Managing Your Cash Flow

A look at the context of new EU VAT laws

6 min read

08 December 2014

Former editor

As part of our new focus looking at the biggest events set to impact SMEs during 2015, Real Business looks at EU VAT changes and what the impact is for business owners.

When the clock ticks beyond midnight on new year’s eve this year, new VAT legalisation will click into place and drastically shake up the way in which company’s export to Europe.

From a situation where EU VAT was charged based on the country in which goods were sold, it will be a case of where they are being bought. 

The rules, which it must be said only apply to telecoms, broadcasting and e-services companies, will mean for paperwork for British firms but could result in added funds to the Treasury.

According to HMRC, the only way to comply with the new VAT code will be to register with the organisation’s Mini One Stop Shop scheme – known as VAT MOSS. Businesses will then be required to submit a “single calendar quarterly reform” and VAT payment to HMRC. 

Research conducted by KMPG in November found that 62 per cent of small businesses were not aware of the rule changes, with a further 66 per cent not aware of the penalties associated with non-compliance.

Merchants which do not comply will have to pay penalties in the jurisdiction of the Member State in which VAT laws have been infringed. Not only that, but the UK businesses that are currently exempt from paying VAT as sales are under £81,000 a year will be brought into the fold. From 1 January the threshold will be removed for those exporting digital products and services to Europe.

Businesses will be expected to obtain and hold onto two pieces of “non-contradictory” evidence to support taxing decisions. Evidence can include: billing address of customer; IP address of device used by customer; location of bank; country code of SIM card used; location of fixed land line and other “commercially relevant information”.

Read more on EU VAT law changes:

The next question to answer is just what kind of companies are impacted. Broadcasting companies are characterised as those supplying television or radio programmes to a schedule by the person that has the editorial control of those programmes. Telecoms firms are those that send or receive signals by wire, radio, optical or other systems – including fixed and mobile telephony, fax and connection to the internet. Finally, e-services businesses are described as those involving video on demand, downloaded applications, music downloads, gaming, e-books, anti-virus software and online auctions.

So what about penalties? Well, here is where it gets a bit hazy. Despite clearly outlining what the expectations are, when documents must be filed and who is involved, the government website simply states: “To resolve disputes and/or paying any penalties or fines, you’ll be expected to deal directly with the tax authorities in the relevant MSC and to make the payments using the currency designated by that member state”.

Issues have been raised by businesses and industry bodies relating to the difficulty some will have in determining where payments have been made. Those using services such as PayPal may not provide enough information to sellers. Sellersof digital products will also have to be VAT registered in every country, even if it is just to justify one sale in a particular country.

Many pieces of commentary on the issue have focused on the complexities of compliance of buyers are making purchases in mixed territories. A French person, living in Germany, making a purchase of a British digital product, whilst on a Spanish registered cruise ship, whose last port of call was Portugal. Work that one out.

However, at this stage it is more important for businesses, and the finance teams at each, to become familiar with the top line changes. Preparing now involves conducting an audit of systems, making sure that businesses can capture the information needed in relation to where a customer lives. Next is a decision on how a company will report and pay VAT, and an understanding of how new changes will impact on finances.

After that, make sure you take advantage of online government resources. With changes like this, there will always be a degree of flexibility as long as businesses can prove they’ve taken the right steps to comply. However, if you have any tips on getting ready we’d very much like to hear in the comment box below.