VAT on cross-border digital services

On 1 January 2015 the VAT rules for cross-border B2C supplies of digital services changed. From that date, VAT must be accounted for in the member state where the customer normally lives, rather than where the supplier of the service is established. From the UK perspective, this should ensure that sellers of digital services will no longer be able to unfairly undercut businesses in the UK by locating themselves in another EU member state with a lower VAT rate. It does so at some considerable additional administrative cost for businesses; in the case of small B2C businesses primarily supplying the UK market, this cost is wholly disproportionate. Further, as the rules were finalised only in December, there has been little time to absorb the full impact, for businesses to ready themselves and for third party solutions to be developed.

All suppliers of digital services over the internet are likely to be affected and they and their advisers should therefore familiarise themselves with the new rules. Below we’ll look at the key questions and the practical implications.

HMRC’s Guidance on “VAT: businesses supplying digital services to private consumers” is published here.

Application

The new rules apply where a UK business:

supplies digital services for a charge
to a private (non-business) consumer
in another EU member state (the place of supply).

Businesses outside the EU that supply digital services to consumers in one or more EU member state are also affected.

If the rules apply, you must account for VAT to the tax authorities in that member state and at that member state’s VAT rate: depending on the type of supply, this may be the standard rate, a reduced rate, or the supply may be VAT exempt.

Determining whether the rules apply and then applying them involves a number of processes.

Digital services

The rules apply only to broadcasting, telecoms and e-services which are delivered over the internet or other network with minimal or no human intervention. In practice, this means where the sale of the digital content is entirely automatic. So, for example, a PDF document manually emailed by the seller in response to an automated purchase is not for purposes of these rules a digital service.

Private consumer

The rules apply only to sales to private consumers. If you supply digital services and your customer doesn’t provide you with a VAT registration number, then you should treat them as a private consumer. If a customer is unable to supply a VRN but claims they are “in business” but not VAT registered, you can accept other evidence of their business status, but of course handling such cases just adds to your admin.

Place of supply

You need to identify the place where your consumer is based, has their permanent address, or usually resides. This will be the member state where VAT on the digital services supply is due. You must obtain and keep two pieces of information to evidence where a consumer normally lives. As HMRC observes, “For many micro and small businesses this requirement may be challenging.”

Accounting for VAT

So that you don’t have to register for VAT in every member state where you have customers, HMRC has developed a Mini One Stop Shop (MOSS) service for UK-based suppliers of digital services. You can find guidance on MOSS here (one of the longest URLs in history).

It is a condition of registering for MOSS that you must have a UK VAT registration number to identify the business. If you are an affected business currently below the UK VAT Registration threshold, to use VAT MOSS you must still register for VAT but will not lose your UK VAT registration threshold.

Get me out of here!

Given the admin burden the new rules impose, many small businesses are figuring out how to avoid the hassle and expense. Here are some of the options:

(1) Ignore the rules. This cannot seriously be advocated, though you have to wonder whether a non-compliant micro-business selling a small number of low value digital downloads into Europe is going to pop up on the Taxman’s radar, and even if they do, what are the chances they will be pursued?

(2) Don’t sell digital services to Europe. If you only make a few hundred quid from European sales of digital services, it may well not be worth the cost and effort.

(3) Convert your digital services to non-digital (as defined). For example, rather than supplying automated downloads to European customers, you could send them the files as attachments to (non-automated) emails, or as CDs in the post. That’s progress for you!

(4) Sell through a third party platform. If you are willing to surrender a chunky margin to a third party platform like Amazon, VAT will be their problem. However, EU VAT Action provides these warnings:

If a third party platform handles the payment and supply and also sets the standard Terms and Conditions, they are responsible for VAT. Unfortunately, not all third party platforms are ready to comply with this legislation and many have only found out about this recently. So please do check with your third party platform.

Payment providers such as PayPal are not third-party platforms (they just provide a payment mechanism) so they are not responsible for accounting for VAT. At present, many of them will not even supply you with the relevant data you require to comply.

Solutions

Are there any third party ecommerce solutions that will solve this all for you? Well, by Googling hard I found a few claiming to, but none appears to be purchasing relevant AdWords keywords yet, so I guess they’re still working on it.

Internet for Lawyers Newsletter

Edited by Nick Holmes