EU VAT changes 2015 – are you ready?

What is it?

If your business makes supplies of telecommunications, broadcasting or electronically supplied services in the EU, from 1st January 2015 you will need to charge VAT in every EU member State even where you have non-taxable or private customers. 

Almost two thirds of smaller businesses unaware of new VAT rules, with far reaching implications, coming in from 1st January 2015 , which will affect them directly, according to a KPMG survey.

 

What are the changes?

  •  Previously VAT was applied in the country that the business seller was located and the seller applied the relevant VAT rate, it also only applied to business sellers who were VAT registered.
  • This legislation changes the place of tax so VAT is applied at the rate in the country where the buyer is located/ where the service is consumed. Even if you are not VAT registered in the UK, you will still be affected.

 

Some examples of the services affected

E-services – Includes video on demand; downloaded applications (or ‘apps’); music downloads, web hosting; distance learning; gaming; e-books, anti-virus software and on-line auctions.

Broadcasting – Includes radio and television programmes transmitted over a radio or television network; live broadcasts over the internet.

Telecommunication – Includes fixed and mobile telephone services: videophone services; access to the internet.

 

Why are these changes happening?

Basically, because there are 28 EU member states and the rate of VAT across them varies from 15% to 27%, so a business could gain an advantage by being established in a lower VAT rate jurisdiction, by introducing the new rules then it is deemed to be fairer with the current EU average VAT rate being 21.54%.

The options for accounting for VAT from 1st January 2015

There are two compliance options: VAT register in each member state where you make sales to non-business customers or use the Mini One Stop Shop (“MOSS”) simplification scheme. 

Option one: Use local registrations

Dependent on what EU member state you trade, and if you are not yet registered for VAT, you may need to set up a new registration.  This could result in up to 28 different VAT registrations across the EU.

 

  • Let’s be honest for a small business to VAT register in each member state would be an administrative nightmare. Most SME businesses do not possess the manpower or expertise to understand the legislation and how it impacts on their businesses and then to be able to keep on top of the extra administration in terms of capturing the information and keeping abreast of tax rates in the various EU members states and paying over the VAT. 

 

Option two: the Mini One Stop Shop

This scheme allows a business to account for all of its VAT via a single online web-portal and simplifies the administration as you produce just one return irrespective of how many EU member states you trade in..

 

  • Whilst a first glance this option may appear more favourable from an administrative perspective it will have its drawbacks. Like for example, shorter payment deadlines and longer record keeping obligations (10 years!). 
  • It could also have cash flow implications as it is slower to receive any VAT repayments than if you registered and submitted direct to the EU member state.

 

Can your systems cope?

 

As a result of these changes, systems and procedures will need to be reviewed to ensure compliance is met and changed/updated as appropriate.

 

Issues/Action businesses need to consider/implement in order to account for VAT from 1st January 2015

 

  • It falls on the supplier to decide who the customer is and where they reside – you need to keep 2 pieces of non- contradictory evidence of the buyer’s location. This is very difficult for the smaller business owner as an overwhelming majority use a payment provider like PayPal and they don’t provide payment details due to legislation requirements to keep it private.
  • The business needs to take a decision on pricing will they charge a Fixed price across all EU member states or will it be dynamic and different in each EU member State?
  • You need to keep the evidence of buyer’s location for 10 years (if using MOSS) and at any time the country of sale can challenge you in their own countries’ courts.
  • These records need to be kept on an EU server, which will be tricky to guarantee as lots of businesses now use cloud based providers for IT services.
  • If your sales are UK only and you are based in the UK, then in theory you are probably meant to be ok.
  • Modify invoice template to be VAT compliant, ability to invoice in local currency and meet the local invoicing requirements in that country and to determine the local VAT correctly!
  • Ensure your financial systems can cope with additional VAT accounting
  • Develop ability to produce the member state VAT returns individually or via MOSS if that is the preferred option
  • Develop data storage solution to meet requirements.

 

What is classified as non- contradictory commercial evidence?

 

  • 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)

 

Potential Issues

Legislation covers all business worldwide as discussed above.

  • Applies regardless of whether you have hit the VAT threshold or not – i.e. even a 99p e-book could mean you are affected by it (or even a live programme with just one automated resource)
  • Currently the legislation is a little grey with little help and guidance that we can make an informed decision on to ensure we comply with the law (Even the EU guidance isn’t legally binding).
  • The emphasis is on you to keep records to prove you haven’t made any EU sales
  • Determining the place of supply if someone is using mobile phones, perhaps on holiday, in internet cafes, on board transport travelling between different countries in the EU.
  • The confusion over what is and what isn’t captured by these rules; i.e. whether it is automated or not!

 

 

Questions for you the business owner to consider now

What telecoms, broadcasting or electronic services do you sell and to whom, are you captured in the new legislation?

  • Will the new VAT rates impact on your margins and profitability? If so, do you need to revise your pricing model?
  • Review systems to prove you know within the terms of the legislation where your customers are located
  • How do you capture this data?
  • Do you need to amend your operating procedures?

 

Whether your electronic supply is ancillary or additional to a physical supply for example if a physical book is purchased and that gives you access to a downloaded copy also.

 

Potential pitfalls

  • You cannot rely on HMRC’s advice as if another EU country disagrees they can pursue you in their tax system.
  • Also in the EU guidance notes they mention that their explanatory notes are not binding so you can’t rely on those legally either.
  • There is a MOSS – Mini One Stop Shop where if you are UK VAT registered you can make 4 VAT returns a year for the EU and UK so you don’t have them to do a return for each country individually. However, this doesn’t help you either if there is a problem ( you need to deal directly with the tax authorities in that country) also it doesn’t help when you need to account for claiming back UK tax and every refund means a VAT return amendment.

 

 

What should you do now:-

I personally believe that this legislation will be a nightmare for small businesses in the UK, as many are completely unaware of it and certainly the implications on their day to day business operations.  If you agree these are some suggestions you may want to do to prepare.

 

  • Don’t panic – as it currently stands this will happen we just need to make it as workable as possible!
  • Don’t think you need to know the legislation inside out – you just need to know enough or seek help to understand what is the right action to take for you and your business.
  • Take some action
  • Write to the Secretary of State for Business, Innovation & Skills, Vince Cable
  • Write to your MP or MSP and MEP.
  • If you have the contacts raise it with the media and see if they can highlight the issues as not enough is being done or known about.
  • Suggest to people in authority that the simple way round all this extra administrative nightmare may be for the online platform and payment providers to be legally responsible for record keeping, correct tax rate provision and cross country tax dispute resolution, they can use MOSS.
  • Make a fuss, use social media and share posts like this to raise awareness in the business community.
  • Review and decide if your current digital content and services is now affected by this legislation and take action as necessary to ensure you are not compromised. This may require you to withdraw some or all of your digital content services in the short term, whilst you take make or seek advice to make the correct decision for your business or implement systems to ensure you comply.  You could adapt your content by making it a 100% live programme with no automated digital content.  Remember this withdrawal won’t be forever, just until we know with certainty what’s happening and we get more information from Vince Cable.

 

 

 

Disclaimer

This is my opinion and I am not nor cannot be held responsible for what you do or do not do on this subject or anything related. This is my opinion, belief and my interpretation and I may be considered wrong by the EU.  You should take advice before acting upon this document and its content.

 

Further reading:

HMRC website Guidance notes on VAT supplying digital services and the VAT Mini One Stop Shop.

 

New EU VAT regulations threatens small businesses

https://www.huffingtonpost.co.uk/soozi-baggs/new-eu-vat-regs-seriously_1_b_6177222.html

 

New EU Vat rules change the game for digital businesses

https://wordsthatchangetheworld.com/2014/eudigitalvat/

 

Rachel Andrews – The horrible implications of the EU VAT place of supply change. First piece I found by someone who’ll be affected starting a discussion, good intro. 

https://rachelandrew.co.uk/archives/2014/10/13/the-horrible-implications-of-the-eu-vat-place-of-supply-change/

 

Taxamo – Five digital EU VAT myths busted – people are running away with some wrong ideas, and this short post reins some of them in. 

 

Get in touch

0161 410 0020
info@kmaaccountancy.co.uk

KMA Accountancy
Progress House
17 Cecil Road
Hale
Altrincham
Cheshire WA15 9NZ

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