As of 1 January 2015, if you make a sale to a customer located in the EU, you need to be charging VAT at the rate in the customer’s location. You then need to account for that VAT and pay it over to their country’s tax authority. As a direct seller of your services over the Internet, you are often in a B2C (business to consumer) relationship with your buyer and this is why these rules apply to you. If it sounds like a whole lot of hassle, you’re right. Thankfully, solutions are popping up already. But first, let’s understand the problem.
Before 1 January 2015, VAT was charged at the rate where the sale was made - so as a UK platform selling cloud storage for £10 a month to a Portuguese consumer, you would charge VAT at the UK rate of 20% on top of the sale price (total £12.00). Thanks to a change in the EU’s ‘place of supply’ rules, VAT will now be charged at the rate in the country where the cloud storage is used - so in our example, you now need to charge the Portuguese consumer VAT at 23%, on top of the sale price (total £12.30).
The EU wants its member states to get their fair share of the VAT due to them. They seem to be particularly worried about certain multinational online companies basing themselves in low VAT rated countries like Luxembourg where the VAT rate is 15% - meaning countries with higher rates like Denmark (where the rate is 25%) lose out. Unfortunately, the new rules don’t discriminate based on size and so anyone now supplying 'digital services' to EU consumers is caught.
Am I supplying a ‘digital service’ electronically?
If you do any of these things (and this is just a list of examples based on the 3 broad categories of ‘broadcasting’, ’telecommunications’ and ‘e-services'), you may be supplying a digital service and might be caught by the rules if delivery of the content is automated and the sale is being made to EU based consumers:
- Selling web hosting or cloud storage
- Providing online accounting/bookkeeping services
- Selling web advertising
- Selling ebooks or other digital downloads
So I’m being penalised for developing an automated system?
Yes. If your system is not automated, you aren’t caught. Likewise, if what you are selling is a tutorial, lecture or other live webinar then that isn’t being ‘electronically supplied’ and is also not caught by the rules.
How can I possibly be expected to submit VAT returns for 28 countries?
You’ll need to register for VAT in the UK first. You’ll then need to join the MOSS (‘mini one stop shop’) scheme which will enable you to file a single return to HMRC which will cover all of your EU tax charges.
My turnover is below the £81k UK VAT threshold and I have no interest in registering for UK VAT! Too much admin!
If you want to sell to EU consumers, you’ll need to join the MOSS scheme. If you want to join the MOSS scheme, you have to be UK VAT registered. A late change to the rules means that you don’t need to account for VAT on sales to UK customers for those turning over an amount under the threshold, so your admin will only increase in relation to EU sales. If you’re in the UK and you don’t want to sell to EU consumers, you need to be careful not to fall foul of the EU’s anti-discrimination rules.
So how do I know where my buyer is located and what the correct VAT rate will be?
The EU rules require that you collect at least 2 pieces of location data at the checkout point which will corroborate the buyer’s location. These are likely to be the buyer’s IP address, confirmation of their billing address and/or their bank details. You’ll also need to put together a list of the current VAT rate in each relevant country, then cross reference the data to apply the correct rate. HMRC have confirmed that if you sell directly from your website using a payment services provider like Paypal or Stripe, the data they provide you about the buyer’s location will be sufficient - but only until 30 June 2015, after which you’ll be ultimately responsible for verifying the location.
I’d rather go out of business. How have others handled this?
Platforms have taken differing approaches to the problem. Many are concerned about the increased admin costs if they want to take on the responsibility for VAT, and many simply don’t appear to understand the scope and application of the new rules.
I’m worried about all of this and I think I need more advice.
This is a basic explanation of the problem, but the rules are complex and there are a number of other factors which might affect your business. Your accountant should be your first port of call and should be able to advise you of how these rules may impact you.