VAT on digital services: Human intervention

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Rebecca Cave believes that many micro businesses are worrying unnecessarily about the VAT implications of supplying e-services to overseas customers, as they could avoid falling within the new rules.

The main problem with VAT on e-services rules is that there is no de-minimis threshold of sales to keep micro businesses out of the EU VAT regime. As such if they are in, the business is forced to become VAT registered in the UK in order to use the VAT MOSS system.  

HMRC recently changed their guidance for unregistered UK businesses, so they can hold a UK VAT registration and use VAT MOSS but not charge VAT to UK customers. This change in guidance (hopefully followed by a change in the law) will help those micro businesses. However, they will still face the administrative burden of paying and accounting for EU VAT in the countries they sell to on a quarterly basis, and keeping all the associated records for 10 years.

A better way would be to avoid falling within the EU VAT rules altogether. This requires a good understanding of which electronically supplied services fall into the new rules. According to the EC guidance on the e-services rules,

electronic services shall include services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology

HMRC interpret this as meaning “digitally delivered e-services” which are fully automated with no or minimal human intervention.

So what is meant by “minimal human intervention”?

HMRC appear to be providing conflicting advice on this point, which is a shame as it could prove to be crucial for micro-businesses who are anxious about complying with these new rules.

In their Revenue & Customs Brief 46 (2014), HMRC says that a PDF manually emailed by the seller is not a digitally delivered service, and thus falls outside the EU e-services rules. Similarly individually commissioned items such as articles or photographs which are sent in digital form to the customer are not digitally delivered services for the purpose of the EU rules.

However, in a webinar featuring Andrew Webb of HMRC he said that sending out a knitting pattern as a PDF by manual email which had been ordered online, would qualify as a digital service within the rules. However, if the customer asked for further details, which required bespoke communication from the seller – that would take the service out of the scope of the digital e-service rules.

The boundary between automated digitally delivered services and human intervention as part of an e-service is thus quite hazy, and it will be up to the individual business to assess which side of the line they fall. 

A micro business that sells a few knitting patterns, photos or e-books online may decide it is not be caught by the e-services rules, as long as any overseas sales require human approval by the seller and the products are dispatched by an individually written email to the customer. Where an online shop is currently set-up to provide automatic delivery to all customers, perhaps a tweak to the website coding to pause the process for overseas customers, to allow a human to complete the next step, may take the service outside the e-services rules.

So perhaps there is a de-minimis after all. If the micro business has a low level of overseas sales such that human intervention can easily be applied to each of those sales, those sales will be outside the scope of the e-services rules. If the volume of overseas sales grows to such a level that automation is required, then the business will have to register for UK-VAT and use VAT-MOSS for the EU-VAT. 

Rebecca Cave is author of Tax Rates and Tables published by Bloomsbury Professional.

Rebecca Cave
Tax Writer
Taxwriter Ltd
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16th Dec 2014 09:44

The UK's view

Excellent topic Rebecca, I was talking about this last night on a MOSS forum on FB etc (hey, who needs free nights!).

My worry is twofold (or maybe threefold).

1 HMRC's view is all well and good, but for UK sellers, the point is what do the other 27 countries think about the degree of human intervention ad whether it stops it being a digital service? The EU guidance is there, but is very woolly and they admit that it is the Commissions view only.

2 Established principles of VAT, e.g Card Protection, might not help the argument that a small degree of human intervention makes the supply something different to what it appears to be - what is the predominant supply?  HMRC say this too in their last Q & A - A7.  Again, what does the MS the supply is made in think?

3. If the EU's plans are realised, this issue will be irrelevant as ALL sales to consumers would be taxed.

Interesting times ahead...

 

 

 

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16th Dec 2014 17:15

An imaginative and practical solution

 I think that this is a very workable solution for worried micro businesses .

Thanks Rebecca

 

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16th Dec 2014 19:56

Never a dull moment

Thanks Rebecca - if nothing else, I'm sure this will be a solution for a proportion of micro businesses and then, when all services & goods sold to EU consumers fall under the new rules, it will be time for me to fully retire!

Another solution would be for all EU consumers to have to self-bill and do it all for us (electronically and hopefully with as little human intervention as possible).

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17th Dec 2014 16:03

Never a dull moment

Now, the self-billing idea for all EU consumers, is an excellent idea!

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17th Dec 2014 10:22

Without obtaining satisfactory evidence of the customer's country, how does the supplier know which orders need to be delivered by manual e-mail?

From what I can see, the biggest problem is identifying the sales that are to another EU country, and which one. And also being able to prove that sales within the UK really are internal. Obtaining non-contradictory evidence that the supplier can be certain will be acceptable to HMRC and other EU governments doesn't seem at all straightforward. It appears that IP address and the customer's postal address are the easiest to obtain, but IP address isn't intended for this purpose, and can't be relied on, and customers will be reluctant to give their postal address when there won't be a physical delivery.

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17th Dec 2014 14:33

 

 

If you can't obtain address information or don't want to rely on it , then why not simply apply the suggested solution to all online customers?

If the business really is the type of hobby or microbusiness envisaged in the article and preceding twitter storm , then it's grim but easier than VAT Moss .

And if the hobby solution is too much work for larger businesses then hopefully there won't be massive abuse that forces a more restrictive interpretation.

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17th Dec 2014 21:46

That may only provide a year or so of breathing space

naomi2000 wrote:

If you can't obtain address information or don't want to rely on it , then why not simply apply the suggested solution to all online customers?

That may only provide a year or so of breathing space, as the plan is to extend it to physical products ASAP, maybe in 2016. So sending manually will only be a short term fix. People have got used to buying and downloading immediately, won't be impressed by having to wait, and will probably take future business elsewhere, either to bigger businesses, or small ones who don't know about or ignore this.

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17th Dec 2014 11:46

MOSS hair splitting

This seems to be too woolly and somewhat hair-splitting. Giving advice like this, if it subsequently proved incorrect could lead to a substantial PI claim being made. Would you want this?

To me, it is up to HMRC to provide the rest of us with a definitive ruling on this subject. After all, they have written the rules (albeit with help from our "friends in Europe") and it is they that, until tested in court, will be monitoring compliance. Until then it seems to me the best advice we can give is either {a} don't permit downloads from your website / emails in the EU or {b} register in the UK and use MOSS

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By kjevans
17th Dec 2014 11:52

Not really a lot of help, as the changes are apparently schedued to apply to all cross-border sales from 2016. I've been given contradictory information about what is proof that a sale is B2B, not B2C if the seller (or buyer) is a non-VAT registered company and been told that VAT MOSS involves registering as a data controller even if the only data kept is for invoicing purposes. So sending a PDF by personal email isn't really a solution. Ip addresses don't really tell you where the customer actually is (not even the corect country, quite often, in the case of an employee of a multi-national ordering from work - during lunch, of course). And if an online seller asked me for the country code of my bank account I'd immediately suspect identity theft or some other type of scam.

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17th Dec 2014 11:52

Payment gateways that handle VAT

Great article Rebecca! 

Just wanted to add that an alternative to dealing with the VAT changes is to sell through payment gateways like Paddle.com. We're a UK based payment gateway that provides sellers with a checkout they can use to sell on their own websites, an analytics dashboard, customer support and most importantly, we handle VAT too.

For VAT purposes, Paddle is the "merchant of record" so we comply fully with the VAT changes, including collection of customer data, applying the correct rate of VAT and filing returns. All our sellers have to do is drive sales and collect their earnings on a monthly basis. 

If you're interested in covering any more stories about potential solutions, would be great to have a chat!

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17th Dec 2014 11:54

Interesting, but this still involves too much admin work for a problem that shouldn't exist in my opinion.

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By bseddon
17th Dec 2014 13:02

Inappropriate advice?

As other commenters have suggested, the scenario you are describing is really a small proportion of the vendors affected.  And then to suggest that some of the qualification criteria could be avoided by crafting a personal email seems to me to lack any merit. A bit like tax evasion is bad, tax avoidance is OK as long as it is not too extreme, this advice seems to me to be too extreme.

We small business owners that sell digital services have to get on this train, one the set off in 2005.Offering suggestions that seem to get perilously close to evasion doesn't seem helpful.

Another commenter suggested their services and there are others.  For the digital services platform we use on www.lyquidity.com, which is Easy Digital Downloads, we created a plugin to collect the evidence required by the regulations, workout where the buyer is located and charge VAT or allow them to enter a VAT number.  We make the plugin available to other users of this e-commerce platform so they can be compliant as well. And others have done the same for other platforms.

As has been commented, HMRC may take specific view on the application of VAT but view may not be shared by the tax authorities of other EU member states. Perhaps better would be a summary of the review available on the EU commission's web site.

This long document does a good job of summarizing the implications of the different articles, especially article 24 and sections a through f.  However it is still a lot to take in and an intelligent review would benefit and enlighten everyone affected.

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17th Dec 2014 13:17

Dangerous

I think @bseddon has covered most points. HMRC have 'form' for offering tax avoidance advice when it suits them (e.g transport company scheme) but they are far from being VAT experts and have a very narrow field of experience.  The main point surely though is that it matters not what HMRC say as they can't decide what, say, Germany say is a digital service.  The solution of course is pure nirvana for the lunatics in charge but very bad news for us with our zero rates.

I think it's incredibly dangerous to try to be something you are not, adwere not before anuary, just to save tax.

As has been said, the bad A word could apply.  Not the UK VATma though -maybe one from Germany or Belgium

 

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17th Dec 2014 13:41

We've got away with it for long enough
Like it or not the EU has decided that too little VAT is being paid and disproportionately to low VAT Members. Get used to it. It is going to continue and apply to physical products at some point.

And don't think that leaving the EU is a solution. This legislation will effect non-EU businesses, hence Amazon changing the pricing on its e-books. No more 3% VAT.

It will be unlikely that a small business will want to spend valuable time trying to comply without help. Indeed HMRC have said they doubt if small businesses will be able to. We are still researching the 'partners' who will deliver a done for you solution. Some are mentioned here and there will be others. To my mind going through a third party makes absolute sense.

The best advice to anyone affected is look at your pricing carefully and work out how much you can pay for the done for you service. Then get on with building more products and sleep soundly knowing that your tax affairs are taken care of.

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17th Dec 2014 16:10

Not really a solution

Having been involved in the various facebook pages for several months now, a person producing low value items, like knitting patterns, 'stamps' for greetings cards etc, of which it seems there are thousands can only survive IF they at least partly automate their product, they don't have staff waiting at computer terminals to personally fill orders, they might have an hour or so each evening after the children have gone to bed. Rebecca's article seems reassuring but be assured it is not terrifically realistic for the many thousands of small, small, businesses which the net has allowed to thrive and this EU disaster area will exterminate because our various taxation bodies didn't realise they were there.

Also can I point out that Andrew Webb's confused guidance is partly explained by the webinar having taken place in September, the original guidance being issued in October but Business Brief 46 being issued on December 10th after he and HMRC began to realise, because of the concerted campaigns on Facebook and Twitter, that there was a whole Nano industry he blissfully assumed didn't exist.  The software 'solution' has been criticised by the Government Data Service who refused to allow it go live at the beginning of October and now that the Mickey Mouse Gov.UK site has been unleashed small traders trying to register are being directed to the shortly to end VoES registration which can only be completed by businesses who have no presence in the EU at all.

At to all that the cynical ploy of countries to the South of France insisting on there being no threshold at all (Spain) and retaining data for 10 years (Portugal).

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By Mikolaj
26th Dec 2014 10:23

Legal challenge to HMRC position/advice

I strongly believe that the onerous non-UK requirements of this UK legislation and subsequent advice from HMRC can and should be challenged under EU law. HMRC is exceeding its powers here.

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13th Jan 2015 11:20

Its ended up very complicated

I think this one will run and run, especially when some Accounatnts start to twist the rules to their advantage. 

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13th Jan 2015 14:39

Not sure it will cut the mustard

https://www.gov.uk/government/publications/revenue-and-customs-brief-46-2014-vat-rule-change-and-the-vat-mini-one-stop-shop-additional-guidance/revenue-and-customs-brief-46-2014-vat-rule-change-and-the-vat-mini-one-stop-shop-additional-guidance

"Where the sale of the digital content is essentially automatic, and the small amount of manual process involved does not change the nature of the supply from an e-service. "

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04th Mar 2015 19:25

I wanted to follow up with information about covering off all aspects of VAT.  Most of the ones listed below are free to produce the information but have a £5 charge to submit to the tax authorities.  We’ve priced them this way so it is a small cost for any business.

Recently we released two plug-ins:

VAT-MOSS - Generate your VAT-MOSS reports automatically.  No later than April 20th we will need to have submitted a MOSS return to our tax authority to document the VAT collected on sales to EU consumers.  We have been in contact with all EU member states and currently the plugin will generate the MOSS report in the required upload format of 10 EU member states with new ones being added every week.  Even if the plugin doesn’t support the format of your country’s tax authority today it will generate a MOSS report so you are able to type in the return you must complete before April 20th.  You can find out more about the VAT-MOSS plug-in on our web site or on the WordPress.org site.ECSL (European Customer Sales List) – This is a plug-in that is useful to customers registered for VAT or MOSS with the UK’s tax authority, HMRC, and which sell to businesses (B2B) in other EU member states.  Those business who do must complete an EC Sales List return each quarter.  This plugin allows you to complete the ECSL submission to HMRC in WordPress directly from your EDD sales records.  You can find out more about the VAT-ECSL plug-in on our web site or on the WordPress.org site.

Once you have uploaded your first MOSS return, the tax authorities in any one of the EU member states may choose to audit your returns.  If they decide to request an audit you will need to provide details of sales to EU consumers in an ‘audit file’.  Lead by the EC commission, the tax authorities have agreed a standard format for the audit file (SAF).  We are currently completing a plugin you will be able to use to generate an audit file of your EDD sales records that you will be able to send.

SAF-MOSS – make sure you are prepared for an audit – better safe than sorry.  This plug-in is available on the WordPress.org site and on our site at http://www.lyquidity.com/wpstore/2015/02/standard-audit-file-saf-moss/ .

I hope this goes some way to small businesses are able to get on with what they want to do.

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04th Mar 2015 19:54

Forum
This is a forum to provide advice, help people, not to sell our wares. Lots of us have businesses or an ability to sell stuff, but not here

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04th Mar 2015 20:07

reasoning

Hi

Sorry if I've offended you - but if you look at the links ALL of the products mentioned have free components to help businesses - so no cost.  The only cost element is £5.

My aim was to show that the requirements are covered.

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06th Mar 2015 10:01

@bethroberts

If someone had asked specifically about software and possibly one of your existing users had responded that would be different. There is just an etiquette on these threads to stop them becoming self promotion (otherwise my post of 13/01/15 would have included the words "visit www.tax.co.uk for our range of great value software").

The thread is really about whether human intervention can be used to escape the vat on eservices regime and that is not going to be addressed by software.

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06th Mar 2015 10:21

We are talking about free

Again, my comments were aimed at showing there are ways of dealing with this - free, as in no cost.  Software developers are affected by these laws and, because they write software, they have come up with solutions. 

There is, uniquely, as far as I am aware, an ethos in software development where code is shared - freely - to the benefit of others.  This is a case in point. 

I know of instances where some small businesses have been told it's going to cost them x amount more as it's so complicated.  That, to me, seems wrong.

I apologise I highlighted a no cost option as I'm sure there are companies out there who would like to charge big time for this.

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06th Mar 2015 22:41

Beth you are missing the point
As dave Forbes comments, read the original post and then consider how your response contributes to it.

In other words, what are your views on using human intervention to avoid the need for VAT MOSS and therefore the use of your software, free or not?

I don't have a problem with a supplier pointing out how their product can resolve a question and I have no doubt you meant no insult or upset but worth appreciating the ethos of this section of Accountingweb.

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07th Mar 2015 11:02

Paul, thanks

Paul, maybe my problem is that I have leapt ahead.  You must know me, in that I always do look for a solution to a problem!

My concern, is there seems to be so much FUD around the issue with small businesses desperately trying 'work arounds' and becoming increasingly frustrated.  I have also read of cases where some US suppliers are now talking about banning EU sales.

It is irritating there is yet more red tape, but it seems to me trying to get around the legislation isn't the answer, we have to get on with it and make it work. I just find it disappointing to hear some businesses talking about not being able to trade when it clearly isn't the case. 

My concern is that they could fall foul of the legislation.

Life can be hard for businesses I was trying to highlight a no cost option rather than dwelling on the problem.

Have a good weekend.

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