New Year’s Day saw the introduction of new VAT rules for sales of telecoms, broadcasting and electronic services (the likes of ebooks, video on demand, and mobile apps) to consumers within the EU.
The reforms have resulted in VAT no longer being charged and accounted for based on where the business supplier is situated, but instead according to the EU country where the customer belongs. The VAT on these services supplied to UK customers goes directly to the UK government and the same is true for customers in France, Germany, Hungary – right across the EU. As part of this KPMG Enterprise blog, we’ve taken a look at what these recent changes mean for UK businesses – big or small – engaged in European trade. The intention of these rule changes was to level the playing field for businesses of all shapes and sizes selling electronic services within the European Union. Current standard VAT rates in the 28 member states vary from 17 per cent to 27 per cent, so an organisation previously had an advantage if it set up supply in a lower VAT rate jurisdiction. For example, many have chosen the likes of Luxembourg to supply these services from where VAT was previously 15 per cent (as of 1 January 2015 it has been increased to 17 per cent) and only 3 per cent for ebooks. This is exactly what the rules are attempting to address – by charging VAT according to where the customer is resident, the incentive for locating in a low VAT jurisdiction has been removed. This means that businesses based in the UK are no longer at a disadvantage compared to those in lower VAT jurisdictions when it comes to selling telecoms, broadcasting and e-services into the rest of the EU. Where previously businesses would charge a single rate of VAT across all sales, they now have to apply different rates according to where their customers are based. Potentially, this significantly complicates the compliance burden and makes billing more difficult to manage. Read more about the changes:
So businesses selling affected services into the EU have had to make some decisions about what to do. There are a number of ways businesses can report and pay the VAT under the new rules: they could choose to file VAT returns in every EU country in which they have a customer – a task which is which is potentially very onerous with a myriad of complex tax regimes to comply with. Alternatively, suppliers can opt to use the “mini one-stop shop”, an online service through which businesses can register for VAT in one country and account for VAT on supplies to customers in other member states. However, in either case, suppliers will be required to determine and prove where each customer is established/resident as this will determine the place of taxation. The new rules require organisations to obtain and keep two pieces of non-contradictory evidence (for example, the consumer’s billing address, their bank details, their IP address), to determine customer location. One important consideration for businesses at the smaller end of the scale is that there is no minimum threshold for VAT on sales into the EU. Unlike here in the UK where if a business makes domestic sales of less than £81,000 a year it is not liable to register and account for VAT, there is no equivalent in the EU. A sale even of just a single euro triggers a VAT obligation. On the face of it, the “mini one-stop shop” would seem the easiest option for such small businesses, but if they are trading under the VAT threshold they won’t be registered for VAT in the UK and will need to do that. Technically, registering for VAT means that they potentially lose their UK £81,000 exemption – but HMRC have said that such businesses can register for their EU sales only and as long as their UK sales don’t go over this threshold they can remain outside the scope of UK VAT. Whatever the decision, each of these options require changes to customer-facing and back office structures so businesses need to be making every effort to ensure their systems, processes and pricing decisions are in place to properly address these crucial issues. As a transitional measure, HMRC are allowing UK micro businesses trading below the VAT registration threshold to rely on information provided by their payment service provider to determine where their customers are located, but only until 30 June 2015. From 1 July 2015, these businesses’ front office systems should be ready to collect the required information themselves. If all this seems like just too much hassle, affected businesses could opt to sell through a platform or online marketplace which would then be responsible for complying with these new VAT rules. However, this comes at a cost as the business would need to pay a commission to the platform. Depending on the business model, expansion plans and potential access to new customers and markets, this might be a price worth paying. Conversely it might just be too expensive. It’s a decision to make on a case-by-case basis. With this increased complication surrounding compliance, access to the European market could become more challenging for smaller UK tech businesses and start-ups. Mike Camburn is a tax partner at KPMG in the UK. More information on EU VAT can be found here.
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