A change in the way VAT is collected across the EU will be introduced on January 1. It will affect supplies of digital services such as books, apps and music.
The changes, aimed at creating a more level tax playing field, may invoke images of recent newspaper headlines featuring the tax affairs of Amazon, Google and Apple to name a few.
These firms have often located themselves in Luxembourg, which has enabled them to only pay the rate of VAT in Luxembourg (currently 15%) on their digital supplies.
However, the move threatens to leave many UK-based small and micro businesses with a very unwelcome VAT compliance hangover. Q What has changed?
A The place where the EU considers a digital supply to a consumer takes place will change to be where the service is consumed or used.
So if, for example, a UK business sells an app or a piece of digital music to a consumer who lives in Germany, local German VAT will be payable.
UK suppliers will be required to be registered for VAT in Germany in respect of such supplies, to declare the VAT involved, even if it is only a few pounds.
Q What supplies does this affect?
A So-called BTE services: broadcasting, telecommunications and electronic services.
Electronic services cover:
* music downloads;
* knitting and craft patterns;
* downloadable software;
* software as a service (SaaS);
* webhosting services;
* downloads of training course videos.
Q What does this mean for the end consumer in the UK?
A The general public and end consumer may see prices rise in the UK as suppliers look to recoup some of the increased additional VAT to be collected when supplying them.
Whether the supplier will introduce a price rise across the board, or different pricing policies depending on the rates applicable in each country, remains to be seen.
Q How are small/micro business in the UK affected?
A Crucially, VAT will be due and payable in each country to which you supply a BTE service.
There is no turnover threshold over which your sales must be in order to be liable to register for VAT within the EU.
So, even if, for example, you make one sale to a customer in Germany and half a dozen to a customer in Italy, you will be required to register, charge and handover the VAT payable in each EU country where supplies were made.
Q This sounds like an administrative nightmare. How can a UK business possibly manage VAT in 27 EU countries?
A In the UK the Government has introduced an online system called the Mini One Stop Shop (MOSS or #MESS if you’ve been following the developments on social media).
The MOSS only requires you to register once, in the UK, and pay all the VAT you owe on one aggregated quarterly return.
This will in turn be divided up by HM Revenue & Customs between the countries to whom it belongs.
However, the MOSS still represents a very real increase in the administrative burden on businesses as they are required to collect and retain significant detail and data in relation to the supplies they make to demonstrate where the service is being consumed.
Q What do UK digital service suppliers in the UK need to do now?
A In the UK in order to use the MOSS you require a UK VAT registration, and then register for MOSS.
Q But I’m not VAT registered as my turnover is below the UK threshold, and I do not want to have to charge 20% VAT to my UK customers.
A HMRC, after lobbying from representatives of trade and tax advisers, have issued guidance which states that businesses whose turnover is under the VAT registration threshold (currently £81,000) can still register for VAT, in order to use MOSS. Crucially, HMRC say that businesses in this position will not then be required to declare VAT on their UK sales, where their turnover remains below the limit.
There are sure to be further developments as MOSS and the legislation go ‘live’ next month.
VAT at Christmas: parties and gifts
On a lighter note, and as a gentle reminder to employers who throw their staff Christmas parties, don’t forget you can reclaim the VAT incurred, provided the party is for your staff only.
This does not, unfortunately, extend to the spouses or partners ofstaff.
An apportionment must also be made if the partners of a business are attending as their share isn’t recoverable.
Similarly, if you are generous enough to give your staff a gift this Christmas, provided the cost to you is less than £50 (excluding VAT) you will be able to recover any VAT incurred and not be required to account for any VAT.