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Business Services  •  Business Tax  •  HMRC  •  Personal tax  •  Small Business  •  VAT

Selling digital services? Don’t let VATMOSS become a VATMESS

By Simon Paterson on 17 December, 2014

Starting from January 1st 2015, all businesses who sell digital services (which are defined as telecommunication, broadcasting and electronically supplied services for example - e-books, music, images and other electronic content) to European customers who are not VAT registered, will need to charge VAT based on where their customers are located and the local rate of VAT. The changes apply to businesses selling directly to consumers as opposed to business to business sales.

The new legislation was introduced by the EU to help to limit the ability for large multinationals (we needn’t mention any names, if you read the newspapers it will be obvious!) to gain an unfair price advantage by deliberately registering in lower rated VAT jurisdictions and undercutting smaller competitors on price.

Clearly this could become a logistical nightmare for a business to have to file multiple VAT returns, all at differing time periods. To help reduce administrative complexity, HMRC have introduced a VAT Mini One Stop Shop (VAT MOSS). This is been designed to reduce the impact of the new rules by allowing VAT registered business owners to account for the VAT due in each member state using the VATMOSS return, which is administered by HMRC as a single transaction.

Although VATMOSS has been heavily criticized by the business community, this new system will be useful in cutting down compliance costs and avoiding the potential need to register in all 27 EU countries at once. Instead, the return would be submitted centrally via one VAT authority.

In addition, for UK businesses specifically, if UK sales are below the £81,000 VAT registration threshold, there will be no requirement to account for VAT on UK sales. This was one of the proposed features of the new VATMOSS rules that attracted the heaviest objections. It would have meant non VAT registered UK businesses would suddenly be required to add VAT onto their prices and potentially be perceived as more expensive than other EU rivals, who do not have a minimum registration threshold and are automatically required to charge VAT already, regardless of sales levels. Now, only those with £81,000 of UK sales or more are required to charge VAT, although it is possible to voluntarily register.

When filing a VAT return through VATMOSS it is still essential to manually account for the VAT amount payable in the appropriate EU member states. This involves either adding the VAT amount on after the transaction, or using a specialist system that calculates the amount for you. Whichever option you choose, a VATMOSS return needs to be completed and filed.

Our experience providing VAT services to the small business community has shown a lot of confusion still exists amongst affected business owners about whether VATMOSS applies for those selling electronic services through a marketplace such as Amazon. Business owners have been relying on forums and hearsay advice about how to comply with the new VAT requirements instead of speaking to a specialist. Essentially, if you are selling through a marketplace that directly transacts with the consumer, it could be regarded as a B2B sale and therefore exempt from the new regulations. Alternatively, if you are operating an e-shop through a marketplace, this could be a B2C transaction and requires a VATMOSS return.

Without checking the small print within your business contracts it is impossible to verify and therefore our advice is to speak to a specialist and find out before assuming all marketplaces are identical. Otherwise, you could be in danger of under or over-declaring VAT, which will be subject to HMRC penalties regardless of whether the error was an inadvertent mistake. As a business owner you have a responsibility to be up to date with tax legislation and have a requirement to comply.

In addition to understanding whether you need to comply or not, there are other practical considerations with VATMOSS. For instance:

  • Where is the customer based? If you are accepting Paypal payments, you will need to know where the consumer is physically based, which may not be immediately apparent.
  • What are the return timings? These may not coincide with your existing VAT return calendar for the UK. VATMOSS returns are required calendar quarterly and the first payment will be required on the 20th April and then three monthly thereafter.
  • When is payment actually due? VATMOSS returns differ from ordinary VAT returns because the return needs to be filed with full payment 20 days after the calendar period end, whereas ordinary VAT returns are filed and paid 1 month and 7 days after the period end.

If you have any questions about VATMOSS, contact us for a free initial discussion. Compliance is just weeks away and there may be a number of practical problems to overcome if this new ruling affects your business. And, if you need help completing your first VATMOSS return, our VAT specialists are on hand to assist. For more information contact Simon Paterson by emailing sp@rjp.co.uk.

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