Tax lecturer Paul Soper outlines the 1 January changes in detail below, after a recent HMRC 'clarification' on the VAT MOSS.
The decision made by the EU to refocus the place of supply rules from the place where the supplier is located to where the customer is located, has made it increasingly clear that the greatest problems will be encountered by the smallest businesses.
Although these changes have been introduced over the course of the last seven years, and businesses outside the EU making supplies of e-services have had to apply a similar system since 2003 (VAT on Electronic Services (VoES)) it was only with Budget 2013 and Finance Act 2014 that the legal shape of the new system became apparent.
At the moment, supplies of telecommunications, broadcasting and e-services take place where the supplier is located but from 1 January 2015 if the supplier is located in the UK but the customer is located in another EU state then the supply will be 'outside the scope' of VAT in the UK, taking place where the customer is located.
It will no longer count towards a registration threshold, nor will it be turnover for the purpose of the flat-rate scheme either as explained here by AccountingWEB leshoward.
VAT attributable to the supply would still be recoverable in the usual fashion, either through the domestic VAT return or what used to be an Eighth Schedule claim but is now made electronically to the country where the VAT was suffered.
Where the supply is a B2B supply the details will be shown on an EU Sales List but the recipient of the supply will account for VAT under the reverse charge mechanism. The problems really start when it is a B2C supply, a supply to a private consumer, where a completely new obligation is introduced and a fundamental choice needs to be made.
If a B2C supply is made by a UK trader, in Germany for example after 1 January 2015, there will be an obligation to register for VAT in Germany, if a supply occurs in Greece then an obligation to register for Greek VAT. Unlike domestic supplies there is no registration threshold in any country of the EU unless the supplier has a presence there.
The thought of registering in up to 27 countries as well as the UK, submitting over 100 returns per annum, each with different amounts of information being sought - the Italian VAT return seeks, it is claimed, 500 pieces of information - does not bear thinking about and so the EU has encouraged each member state to introduce a facility - the MOSS or Mini One Stop Shop - to simplify accounting for these amounts of VAT.
A trader, having first registered for VAT in their member state of identity, can then register to submit MOSS returns which will summarise the value of the various supplies made at the various different rates and the VAT due on these B2C supplies. MOSS returns are due quarterly to 31 March, 30 June etc and to be submitted, together with payment in the domestic currency, sterling for the UK MOSS, by the 20th of the following month.
It still means eight returns per annum, rather than four, but still much simpler than individual registrations. So far, so good.
A number of contributors, including myself, have flagged up concerns with the new system, and momentum has grown in a number of trader groups including Digital VAT 2015 on Facebook concerning the fact that a small trader whose turnover is below the registration threshold seemingly has to sacrifice their exempt status to be allowed to join the MOSS system or decide to register in each country individually.
On 10 December HMRC issued Business Brief 46 (2014) following on from meetings with groups of very small traders. This confirms a very unusual method of VAT registration, first hinted at by HMRC's Andrew Webb that will be permitted in anticipation of the rule change.
A supplier of digital services with a turnover below the current UK limit will be permitted to register for VAT to be allocated a VAT number but will be permitted to treat their UK supplies as nil.
They are advised that they will need to file UK VAT returns but show the VAT due etc as nil. This will then permit them to add the facility to make a MOSS return on a quarterly basis - HMRC will ensure that their UK stagger group will also be March, June, etc, so that the nil return and the MOSS return can be submitted at the same time.
VAT attributable to these supplies continues to be recoverable but there is no facility to recover VAT through a MOSS return. But HMRC has confirmed in the business brief that recovery of the VAT attributable to the e-services supplies will be able to be recovered in the UK return even though the UK sales and liability are shown as nil.
Even allowing for the business brief clarifications, there are potential complications that still exist, for example, what happens if digital services are simply part of that person's business, a person supplying an e-service to download knitting patterns may also make and sell jumpers and knitwear and may also have a furnished holiday letting that they own? Can they register in this unusual way?
What amendments will be necessary to UK law to permit this new method of registration - as yet no proposals have been made for further amendment in today's draft legislation for the Finance Bill 2015 - but without legal backing to what extent can a small trader rely on this clarification?
We also don't know to what extent small traders will comply. To date only 1,000 traders registered under the VoES scheme (although they will also need to register for the non-Union variant of MOSS from 1 January 2015) even though in America alone there must be many more who should have complied but didn't.
Penalties will be levied by each country individually, for example for late filing, and investigations will take place by each country, even though HMRC will try to co-ordinate this process, but no-one knows how enthusiastic each country will be in pursuing defaulters.
South Africa has already introduced a variant of this scheme and other countries may well follow. The topic is under discussion in the US too. MOSS may be able to go some way to simplifying the system within the EU but can it also do so on an international basis?
The EU also has plans that the MOSS will become an OSS in due course so that all supplies of both goods and services are within these rules. The current distance selling limits (€35,000 or €100,000 depending on each country) that prevent small traders having to register in each country for sales of goods to consumers will also disappear.
Whilst HMRC and the Treasury may claim that these rules have been developed over time and notified extensively, it is also clear that the very large number of very small traders have taken them by surprise and the solutions offered at present are, at best, a workround rather than a permanent solution.
Compliance may not happen but that will create a large number of taxpayers vulnerable to a multi-country process of investigation and penalty.