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Experts warn over VAT digital services rules

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19th Sep 2014
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Businesses who make and sell apps or provide digital services to consumers in the European Union will see their paperwork increase in January due to new legislation to counter tax avoidance, experts have warned.

Currently VAT on digital services is charged at the national rate where the supplier is. Providers of electronic services such as Amazon have been criticised for basing their European headquarters in countries such as Luxembourg where VAT rates used are much lower than the UK.

From the 1 January 2015, businesses supplying broadcasting, telecommunications and digital services to consumers will have to charge customers VAT at the rate of the country where the customer buys the service from.

So a UK business selling an app to a customer in Luxembourg, will have to charge VAT at 15%, but at 27% for same app if the customer lives in Hungary.

“There are 28 countries in the EU with 30 different VAT rates [which] creates a high administrative burden, plus enormous potential for mistakes,” said Ruth Corkin, VAT senior manager at accounting firm James Cowper.

Tax rules on digital transactions are further complicated because different technology platforms are categorised differently by the new tax rules.

Apple’s App Store, for example, is considered a marketplace with purchasers buying directly from Apple, and Apple automatically accounting for the VAT, Corkin said. 

In contrast, Google Play acts as an agent taking a commission on sales, leaving the retailer having to account for the VAT themselves. 

“A business selling the same app from both Apple’s app store and Google Play will have to account for VAT in completely different ways,” Corkin added.

In the UK, businesses can register once with HMRC for VAT in every EU country they supply electronic services to.

The online registration – called the VAT Mini One Stop Shop (MOSS) – is intended to make it easier for businesses to comply with the new VAT rules.

The service will start on 1 January but businesses can register to use it from October. HMRC consulted on the registration service over the summer.

Businesses will have to submit separate VAT returns for their cross-border digital services and pay tax due every three months. But the government’s online service won’t apply to Britain’s smallest businesses, which trade below the threshold for VAT registration, which is £81,000. These businesses will have to register for VAT in each EU country they sell digital services to.

This and other implications of the new VAT rules were discussed by tax experts during an AccountingWEB webinar in August.

Kevin Hall, a VAT specialist at Gabelle, said it may be hard for some businesses to work out if their service is defined as an electronic service for consumers under the new VAT rules. He advised businesses to start planning for the new rules.

“They may even need to consider whether some countries are not worth targeting [because of the new VAT rules],” he said.

Tax expert Rebecca Benneyworth said some small businesses below the VAT threshold - who will not be able to register with HMRC’s VAT registration service for electronic services - will have an “unenviable task”.

As a director of a small tax software company with European customers, Benneyworth said she would also be affected by the rules.

Replies (14)

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By The VAT Doctor
19th Sep 2014 15:35

Non registered nightmare

Agree with everything that has been said and have been wittering about this for ages. However I would say that the position for those operating under the threshold is not so simple as having to register in each country.  That's the nuclear option!

The choice is:

1. Stop making sales to people outside the UK

2. Trade via an intermediary.  The Commission and HMRC have been implying that Google Pay and Apple may all be seen to be the same whatever the legal basis with their principal - they have to declare any tax.

3. Register for VAT and use MOSS - in some circumstances, the impact might be negligible

4. Restructure so that MOSS sales are via another VAT registered legal entity.  It is unclear hat HMRC's reaction would be!

5. Register in the affected countries

What's clear is that affected taxpayers of all sizes need to consider these changes NOW

 

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By simon briton
22nd Sep 2014 14:02

Practical points for dealing with this

Hi - I wrote a piece on this which sets out some practical points on the information to be collected and how e-commerce sites should be changed to support whatever VAT treatment is chosen.  Have a look at https://medium.com/@simonbriton 

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By LA Designs
22nd Sep 2014 17:11

App Development

I have recently finished developing an app for a client (who recently spent over £2k on tax assistance for the app) and we are unsure about what needs to be done. It's currently looking like we are going to have to manually keep track of and update the tax rates for every single country and region that we want to sell in!

This can't be right? Is there anyone who might be able to give some guidance on this subject? I have spoken with one law firm, and several independent accountants and we still cannot get a definitive answer on the matter!

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By LA Designs
22nd Sep 2014 17:27

App Development

I'm based in Worthing (Brighton) and it's a bit too far, at too short notice I'm afraid. If you would do me the huge favour of asking that question, helping me and my client, I would be incredibly grateful!

 

It's like everything is going round and round in circles and I just don't know where to go at this point! It's honestly enough to make me want to never get involved in a commercial app again. I'm sure when the answer is available the resulting process probably won't be that hard, but to get to a solid, grounded answer seems incredibly difficult!

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By LA Designs
22nd Sep 2014 18:24

App Development

I actually have a meeting at around that time, but I have registered and I will try to make it.

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By dominovision
22nd Sep 2014 23:00

Ridiculous rules

I don't see why a small UK retailer should be responsible for collecting another countries VAT.... more EU bureaucracy (sooner we have control over our own rules again the better).

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By ireallyshouldknowthisbut
23rd Sep 2014 09:08

.

I am watching this one with some interest, we have a number of clients who will be affected and whilst I have them collecting the correct by country sales data that is all for now.  First returns will be for end of January, due end of Feb so one for the post SA season. 

 

 

 

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By Ian McTernan CTA
23rd Sep 2014 10:09

Driving Out Business

I'm convinced the EU just makes these rules to ensure business dies within the EU.  Or just makes rules up to be seen to be spending our money on something.

There's a reason the rest of the EU is slow to recover from the last recession, and it's because at every turn the EU come up with more and more rules and regulations preventing businesses from getting on with business.

They could easily have come up with a work around for businesses with less than £1m of turnover, which is to apply your own country's VAT rate to all your sales (you will still be completing an EU sales list, presumably..), or have one rate applicable to all cross border sales (say 20%, it's easy to work out).

Once a business goes over the £1m mark, they should have sufficiently robust software in place to be able to deal with multi country sales.

Micro businesses with a turnover below the VAT threshold should be exempt.  The VAT threshold should be the same in every EU country.  Given that is a political impossibility (they'd never agree on a figure) then the exemption would apply using the threshold in whatever country the business is based, encouraging countries to raise the thresholds to sensible figures for those that have a very low exemption at present.

I'm not a VAT expert and it took 5 minutes to come up with this workable solution- why does the EU have to spend £100m++ to come up with their crazy systems?  Pay me the £100m instead!

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By ireallyshouldknowthisbut
23rd Sep 2014 10:43

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Ian - your points are well made. I imagine something like this will emerge within 12-24 months with some limits, formal or informal on who has to report. As ever this sort of impractical burden will be watered down in time.

Unless HMRC enforce reporting for non-VAT registered businesses it wont happen, not least as it wont even occur to many of them (lots will be unrepresented) that they even need to think about it. 

 

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By The VAT Doctor
23rd Sep 2014 10:58

Interesting HMRC comments

Picked up a few tasty quotes from HMRC this morning on the webinar.

1.  HMRC and the commission looking to move "very quickly" to extend MOSS to B2C supplies of goods

2 HMRC looking to "level the playing field", inferring the position with Luxembourg ebooks at present wasn't acceptable

3. Original proposal was to apply MOSS to all supplies B2C

The extension of MOSS (or will it be OSS?) brings with it a lot of issues and a massive expansion of the number of businesses impacted, and lots of non registered businesses too. Let's take an example of such a problem.

At present a UK supplier selling anything of a zero rated nature to an EU consumer has to consider the distance selling rules. If trading below these limits, sales are zero rated.  When the rules are extended and he place of supply is, say, Germany, the VAT rate in Germany will apply. In other words the UK zero rate has been 'trumped'.  But other countries selling into the UK would benefit by being able to zero rate sales they currently tax

I have a headache now!!  This is all looking to be an absolute 'mare!

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By miketombs
23rd Sep 2014 13:27

Cloud computing in cloud cuckoo land

I've asked people from the two leading cloud accounting packages that our clients use if they will be MOSS compliant and they both said No. One of them expects to have a workaround in place, the other doesn't even know that.

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By The VAT Doctor
24th Sep 2014 14:39

Blogged

http://www.larking-gowen.co.uk/blog/warning-tax-nirvana-approaching-fast/

Felt compelled to pen a few words.  I really feel that this first phase is nothing compared to the issues for goods.

 

 

 

 

 

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Teignmouth
By Paul Scholes
25th Sep 2014 18:32

Cloud Accounting

@miketombs - you've asked two "leading" providers, any chance you could ask the other 90%+ that are now out there, maybe then we can judge which are melodious (but weird) birds?

The actual mechanics within the software for the user to identify these transactions, separate them from the UK return and, with the customer's address, apply the appropriate rate is not a big deal, it's what you then have to do with it that's currently a bit of a mystery.  

Clear Books are working on this at the moment but, despite a search of HMRC's development areas there seems little if anything to indicate how the software will transmit the MOSS return. (we may not be looking in the right place so if anyone has any idea I'd be grateful).

Obviously the other issue to decide is whether the software can, just as easily, handle non-MOSS declarations for non-UK reg'd suppliers, I'm guessing but I'd imagine this is where the software providers will hold back.

@The VAT doctor, thanks for the info on expansion, I'd somehow missed this, that should spur any cuckoos to wake up....and even more so when other B2C services are included later! 

 

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By Vishal Kurani
27th Nov 2014 12:18

Will the VAT changes be based on using the current VIES reporting?

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