Selling digital services to the EU – don’t end up having to pay more VAT than you need to

By Phil Moss, Tax Partner

If you supply broadcasting, telecoms, digital or ‘e-services’ to people in the EU you should make sure you’ve got your pricing right as if you don’t get the VAT part right you could lose part of your profit margin.

The EU introduced a number of changes about the treatment of VAT for businesses supplying broadcasting, telecoms, digital or ‘e-services’ to people in the EU on 1 January 2015. To simplify matters for those affected, all Member States have introduced a system call ‘MOSS’ – the Mini One Stop Shop – to allow businesses to register with their own local tax authority and complete just one special MOSS VAT return on which all VAT is declared and accounted.

 Mini-One-Stop-Shop (MOSS) and VAT liabilities

These EU-wide major changes concern the VAT treatment, and therefore the liability for accounting for VAT, for any person, body or company that supplies broadcasting, telecoms, digital and e-services to private consumers resident anywhere in the EU and who download those services at their places of residence.

What does the change mean?

Before these changes, VAT was accounted for in the Member State where the supplier was established.  This meant that if a UK supplier of downloadable content, such as a game or an app, sold it to consumers in other EU Member States, it accounted for UK VAT, subject to being registered under the normal UK VAT registration threshold.  However, from 1 January 2015, the UK supplier is required to account for VAT in every EU Member State in which its consumers download its content.  This means it should register for VAT to do so. But, unlike ‘standard’ UK VAT registration where the threshold is now £82,000 per annum, the EU-threshold for MOSS registration is effectively £1, i.e. if any e-services are downloaded by any EU consumers the supplier must register for VAT. 

However, to simplify this, all Member States have introduced a system called the MOSS (Mini-One-Stop-Shop) which allows businesses to register with their own local tax authority e.g. HM Revenue & Customs in the UK, and complete a special MOSS VAT return on which VAT due to any and all other Member States is declared and accounted. B2B and UK B2C MOSS sales continue to be reported on the UK standard VAT return, if the supplier is ordinarily UK VAT registered.  ‘B2C’ sales to the 27 other Member States will be reported on the MOSS return and the VAT paid to HMRC based on the applicable VAT rate in each country.  HMRC then distributes all of the other Member States’ VAT accounted for on the UK MOSS return to the relevant Member States under a ’clearing house’ procedure.

All of this means that suppliers must determine the places at which consumers actually download the content and the VAT rates in all the Member States that apply to the relevant e-services. The consumer’s IP address, normal residence address (billing details), bank account or PayPal details should be used to prove the place of consumption.  Product pricing should therefore take account of varying VAT rates across the other 27 Member States as applying an incorrect VAT rate to contracts and web prices etc. could be very costly. 

Effectively, this means that for a UK supplier, rather than having one tax code at the UK standard rate (20%) for these supplies, the accounting and billing systems need to have up to 28 tax codes, identifying the tax rate in each jurisdiction, with sales to customers posted to the correct VAT account.  This assumes that all sales will be at the standard rate in each country – if there are any supplies that are subject to VAT at reduced rates then tax codes will also be required for these supplies.

What has happened since January 2015?

Understandably there has been widespread condemnation of the European Commission’s insistence on these rules and the actual reduction in e-commerce as a result of red tape.  The new rules were principally introduced to combat large off-shore suppliers failing to account for VAT anywhere in the EU or choosing a low-rate jurisdiction and effectively sidestepping VAT registration in every Member State, but they have seriously affected small entrepreneurs from exploiting perhaps lucrative markets.

However, after a good deal of lobbying by affected businesses and trade bodies, and tax authorities themselves, the European Commission has announced that it intends to introduce a threshold to exempt the smallest businesses from the rules.  There is no further detail yet on the threshold and no set date for its introduction.  Therefore, currently, all affected suppliers should continue to follow the detailed guidance provided by HMRC and seek advice if there are any issues. 

What should you do?

Suppliers should ensure that they apply the correct rates of VAT to all Member States’ consumption and the set prices will actually cover the VAT liability.  It is important to remember that for VAT purposes, the stated price of a B2C sale is always treated as VAT-inclusive so any errors in deciding the VAT rates will lead to a loss of profit or indeed create a loss on the sale.

If you would like to speak to us about any of these issues please email me or your usual Lubbock Fine partner. 

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