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?
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.