What sales are affected?
All digital download and e-service traders, telecoms providers and broadcasters selling to consumers will have to charge VAT on sales to a customer in the EU (regardless of their annual turnover), and do so at the tax rate of the buyer’s country.
Previously, a UK business with an annual turnover below the current £81,000 VAT registration threshold (at time of writing) wouldn’t need to become registered and charge tax on sales.
From 1 January, all businesses, whether inside the Union or outside it are affected. The EU will attempt to use its foreign trade agreements to press businesses located outside its borders to comply.
Why the change?
Big businesses such as Google, Amazon and Skype have had the luxury of establishing their EU operations in countries with lower rates of VAT, such as Luxembourg and Ireland. The EU is trying to stop this practice, which it feels is stifling smaller competitors located in EU countries with higher tax rates. By charging VAT at the rate where the consumer is located it avoids disadvantaging the seller due to their country of business.
Business to business (B2B) sales remain unaffected and are still charged excluding VAT when the buyer presents a valid VAT number.
What does VAT apply to?
However, not all digital products are affected. It only applies to downloads and e-services where the e-tailer has an automated fulfilment process on orders.
- Downloaded or streamed data, e.g. music and audio tracks, films/video, photos and graphics, software, games, PDFs, e-books and text documents, etc
- Web-based training where each trainee receives pre-recorded material without any live interaction to their course
- Journals, magazines, newspapers and books delivered through a digital medium
- Website hosting
- Ad placements for a website.
The level of manual intervention when supplying digital content plays a big part in establishing if the regulation applies.
If you run a smaller business with low sales volumes, a more manual approach allows you to stay outside the regulations. For instance, you can send the buyer an email with the purchased content attached and this is not classed as supplying content electronically. However, if you manually email the buyer a link to the purchased download, instead of attaching it, this still has to be taxed.
Examples of excluded online sales:
- Physical items purchased online but fulfilled offline
- Live training courses delivered digitally where human interaction takes place
- Online bookings for offline events, accommodation and hire
- Procurement of a service online that is undertaken offline, e.g. maintenance and repair services
- Ad space bought online for publication offline in a magazine, TV or radio.
Applying the new VAT rules
UK businesses may take one of two approaches. Either they must file a tax return directly with each EU country you sell to, or sign-up up with HM Revenue and Customs’ (HMRC) VAT Mini One Stop Shop (VAT MOSS) online service to account for tax centrally in every other member state.
The full list of VAT rates and specific tax requirements of each EU state is published by the European Commission.
How VAT MOSS works
The VAT MOSS online service allows a business to declare all EU sales centrally, instead of filing a return with each individual member state’s tax office; much simpler. HMRC will collect a single tax payment which it will distribute to each country where tax is due. Tax accounting periods will run quarterly with the first period from 1 January to 31 March.
To be eligible to use the service, your business first needs to obtain a VAT number by registering with HRMC, even if your annual sales are under the mandatory VAT registration threshold.
What’s new here is that HMRC is giving UK businesses the choice of charging VAT on their UK digital sales (or not) whilst their turnover remains below the threshold.
Claiming tax back
B2B purchases made between two VAT registered companies allow the buyer to claim back VAT as an expense on their tax returns.
But if you are a VAT registered UK business below the mandatory VAT threshold that has opted not to charge tax on UK sales, you can’t fully reclaim tax back on purchases. Instead only a percentage of the VAT may be reclaimed, based on the proportion of sales made to other EU countries where tax has been charged. As an example, if 70% of sales are untaxed within the UK, and 30% are to EU consumers, then only 30% of VAT may be reclaimed back on taxable company expenses.
Tax authorities require you to collect and store two pieces of evidence which corroborate the customer’s location for the tax rate charged. Acceptable evidence could be the delivery address entered at the checkout, the billing address captured by the payment service provider or the geographic information for the IP address of the customer’s device (GeoIP). All of these are ways for merchants to demonstrate they are taking reasonable efforts to verify the buyer is based within the member state for the tax rate applied. If, after a sale, both pieces of the customer’s location evidence don’t match, the merchant will need to contact the buyer for further proof to justify the correct tax rate was charged on the sale.
Storing customer data electronically means a business must register each year as a data controller with the Information Commissioners Office (ICO) of the EU member state where their business is based. In the UK, there is a £35 annual fee (correct at time of publication) charged by the ICO for this service.
You can share your experiences of preparing for the new regulations by commenting below or by tweeting to @shopintegrator.
Simon Horton is the founder of ShopIntegrator, a hosted shopping cart ecommerce add-in making it easy for anyone to add an online store into their existing website, blog or Facebook page, without any coding skills required.