The Place of Supply of VAT avoidance

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As the Public Accounts Committee has recently heard, the current VAT rules allow large corporations to (legally) minimise their VAT bill and it is is perhaps somewhat surprising that this state of affairs has been allowed to carry on for so long.

As long ago as 2003, rules were introduced to counter the growing trade in B2C electronic sales from non-EU (mostly USA) suppliers.  In the old days, if you bought some software online from a supplier in the USA, there would be no VAT to pay.  In the USA there is an agreement that internet sales are not taxed, though this is under debate again at present, so all was well in the world.

However, from 1 July 2003, any supplier from outside the EU who made sales to European consumers HAD to pay VAT in the country where the customer resided.  So the VAT due may range from 15% (Luxembourg) to 25% (Sweden).  Most non-EU suppliers elected not to use the special scheme set up to collect VAT, but instead based themselves in a single EU country through a corporate entity and then sales could be routed from the USA through these entities and onto European customers using local EU rules.  As a side note here, I still believe a lot of non-EU sellers simply ignore these rules.  I have heard more than one USA supplier say that they don't have to charge tax when they make sales outside their state, so they are not going to do this when the sale is outside their country.

Not surprisingly, the big players such as Amazon and Apple elected to base themselves in Luxembourg, who I understand were so grateful for their presence that they agreed 'special' VAT arrangements, splitting up electronic supplies into different components and different VAT rates, effectively lowering the VAT on sales to below 15%, which is supposedly the minimum rate in the EU.  It has been well reported that Luxembourg has also recently, despite opposition from the EU, introduced a 3% VAT rate on ebooks.  Amazon were no doubt very grateful to their local friends!

Other companies, such as Adobe and Microsoft went down the Irish route, to take advantage of the low corporation tax rate there, though as it seems the bulk of the profits from almost all of the large electronic retailers is routed to Bermuda (as commonly reported), it may not have been the tax, but the Guinness that was attractive!

The fact that the EU has allowed this to go on for so long is somewhat amazing.  It has now been announced that, from 2015, there will be level playing field and a 'one-stop-shop' system, effectively requiring European suppliers to pay over the VAT on e-sales in the EU country their customer resides in.  Registrations will be needed in every country, unless the one-stop-shop system is used, effectively a single return in the country the supplier is established in in the EU, and the local country will then divvy up the VAT receipts to the respective countries.

Whether this will prove to be a systems and procedural nightmare is unclear, and it is also unclear whether the rampant VAT mitigation that is currently occurring will reduce.  It should do, but these are very clever chaps!

So, what does this mean to the UK?  In theory, the UK should benefit considerably.  At present, Apple and Amazon, to name just two, make enormous electronic sales in the UK and yet the UK receives not a penny of the VAT on the sales.  From 2015, the UK should be receiving the VAT on these sales, in theory.

Just as a final thought, I am not sure why corporate tax cannot operate in the same way - where the UK receives corporate tax on profits made on UK sales.  Even typing this, I can see the issues that might complicate this, but we as a country need to take a different approach if we are to get a different result.

Any thoughts welcomed.

About The VAT Doctor

I have been involved in VAT for over 25 years and have worked for some of the top firms in the UK and also had a spell working in New Zealand. I advise small and medium businesses and accountancy practices and have particular experience in education, charities, international supplies and partial exemption. I am based in the beautiful county of Norfolk.

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06th Feb 2013 11:46

Money Laundering

I suppose that when an e-supplier based in Hickville, Arkansas refuses to charge my client VAT on the software he has purchased I will have to complete a Money Laundering report?

 

 

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06th Feb 2013 19:14

B2B Place of supply

The changes only impact B2C sales.  For B2B, the client in the UK has to reverse charge and the people in Hickville are off the hook.

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By redman7
07th Feb 2013 08:34

Thanks for this. This area of VAT brings me out in a sweat!

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07th Jan 2014 13:38

2015 changes

An area very close to my heart.  We sell mobile apps globally, and receive sales income from all of the companies you have mentioned!  I've been watching the VAT/tax situation with great interest.

Two points to make:

- Actually, Microsoft does elect to use the Luxembourg commissionaire basis that you refer to.  Our app income from Microsoft comes from Microsoft S.à.r.l. based in Luxembourg.

- The one interesting exception to all this is Google, who take a very different approach.  They treat each mobile app sale as a direct B2C sale, and pass the tax (and indeed the burden of paying it) onto us.  Along with a statement of exactly who bought each copy of the app, their country of residence, and the amount of tax collected.

At the moment, the place of supply for the sales of apps to private customers in the EC is deemed to be the UK, which at least makes the VAT situation easier for us, since the tax is collected at the UK rate, then declared by us and passed on to HMRC.

However, after 2015, the place of supply changes that you refer to, intended to enforce compliance upon Apple/Amazon/etc. will actually impact us too.  Specifically with regard to these B2C sales of apps through Google, as the place of supply will change from being the UK to all the various different EC member states where the private customers live.  We'll presumably have to change all the various tax rates to be those of the member states, and then jump through various hoops using the new MOSS system to declare the tax.  As for how the VAT 100 return itself will be affected, goodness knows - I'm only just beginning to get my head around the old rules!

Hardly helpful to a small business trying to grow!

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