From 1 January 2015 new VAT rules were introduced which affect all businesses selling broadcasting, telecommunications and e-services to non-business customers (B2C) in other EU countries. It does NOT apply to business-to-business (B2B) transactions which remain unaltered.
E-Services are services that are heavily reliant on the internet for their execution and include the following services:
- video on demand;
- downloading of apps;
- music downloads;
- gaming; and
- anti-virus software.
B2C sales to customer located elsewhere in the EU are no longer subject to UK VAT but will be taxed in the country where the customer is based.
Example. If a business sells a new app for a smart phone or tablet to a private individual based in Italy, UK VAT of 20% will no longer be chargeable, and instead Italian VAT (which is currently 22%) will need to be charged.
What does this mean for businesses?
To prevent the need for businesses having to register for VAT in every country where they supply e-services to non-business customers, a VAT Mini One Stop Shop (MOSS) has been introduced.
The MOSS is an online service from HMRC that gives businesses the option of registering in the UK to account for VAT on B2C sales of these services in all of the other EU Member States (at the appropriate rate for each country) by submitting a single return.
The good news is that this service will significantly reduce the administrative burden which would have existed if a requirement to register in multiple countries had arisen.
If a business is not registered for UK VAT as it is trading below the VAT registration threshold in the UK (currently £82,000), it may believe that these changes will not affect it. Unfortunately this is not the case. When a business makes supplies to another EU Member State there is a nil VAT registration threshold if it makes B2C sales so it will immediately have to register for VAT under a MOSS registration to account for VAT in the other EU Member State but it does not need to account for VAT on sales to its UK customers.
Registering for VAT MOSS
Businesses that are already VAT registered in the UK can register for the VAT MOSS scheme using HMRC online services. If the business is not already VAT registered (turnover below £82,000 p.a.) then it will have to register for UK VAT before registering for the VAT MOSS, but it won’t need to account for VAT on sales to its UK consumers.
Businesses must register for VAT MOSS by the 10th day of the month following their first B2C supply of digital services in another EU member state.
The VAT MOSS returns are required each calendar quarter (end of March, June, September and December) so may well not coincide with a businesses’ normal VAT returns. Provided that when registered for VAT, the business selects ‘supplies of digital services (below UK VAT threshold)’ as its business activity HMRC will ensure that the UK VAT return period is aligned with the VAT MOSS return period, so it can complete both the UK VAT Return and the VAT MOSS return at the same time. The return is due by the 20th of the month following the end of the VAT MOSS return period. Therefore, the return for the period ending 31 March would be due by 20th April.
It’s still important to monitor the UK taxable turnover, once that exceeds £82,000 p.a. the business has to start accounting for VAT on your UK sales.
If a business wasn’t previously registered for UK VAT but had to do so in order to register for VAT MOSS it doesn’t have to charge its UK customers VAT. Even though it is not charging UK VAT it still has to complete a UK VAT return. It can complete a ‘nil’ return or, if it wish, it can claim back the VAT it incurs in making B2C supplies of digital services to other member states. It still won’t be able to reclaim the VAT on the costs relating to its UK sales.
A practical problem that arises is that when you make online sales you probably won’t know where your customer is located. If a business intends to continue making B2C sales to customers in other EU Member States they will need to know what country they are based in so that it can account for the correct amount of VAT. As all the Member States have different VAT rates businesses could potentially have 27 different prices for the same downloads.
If a business charges customers a flat rate VAT inclusive price then it will need to calculate what proportion of that price is VAT in order to be able to complete the VAT MOSS return.
Example: You sell an e-book for £10 including VAT, regardless of where the customer is based. The amount of VAT in that £10 will vary, depending on the VAT rate applicable.
To calculate the VAT a business should use what is known as the ‘VAT fraction’ for the country. If you divide the total sales by the VAT fraction the result is the amount of VAT contained within the total sales. The VAT fraction is calculated as follows:
(100 + VAT rate) ÷ VAT rate = VAT fraction
Andrew Needham is a Chartered Tax Specialist and heads VAT Specialists Ltd. Andrew has a degree in Law from UCNW Bangor and is a specialist in indirect taxes. He is the author of VAT 2015/16 and co-author of the Core Tax Annuals 2015/16 for Bloomsbury Professional.