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Impending VAT changes for digital services

9th December 2014

Arrival of MOSS and reprieve for many small businesses

What's new?
From 1 January 2015, the VAT rules for B2C supplies of all electronically supplied services change! Businesses will need to charge and account for VAT in each EU member state based on where their customer belongs from this date onwards. These rules only apply to B2C services which are considered to be electronically supplied services provided to non-business customers (i.e. private consumers).

HMRC have introduced a Mini One Stop Shop (MOSS) scheme for UK businesses which will give businesses the option of registering in the UK (instead of having to register in each EU member state separately) and then accounting for VAT in all other EU member states through one return (but you still need to apply the appropriate VAT rate for each EU member state). There is also a separate scheme for non-EU businesses.

Unintended implications for small businesses
In order to be entitled to use MOSS with HMRC, UK businesses have to be VAT registered in the UK. As the UK operates a VAT registration threshold which is relatively high (currently £81,000) this enables many small businesses involved in such supplies to not have to be VAT registered. As a result they are not required to charge UK VAT, which would otherwise form a cost to them if they are not able to pass the VAT on to their customer. 

As many other EU member states do not apply any VAT registration thresholds, businesses would have had to VAT register in these EU countries even if they only made one sale to a customer. In order to use MOSS they would have to charge UK VAT on all their UK sales (as well as accounting for EU VAT on the one sale). However, HMRC have recently confirmed that businesses below the UK VAT registration threshold can voluntarily register for UK VAT and only charge VAT on the cross border element of their business and not have to charge VAT on their UK sales as long as they can clearly separate their sales between the UK and other EU countries. This is a welcome reprieve for many small businesses in this sector. 

There are a number of areas that will need to be considered from a VAT perspective, but the key factors to consider are: 

  • Are you supplying a B2C service? 
  • How will you determine where the recipient of your service belongs?
  • What is the VAT liability of your service? 
  • How will you complete compliance procedures for VAT, EC Sales Lists, and MOSS? 
  • How will VAT and the factors mentioned above affect your pricing strategies? 

Our team are experts in this area and can help you plan and avoid the many pitfalls that are out there from a VAT perspective. Businesses need to start giving more emphasis to their VAT position, especially if they are affected by the changes to be introduced.

If you would like to discuss any of these issues further please contact Kamlesh Chauhan.