Implementing the new EU VAT Rules

The blog post I wrote last month alerting people to the upcoming change to EU VAT Rules has attracted a lot of attention, and comments. I don’t like to be the bearer of bad news but I’m glad that people have had some time to prepare for this disastrous legislation. This isn’t UK legislation, it comes from Europe. However I think that the UK small business community have been failed by HMRC for this not being brought to the attention of business who are not otherwise VAT registered earlier. This seems to be the sort of thing that would have warranted a TV campaign as so many of those caught are people whose earnings don’t even take them over the income tax threshold, never mind VAT.

If you are VAT Registered, or are intending to become VAT Registered what happens next? I imagine that most of us, rather than register for VAT in every member state, will register for the MOSS scheme. In the UK you can do this online if you are registered for HMRC online services.

Once registered for MOSS you will be able to submit your MOSS Return through the online system when it becomes due in April 2015, for the quarter Jan 15 – Mar 15. I’m sure that will be as much fun as submitting EC Sales lists are currently. That job has recently been made a lot easier by Xero, I don’t know if they will be able to offer a similar service for this.

If you have developed your own cart and checkout system for your products you will need to ensure that from January 1st, 2015 you charge VAT at the rate appropriate to the location of your customer for any sales to consumers.

Who is a consumer?

This legislation covers sales to consumers. For a product like Perch, we could claim that we are only selling to businesses and therefore the legislation doesn’t affect us. It seems however that won’t work. As is currently the case, if our European customer has a VAT number, we treat them as a business and do not charge VAT. We then report that sale via the EC Sales list. It looks as if the new legislation will generally assume a business only if they have a VAT number, so that doesn’t change.

“If you supply digital services and your customer doesn’t provide you with a VAT registration number (VRN) then you should treat the supply as B2C. You, as the supplier, may choose to accept alternative evidence of business status although this may not be acceptable for all member states. If a member state does not accept alternative evidence then you will be responsible for VAT in that country if a VRN has not been provided.
It’s your decision to accept alternative evidence. Your customer can’t require you to treat a supply as B2B if they have not provided a valid VRN.” – Supplying Digital Services from gov.uk

Even if it were possible to prove that a non-VAT registered person or company was a business, doing that in a hands off online transaction is likely to be impossible.

Proving the place of supply

For most people who have developed their own system charging VAT at the correct rate shouldn’t be too onerous. You’ll need some way to look up the current rate of VAT in each state and your system will need to add that amount at checkout.

The big issue is how do you prove the place of supply. What if I sell a copy of Perch to someone whose company address is in Germany but is currently on a business trip in the UK and so has a UK IP address? The guidance states we need to collect and keep for ten years two non-contradictory pieces of evidence as to the location of our customer. These can be:

  • the billing address of the customer
  • the Internet Protocol (IP) address of the device used by the customer
  • location of the bank
  • the country code of SIM card used by the customer
  • the location of the customer’s fixed land line through which the service is supplied to him
  • other commercially relevant information (for example, product coding information which electronically links the sale to a particular jurisdiction)

If you find another bit of info that does contradict these two, that’s OK. You just need to have two.

How might this work in practice?

For Perch all of our customers have a Perch account. We collect their address before they make the first purchase.

The billing address is one piece of information.

We are going to add a geolocation lookup based on the customer IP address at this point. We’ll check this when the customer updates their billing address. We’ve found a couple of inexpensive services that can help us do this – maxmind.com and ipinfo.io.

If the billing address says Germany and the geolocation is Germany we are good to go. This customer can buy Perch, we will charge VAT at the German rate, and we will log the two pieces of information as billing address and IP address.

However, what happens if the Billing address is Germany but the customer is currently on a business trip in the UK? The correct VAT rate is still German VAT as that is where the customer is “established, has their permanent address, or usually resides”. However we now have two bits of conflicting information.

It looks as if we can use the location of the credit card used for payment as proof. So if we allow the customer to go ahead and make payment using Stripe we can check that, but we would essentially then have to cancel the transaction if their card was not German registered. A nice user experience all round!

I am unclear as to whether we can request some other proof from our customer at the point of creating the account, if we cannot get our two pieces of information in any other way. I don’t really want to be asking our customers to upload documentary evidence of their location. The report from tax specialists Bird & Bird mentions trading history and self declaration. So would it be possible to decide that a history of purchases all from Germany constitutes “proof”, or can we ask the customer to declare their location with a checkbox similar to agreeing terms?

Third parties

I have had various services get in touch telling me how they are going to solve all of these problems for people – at a cost of course. I’d be very interested in knowing how they are going to meet these data collection requirements as they are not straightforward.

If you are using a third party checkout or cart system then you will need to ask them how they are going to help you meet these requirements. I’d suggest doing that right now. If you get a response and could add a comment I’m going to update my Github site of VAT information with which third party providers are offering solutions, and how they are doing that.

I personally think that an ideal solution would be for the payment providers to step in and offer, via their API, validation and proof collection that can be nicely integrated into custom checkout processes. I’d love someone like Stripe to jump in and save people from needing to give another third party a cut of their profits.

Remember – this impacts you if you sell to anyone in the EU. Even if you are not in the EU.

This legislation affects you if you sell digital items – ebooks, knitting patterns, magic tricks, music, software etc. etc. to people in EU countries. People and companies from outside of the EU can register for the non-Union VAT MOSS scheme in any member state, in which case all of the above would apply to you too. If you don’t register for VAT MOSS then you are liable for VAT in each member state of the EU.

Please let me know your implementation experiences, or how third parties are helping. I’d like to continue to collect resources to help all of us with this.

Published on the

Comments

Matt Collins on the 20 Nov 2014 at 16:55:11:

Thanks for such a clear write-up, Rachel. As you say, there’s an interesting question about what exactly to do if the billing address and IP lookup disagree. I watched some videos of an HMRC seminar on this (these, I believe: http://www.online-web-presentations.com/HMRC/) and got the impression that the authorities will be quite flexible about what further evidence they accept as proof of location. So asking the customer as you suggest above (with a checkbox or similar) may well be okay.

Miles Gilmour on the 21 Nov 2014 at 12:46:58:

First of all, thanks Rachel for keeping on top of this!

I have to say I’m pretty shocked by the fact this seems to have “slipped under the radar”; we are UK VAT registered as a consulting firm – currently hoping to move into selling digital products – and have heard nothing from our accountant or HMRC about this change!

What’s also pretty worrying is the incredible complexity this seems to introduce to small businesses and individuals. Although it’s claimed this legislation will apply to companies outside the EU selling into the EU, how will it be enforced exactly? Right now I can go to a US site who will sell me an eBook without charging VAT.

Seems to me like it’s just going to restrict the creation and growth of EU based small businesses.

Sarah Paine on the 21 Nov 2014 at 12:53:06:

You have missed off an important point. If you are NOT VAT registered, you will still be affected. The threshold has been reduced to ZERO for digital products, and therefore if you sell anything digitally to the EU, you will need to register under either scheme.

Personally I am switching to shipping my digital downloads on CD and in the post instead as then they become a physical product. But only to my European (non UK) customer base, as they are the only ones affected by this.

As a UK business, I can ship digitally within the UK (it’s not cross-border) and outside the EU without being affected. It’s only the sales to customers within the EU that are affected.

Catherine Maguire on the 21 Nov 2014 at 14:37:16:

Thank you for all of this Rachel. We are in the music business and this could turn into an utter nightmare for us and many many like us. I have contacted the third party / checkout company in the US that we use to sell digital downloads of sheet music. I’ll be back as soon as they come back to me.

Rachel Andrew on the 22 Nov 2014 at 07:02:20:

@Sarah yes I know this legislation impacts those not VAT registered, my original article on the subject was one of the first posted anywhere about that fact (linked in the first paragraph if you would like to check it out). This is a second article detailing implementation for those of us who are registered or are planning to become registered, as the implementation details are unclear.

James on the 22 Nov 2014 at 13:55:20:

Hi Rachel,

I’m trying to come up with a way to avoid VAT MOSS. What about if I became non-resident in the UK (where I’m from)? And stayed constantly on the move throughout the globe, never staying in any one country for more than 3 months at a time? Could I sell digital products to EU consumers then without having to register/pay VAT?

Rachel Andrew on the 22 Nov 2014 at 17:09:56:

@James I imagine you would fall under the same situation as any non-EU resident. You’d need to register in one member state and register for MOSS as a non-Union business. Moving around isn’t going to make a difference.

Heather Burns on the 23 Nov 2014 at 00:08:05:

How many times have you been at a conference, or speaking at one, and the topic turns to their/your latest ebook or plugin. What happens? Everyone looks down at their gadget and buys the ebook or plugin or groovy thing while the speaker is still talking. If that conference is an international one – as the vast majority of web conferences are – the speaker is going to regret having mentioned it at all, because they’ll spend their travel time back home staring at a spreadsheet trying to determine the place of supply of their audience members.

James Wheare on the 24 Nov 2014 at 13:53:50:

Dealing with this mess ourselves. FWIW, for Stripe, before you make a charge, you can lookup the token you get back from Checkout.js and it’ll give you the card country origin there. So you don’t have to cancel anything, just check it first. Oh and have fun if you plan on accepting Bitcoin!

Cesare on the 26 Nov 2014 at 08:28:42:

I wonder if this new law applies to services. Say you pay me to send you an email every day to cheer you up? Does this case fall into the EU VAT thing?

Diego on the 26 Nov 2014 at 18:38:37:

We will be registering for VAT soon, as our sales increased this year, and we will have to deal with this new taxation mess. However, as a seller, I reckon that going through too many hoops would just cause headaches. For example, the location of a buyer, the billing address and the actual usage of a product may all be different, but, at the same time, I consider blocking a purchase because of information conflict a very bad idea. Customer experience is critical, regardless of what taxation rules say, and we all know that customers can drop a purchase for much less than that.

I could be on a trip to the UK, buying a product for my company in Germany, planning to use it for one of my customers in France. If the purchase were to be blocked with a message like “sorry, we can’t figure out if we should apply VAT, or what rate is the right one”, I would just move on. The amount of cancelled purchases could be quite high, and so could be the loss of revenue and the amount of emails of “your site doesn’t work!” complaints.

Diego on the 26 Nov 2014 at 18:48:50:

@Cesare As far as I know, EU VAT applies to everything, so it applies to your service as well.

Diego on the 26 Nov 2014 at 19:46:51:

One more comment about the “two non-contradictory pieces of evidence”. They may not be available, and that should not be an issue.

Example
- The billing address of the customer. This is available and declared by the customer. If he lies, that should not be our problem.
- The Internet Protocol (IP) address of the device used by the customer. This information is unreliable. If either your site or your customer use a proxy, the IP address will be incorrect. Proxies and VPNs are getting more common (e.g. use Hola and your location magically becomes another one), so we can’t really rely on the IP address.
- Location of the bank. We may not have this information. If customers pay via PayPal, or other processors, there’s no way to find it out.
- The country code of SIM card used by the customer. Even more uncommon.
- The location of the customer’s fixed land line through which the service is supplied to him. This is even more uncommon than the SIM. What services are supplied via a landline, apart from broadband and telephone?
- Other commercially relevant information (for example, product coding information which electronically links the sale to a particular jurisdiction). Product coding can be arbitrary and generated dynamically, it’s not a reliable piece of information.

This boils down to what I was telling to my accountant: the billing address is the only one that may be relied upon. It’s declared by the customer and we must take it at face value. If customer lies, then he should be responsible for the consequences.

Tom Jones on the 28 Nov 2014 at 13:37:01:

None of our billing software is capable of charging VAT based on the point of sale, and I am aware of none. Even if it became available, I can’t afford new billing software: there is the cost, typically £500+, the installation charges, another £500+, and then the customisation, another £500+. And that is the cost per domain. If I have half a dozen, I’m looking at £10K just for the software, not including all the extra administration, costs for an account to ensure I’ve done everything right. As a sole trader who might make only £200 from one site, it’s not realistic.

VATMOSS has put me out of business after 15 years. Way to go HMRC and EU.

hugh on the 02 Dec 2014 at 21:27:50:

I sell apps through google play. but from Jan 2015, they are to operate VAT withholding. The problem is how i am to report VAT on sales if it’s being withheld? My VAT return won’t add up anymore.

Cath on the 04 Dec 2014 at 15:59:39:

I just received this information from the Musicians Union:

“Thankfully HMRC have now confirmed that a musician will be able to register just the digital part of their business for VAT so other work remains unaffected as long as total sales are below the VAT threshold.”

The full (but very short piece) http://www.musiciansunion.org.uk/news/2014/11/27/vat-place-of-supply-of-services-changes-due-in-2015/

Irene on the 05 Dec 2014 at 16:21:52:

My e-commerce and payment service provider Selz.com had just informed that they will be taking care of VAT as a 3rd party.

Kevin Deldycke on the 08 Dec 2014 at 14:36:25:

I’m trying to compile a list of applicable rates and exceptions at https://github.com/kdeldycke/vat-rates . Feel free to contribute ! :)

Mervyn Smallwood on the 12 Dec 2014 at 08:31:10:

Like many, I’ve only recently discovered this ‘by accident’. As I was planning to sell digital products to non-VAT registered businesses the new rules would apply to me.
Because they wouldn’t be able to supply me with a VRN, I checked out HMRC’s website re: “alternative evidence of business status”. HMRC says:
“If a customer claims to be in business but not to be VAT registered then alternative evidence should be obtained. This can be in the form of other reasonable commercial evidence or records that should normally be available, for example contracts, business letterheads, a commercial website address, publicity material, certificates from fiscal authorities, and so on. A digital certificate from a reputable organisation can also be used for this purpose.” (VATPOSS05620)
The logical choice for me is to ask for a commercial website address.
However, if I have “any reason to believe that [such evidence] is false or is being used incorrectly”, I am required to carry out a “full verification”.
If I sell my products online with automatic download, can anyone explain how I can become aware of “any reason” or how I can undertake such “full verification” prior to completing the transaction?

Peter Moore on the 18 Mar 2015 at 08:40:46:

Well done Rachel,
This is just another draconian example of our “European Overlords” ruling with an iron fist.
How can this possibly help UK business? All it does is place yet another road block in the way and adds another layer of complexity to an already overly bureaucratic system.
Sorry for the rant, but I don’t think it’s simply down to getting out of bed on the wrong
side this morning..

Leave a reply