VAT on digital services: Human intervention
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.