VAT and online trading: Part 2 – Services
Neil Warren highlights some issues with selling electronic services on the web and how to deal with the place of supply rules.
In my previous article in this series, I discussed how you can decide if a website owner was acting as an agent or principal in selling goods or services over the web.
I will now consider the VAT issues for a UK business selling services on someone else’s online marketplace, focusing on electronically delivered products, untangling the place of supply rules to get things right.
Selling e-products online
There are many websites that act as an online platform for selling e-products. For example, Warrior Plus is based in USA and is used by millions of businesses and consumers worldwide, selling e-books, online courses, access to paid membership sites and software.
This is how the online marketplace sites usually work:
- One of your clients designs an electronically delivered product, perhaps a piece of new software or an e-report on a particular topic, eg how to lose weight.
- The client advertises the e-product on the marketplace, and not only will there be potential business to business (B2B) and consumer (B2C) sales but he can also appoint an ‘affiliate’ or ‘partner’ to promote sales, and the affiliate will earn a commission based on sales they generate.
- The marketplace charges a sales commission fee plus a low per transaction charge.
What are the VAT issues for the client as vendor?
Joe has designed an e-book that will sell online for £10. For some sales, he will pay a 40% commission to an affiliate promoter. The online marketplace will charge him 4% of each sale plus a fixed fee of 1p. The key figure for John’s VAT registration threshold is the £10 price of the product, and not the net amount retained after commission and fees.
Consider each transaction
It is possible that your client will not be VAT registered, so the opening challenge is to identify the ‘taxable’ sales that need to be included in the UK’s £85,000 registration threshold:
- Any sales to UK customers will be standard rated.
- Any sales to EU-based B2C customers will be standard rated until 11pm on 31 December 2020 when the transitional deal ends with the EU. Where your client’s total e-product B2C sales to EU countries exceed the annual VAT MOSS threshold of £8,818, the VAT must be charged at the rate in the customer’s country. The non-EU VAT MOSS scheme will be relevant from 1 January 2021, and no deminimis threshold applies for that scheme.
- Sales to non-EU customers and business customers outside the UK will be outside the scope of VAT under the general B2B rule. These sales are ignored for the purposes of the VAT registration test. No output tax will be payable on these sales by a business already registered (VAT Notice 741A, para 6.3 and section 12).
Many affiliates will be based outside of the UK. Online marketplaces are often based in USA. Where a UK business is VAT registered and pays commission and fees to non-UK businesses, it must apply the reverse charge on its VAT return, ie box 1 to pay output tax and claim input tax in box 4. But there is an extra twist for an unregistered business.
Payments treated as income
Somewhat bizarrely, payments for most services to overseas suppliers are treated as part of the taxable sales of an unregistered business in the UK (VAT Notice 700/1, para 2.3).
This means that the total taxable sales of a UK business for the purposes of the £85,000 threshold are the total ‘taxable income’ from UK/EU customers explained above, plus the commission payments to non-UK affiliates and website owners.
John has designed software that he sells online. His first sales were made in January 2020. His total deals completed to 31 July 2020 were:
- Sales to UK customers £60,000
- Sales to EU customers B2C £5,000
- Sales to business customers outside the UK £50,000
- Commission payments to non-UK affiliates £20,000
- Fees paid to USA online marketplace £4,000
John’s taxable income for UK VAT registration purposes is £89,000 (items: 1,2,4 and 5). If 31 July is the first month-end that it has exceeded £85,000, he must register for VAT from 1 September 2020.
The internet provides exciting new markets for many small businesses, but it can be difficult to understand how a particular online marketplace works and its business model.
A useful tip is to try and take the internet out of the equation and look at the VAT issues of each deal on a stand-alone basis. The internet has taken the place of physical venues and shops in many situations, but the business model is often the same.