From 1 January 2015, there will be a major change to the EU VAT rules which will affect businesses established in the EU and that supply digital services to end consumers located in other EU jurisdictions.
Before
Under the existing rules, the supplier charges VAT in its own EU jurisdiction and applies a single rate of VAT to all its supplies across the EU.
After
Businesses established in the EU that supply 'digital services' to end consumers in other EU jurisdictions will be required to charge and account for VAT in the consumer's jurisdiction.
This represents a fundamental change in the place of supply rules, for VAT purposes, in relation to digital services, which is likely to significantly increase the administrative and compliance burden on digital businesses making supplies to other EU jurisdictions.
It is worth noting that the changes will only be relevant to supplies made to end consumers (i.e. non-business customers). HM Revenue & Customs take the view that only a valid VAT registration number will suffice as evidence to satisfy all EU revenue authorities that a customer is indeed in business and therefore outside the scope of the new rules.
The meaning of 'digital service'
HM Revenue & Customs provide guidance on the meaning of "digital services" which covers:
- Broadcasting - the scheduled broadcasting of television or radio programmes, webcasts and live streaming (but not on-demand downloads)
- Telecommunications - the sending or receiving of signals, such as landline and mobile telephone and internet connections supplied by ISPs
- E-Services - automated electronic services (or those with very little human intervention) such as digital downloads and online market services.
Steps businesses should take
Any business that will be affected by the new VAT rules should take steps now to ensure that they are prepared. This may entail some or all of the following:
- updating sales platforms so that they can determine where a customer 'belongs' and whether or not they are a 'business' (rather than an end consumer)
- broadening the parameters of sales platforms to deal with different VAT rates and issue appropriate VAT invoices
- amending standard terms and conditions of supplies to account for the new rules
- taking any necessary steps to ensure that any additional data protection, consumer protection or document retention legislation is complied with
One key point to consider is whether affected businesses should register with the new system, known as the 'Mini One-Stop Shop' (or MOSS), designed to alleviate the administrative burden on businesses to account for VAT on cross border supplies.
The MOSS allows businesses to make a single VAT registration and submit a single VAT return in relation to digital services supplied to several EU jurisdictions. There are pros and cons to the MOSS system which should be considered as a whole before any registration is made.
Businesses based out of the EU
Businesses based outside of the EU that have an EU establishment (such as a European branch or office) may also come within the scope of the new rules.
The rates of VAT differ across the EU. Under the existing rules, a non-EU established business may choose to set up a trading presence in a particular EU jurisdiction to benefit from the lower VAT rate applicable in that particular EU jurisdiction.
However, the new rules may mean that differing VAT rates will no longer influence the decision of a non-EU established business as to where to establish its business in the EU. Other factors such as employment or transport costs may prove to be more influential.