop (“MOSS”)
Either you can register for VAT in every EU member state in which you supply B2C digitised services. Alternatively, to alleviate the potential administrative burden, HMRC has created the VAT MOSS scheme. Under this scheme, businesses can submit a single calendar quarterly return and VAT payment to HMRC, who will send appropriate information and payment to each relevant member state’s tax authority. Under MOSS, the business will register in the EU member state where it has established its business (typically where the company has its head office). Note that since 2010, non-EU businesses supplying digitised services to a private customer within the EU have had to account for VAT. They will continue to be required to register and account under a similar scheme to MOSS.
What if I am currently under the VAT registration threshold
HMRC has created a system whereby businesses below the UK VAT registration threshold (£81,000) registering for VAT solely for the purposes of registering for the MOSS scheme will not become liable to account for VAT on transactions within the UK. Such businesses will only need to use the MOSS scheme to account for the VAT due in other EU member states.
What records do I need to keep?
MOSS registered businesses are required to collect and to keep in their records two pieces of evidence of where each customer normally lives (see above). This helps demonstrate, if asked by the tax authorities, the business has charged the correct rate of VAT to the customer.
You must keep all VAT MOSS records for a period of 10 years from the end of the year in which the transaction was carried out.
HMRC have published the following information on the forthcoming changes to the VAT place of supply rules and the introduction of the MOSS.
General HMRC note on VAT changes (including definition of “digitised services”)
What about data protection?
Assuming you keep customer records electronically, you will need to register as a data controller with the Information Commissioner’s Office if you are not already registered.
For further information on any of the above please contact Sue Crawford.