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Consumers buy digital services from countries across the EU. The problem currently is that the rate of VAT is set by the seller’s country, meaning the buyer’s country has less control over the amount of VAT they receive.
In 2010, new EU laws started rolling out that would change this. Thanks to the “EU VAT package”, as of 1 January 2015, the amount of VAT charged will be set by the rate in the consumer’s country.
If you provide digital services, it’s important that you’re aware of the new rules, and that you’re aware of VAT MOSS. So, who’s affected, what exactly has changed, and what do you need to do?
The new rules don’t affect everyone. The changes will only apply to businesses that supply digital services to consumers (B2C), including broadcasting, telecoms and e-services, including those who are self-employed. If you only supply digital services to businesses (B2B) then these EU VAT changes do not affect you. See our video explainer and interactive quiz for more help.
Currently, when invoicing a client in the EU, VAT is charged at the seller’s location, so you charge the UK VAT rate of 20%. Crucially, this is only if you’re VAT registered.
As of 1 January 2015, the EU VAT rate will be set by the customer’s location, and will be charged whether or not you are VAT registered. For example, if you sell digital games to a consumer in Germany, you will have to add German VAT to the sales invoice and pay this to the VAT authorities in Germany.
The situation can get a little more complicated if you sell through an online shop.
You will be responsible for paying the EU VAT if the online shop is seem to be ‘acting as an agent’, meaning you are selling directly to the customer. This is likely to be true if, for example, you’re the one processing card payments for your sales.
However, the online shop will be responsible for paying the VAT if they’re seen to be ‘acting in their own name’, meaning you are selling your services to the shop, which they are then selling to the customer. This is likely to be true if they operate the whole sales process. This would be classed as a B2B sale, so the changes would not affect you and the sale would be classed as outside the scope of VAT.
You should check with the company you’re working with to define the relationship, as it’s sometimes hard to tell. For example, Amazon and Apple currently pay the VAT for their sellers, whereas Google do not. However, the good news is that Google are changing their terms from the first of January 2015.
You might be thinking at this point that this could get very complicated and time-consuming. Luckily, the EU have made it a little easier by introducing what they’re calling a ‘Mini One-Stop-Shop’ (MOSS).
To save you having to register for EU VAT in every EU Member State where you supply digital services, you may opt to use the MOSS online service (VAT MOSS). This will be available from 1 January 2015, but you can register to use it now.
The only downside is that you must be UK VAT registered to use the MOSS scheme. Therefore if your turnover is low from EU sales, you might want to think again if you want to sell in europe or sell though a different legal structure.
With MOSS you can declare and pay VAT to a single elected EU Member State for all your EU sales, avoiding the need to register for VAT in multiple countries.
For example, if you sell £100 worth of digital sales to Germany – the German VAT rate is 19%, so £19 is added to the sale. The total invoice would be for £119 (outside the scope of UK VAT) and £19 would be added to the MOSS return. HMRC would then remit £19 to the German authorities.
VAT MOSS is a voluntary scheme and you can be kicked off if you fail to meet the legal requirements of its use. If this happens you may be deregistered from the scheme by the MSI tax authority and excluded from using VAT MOSS anywhere within the EU for up to 2 years. Legal requirements include submitting declarations and payments on time.
The alternative to using the VAT MOSS scheme is to register in every member state in which you make B2C digital supplies, which would a nightmare to manage.
HMRC released updated guidance for businesses that are not VAT registered in the UK due to falling under the UK’s £81,000 VAT threshold. Initially this left only two options: register for VAT in every EU country where you sell to, or register for MOSS. The second option also requires registering for VAT in the UK, which would mean you would have to account for your UK sales, despite falling under the threshold.
HMRC has now updated its guidance, saying that if you who want to use MOSS and your turnover is below the UK’s £81,000 VAT threshold then there will be a “simplified” registration arrangement. This will allow you to register for UK VAT and MOSS, receive a UK VAT number, but NOT be liable to pay VAT on UK sales.
As you will not be charging VAT on your UK sales, any VAT you reclaim on your business expenses and purchases must either be wholly attributable to your cross-border EU sales, or split according to the proportion which is attributable to EU sales.
For example, if you buy a computer to use as part of your business: if 60% of sales are UK sales, and 40% cross-border EU sales, you will only be able to recover 40% of the VAT charged on the purchase of the computer.
You will need to complete a UK VAT return each quarter even if you are not charging VAT on your UK sales. This means when creating sales invoices the VAT will be ‘out of the scope of VAT’.
Unless you wish to reclaim VAT on business expenses or purchases in relation to your EU sales, you would have to enter all expenses as zeros on your VAT return.
Here’s a short video explainer. Hope it helps!
You might avoid a fine if a close relative died shortly before the self assessment deadline, you've been seriously ill, or if you had major IT problems.