Over a month ago I wrote a post detailing the Horrible Implications of the EU VAT Place of Supply Change, and over the last few days the issue seems to have properly picked up interest from communities of micro-businesses. This post is not to debate the ruling, I personally think it a terrible move for small businesses and am frustrated that HMRC did not advertise it more widely. That said, as a business we have to comply with all kinds of things and so this post is just to try and state what complying with the change means.
I am not a VAT expert, however I have experience in running a VAT Registered business, dealing with the current EC Sales returns and am registered for MOSS. The HMRC and European documentation tends to assume businesses are VAT Registered and have some basis for understanding of things such as “place of supply”. This is not the case for many micro-businesses. I continue to collect links and information over on my EU VAT GitHub site, make a pull request or just email me new stuff that you find and I’ll keep it up to date as a resource.
What are the digital products and services that fall under this change?
The ruling covers downloads of digital products and services that are provided electronically, such as:
- music downloads
- knitting and craft patterns
- downloadable software
- Software as a Service
- webhosting services
- Downloads of training course videos
Things that don’t fall under this are services that you provide in person. As an example if you have a service where you design an ebook cover for a customer, that would not fall under the these rules as you are providing a unique, hands-on service to the customer. If you sold template ebook covers that customers could buy, download and edit themselves that would fall under the ruling.
The same is true for training. If you deliver training via video where you are live on air at the same time as your customer, delivering the training that is still taxed in the same way as now. If you sell videos of you delivering training then that would be liable for VAT at the customer’s rate.
It’s not so much the digital part that matters, both examples above are “digital services” it’s the hands-off part that changes the place of supply from where the supplier is to where the customer is.
This is B2B only, if I only sell to business customers can I avoid it?
Yes, on paper. No in practice it seems. The only sure way to identify a business customer is via their VAT number. The existing VAT rules (and this doesn’t change) allow an EU business selling to an EU business in another member state to sell a product without adding VAT. The seller then records the payment and submits it with their EC Sales List. The purchaser then accounts for the VAT due in their own VAT Return under the Reverse Charge rules. The “place of supply” in this case is always where the customer is, but because the seller doesn’t need to charge the VAT we don’t run into these issues – we just have to validate the customer VAT number to prove they have one and are not in the same member state as us.
Many small businesses and freelancers are not VAT registered and so will generally need to be treated as a consumer for tax purposes.
I am a UK business selling ebooks, not currently registered for VAT. What are my options?
- Stop selling your books to EU countries other than the UK
- Sell via a distributor who deals with the VAT and pays you a royalty
- Register for VAT in every EC Country you sell to
- Register for VAT in the UK, and VATMOSS
I thought that as long as I was below the minimum threshold for VAT, I didn’t need to charge VAT.
The UK benefits from a very high minimum threshold before you are forced to register. So this was the case when the place of supply for digital services was the UK.
However there is no minimum threshold for payments to another EU country, so when the place of supply changes to where the consumer is you are liable for their VAT even if you sell a single 1.99 ebook or knitting pattern.
This has led to this situation where people nowhere near the VAT threshold, in fact people who may not even be earning enough to pay income tax, could be forced into VAT Registration.
What is the MOSS?
Currently if you are VAT registered you charge VAT on these products at your own country rate. So for the UK 20%. You then send a VAT return which details how much VAT you have collected, deducting any VAT you are claiming back and pay HMRC the VAT owed. After Jan 1 you need to do this individually for each country you have made sales in.
The Mini One Stop Shop is a service that allows you to avoid registering for VAT in every country. You charge the correct amount of VAT for each sale and then report it in your MOSS return, and pay the VAT due. The MOSS then distributes the VAT correctly to each country.
You need to register for VAT in order to use the MOSS to pay the EU VAT that is due. This is why small businesses are being forced into registration.
Which companies can I sell through who can act as an intermediary?
If your products are sold via a company who essentially sell the product for you and whose name appears on the invoice that is sent to the customer, this can protect you from registering for VAT. In that case the company making the sale deals with the VAT liability. This may be the simplest way of dealing with the issue for people with a low number of sales that fall under this ruling.
I am creating a list of companies who operate in this way. I’m not using any of these personally so am adding them as people confirm to me that they do become the seller of the product and deal with the VAT liability.
I am already VAT Registered, what do I need to do?
You need to register for the MOSS unless you are very keen to register for VAT in all EU Countries. You can do this via your existing online HMRC account. Once registered you will be required to submit your first return in April 2015, this will cover Jan 1 – Mar 31 2015, so you need to keep all the required records from Jan 1.
You need to ensure that the systems you use for taking payment for your product can identify the location of the customer and charge the correct amount of VAT. You can read how I am implementing this for Perch here.
I am not VAT Registered but thinking about it. What are the implications of being registered?
You can voluntarily register for VAT even if you are below the threshold. If you do this then you will need to submit VAT Returns and potentially EC Sales lists. You will also need to charge VAT on all of your sales, including to UK customers.
If the majority of your sales are to VAT registered business customers then registering for VAT doesn’t make you more expensive in real terms. VAT registered companies pay the VAT and claim it back in their VAT Return. Claiming back VAT is the real benefit of being VAT registered for small businesses. For example if I purchase a computer at £1,000 inc. VAT, I can claim back £200 in my next VAT return.
If the majority of your sales are to consumers of very small businesses who are not VAT registered then you either become more expensive by adding 20% VAT in the UK on top of your charge OR you take a cut in profit by paying that VAT yourself.
Once VAT Registered you need to make sure you send correct VAT invoices to your customers so they can claim back the VAT.
It is a lot easier to be VAT registered now than it used to be, I deal with my VAT returns and EC Sales Lists through Xero, and it really is just a case of checking that everything looks correct and submitting the data every quarter. You are likely to need to help of an accountant however to make sure your record keeping is all correct.
If you are considering doing this I would suggest starting the process now in order that you are all set up when the new rules come into force in January.
I am or will be VAT registered and sell via PayPal/Stripe etc. how do I prove the customer location and decide what VAT to charge?
If you are selling directly through Stripe, PayPal or another payment provider that does not handle invoicing and VAT for you, then the simplest option may be to use a third party service that hooks into your existing processes and does this part of the job. Example services are:
Or you could move to a full e-commerce solution that is able to handle the VAT requirements.
I am or will be VAT Registered and sell via a shopping cart system, but am not a developer, how do I ensure I am charging the right VAT?
You are in the hands of the provider that you are using. If they have not released information about how they will comply with the new rules from Jan 1, you should contact them and ask. If you get a response do let me know. I will add links to the GitHub site to help anyone needing to find an alternate provider.
I’ve written a post for Selz.com a hosted solution for selling digital and physical products, this details some of the possibilities for people in this situation.
Do I need to register as a data controller?
The rules state that you have to collect proof of customer location in two different ways and store this data for 10 years. The data you have to collect is personally identifiable information and therefore might make you liable to register as a data controller
I’ve seen reliable sources state this is not true, along with other sources that say it is. It would be good if the ICO could state whether the additional data collection requirements for the new VAT rules would make registration necessary.
I am a business outside of the EU, what do I do about this?
Businesses outside of the EU should have been charging VAT to EU customers and paying the VAT due for some time now however this has not been enforced. There have been suggestions that this ruling will now be more strictly enforced.
You can register for MOSS as a non-Union company by choosing a country to register in. If you are an English speaker then Ireland or the UK would probably make sense as the documentation would at least be comprehensible.
You would then need to follow the same rules as an EU based business in terms of charging the correct amount of VAT to EU residents and paying the VAT due via MOSS.
Spot any issues with the above?
Post a comment and let me know. I’m trying to be as clear as possible as lack of clarity is a huge issue here. Once you decide which route you want to go down you need to fully understand what you need to do over and above my brief notes, hopefully this will help point people in the right direction though.