Managing Your Cash Flow

EU VAT changes – wake up and smell the coffee!

3 min read

27 March 2014

Internet downloads are set to be taxed in the country where they are purchased, rather than where they are supplied from. Are businesses ready for the change?

Much has been made in the press this week about the Chancellor introducing new laws resulting in internet downloads being taxed in the country where they are purchased. But this is not strictly true, as the new rules are actually being introduced by the EU.

Back in 2010, the EU announced that with effect from 1 January 2015, the VAT “place of supply” of telecommunications, broadcasting and e-services (including the downloading of e-books) would change from where the supplier belongs to where the individual belongs. 

The 2013 Budget confirmed that UK legislation will be included within the Finance Bill 2014 and, to avoid VAT registration in other countries, businesses will be able to account for any overseas VAT using a single return. Last week’s Budget announcement merely reiterated that plan.

But while most of the press have focussed on the demise of the 99p music download, what should be of more concern is whether businesses are ready for this change.

With only eight months to go, many companies may not yet have considered the implications that the digital changes could have on their business, or allowed sufficient time to ensure how the business can best manage the transition.

Fundamentally, there will be a need to assess whether there is sufficient VAT knowledge in the business to handle the compliance obligations across a number of jurisdictions, and whether IT systems and the business infrastructure will adequately capture, record and declare the appropriate information.

Take the example of a consumer accessing e-services by using a wi-fi hot spot, internet café or hotel lobby. 

The presumption will be that the consumer has his permanent address or resides at that location, and therefore the service is “used and enjoyed” there. For e-services received through a fixed land line, mobile network or “decoder”, then it’s presumed that the customer has his permanent address or resides where the land line, SIM card or decoder/viewing card is registered and / or located.

Impacted businesses will therefore need to pretty quickly consider how best and most efficiently to collect and record data concerning their customers’ location. 

Failure to prepare adequately for the impact of these changes could lead to shrinking profit margins or increased prices for consumers, as well as penalties for non-compliance. Businesses really need to wake up and smell the coffee…

David Wilson is an associate director at Baker Tilly.