Changes to EU VAT place of supply of services rules threaten constitute a threat to small businesses which provide digital services. 

From January 1 2015, The place of taxation will be determined by the location of the consumer, not the location of the supplier. 

This essentially means that businesses will need to pay VAT to each country where sales originate. 

In this post, I'll attempt to explain the new rules and how they may affect SMEs.

What are the new regulations? 

The changes are explained here on Gov.uk. In summary:

Whereas VAT was previously charged in the country of the supplier, the new rules state that it will now be payable in the country where services are bought. 

This applies only to digital services such as ebooks, downloads and other non-physical resources. 

It has particular effects for small businesses with turnovers of less than £81,000 per annum, who had previously been exempt from VAT. 

In a nutshell, once they register to pay VAT in EU countries, they lose this exemption and will be forced to pay VAT in the UK as well. 

What is VAT MOSS?

If a business sells, for instance, an ebook to a customer in Italy and one in Spain, it will have to pay VAT at the rate for each country, and to each country. 

The alternative to this is to register for the VAT Mini One Stop Shop (VATMOSS) which will remove the need to register in each country they sell to. 

According to HMRC, the new rules will affect around 34,000 SMEs, though Heather Burns estimates that, since the digital economy is undercounted, the real figure may be more like 460,000. 

Under VAT MOSS, businesses will have to determine the place of supply by providing two of the following pieces of information (I'm quoting gov.uk here).

  • The billing address of the customer. 
  • The IP address of the device used by the customer.
  • Location of the bank from which payment was made. 
  • The country code of SIM card used by the customer. 
  • The location of the customer’s fixed land line through which the service is supplied to him.
  • Other commercially relevant information (for example, product coding information which electronically links the sale to a particular jurisdiction).

In addition, this information needs to be stored for 10 years. It's also personally identifiable data, the storage of which is covered by other laws. 

As Heather Burns states: 

The most astonishing oversight of the buildup to VATMOSS has been a failure to recognise that the data collection and retention obligations are so onerous that sole traders and the self-employed will be required to register as data processors and controllers with the Information Commissioner’s Office.

The problems for small businesses

  • They will lose their VAT exemption if they sell to Europe. This will mean a choice of more costs or passing these on to customers, which will inevitably mean a less competitive price and fewer sales. 
  • More bureaucracy. Small businesses, by their very nature, have fewer staff and resources. Time spent on ticking boxes and ensuring they aren't breaking any laws is time wasted. 
  • Determining location is a real challenge. Many SMEs will sell via services like PayPal rather than setting up their own checkout, so an email address is all they may have as a record.

    So businesses face a choice of making purchases harder by asking for more customer details, or hunting around for details such as IP addresses every time they make a sale. 

  • Storing personal data. The obligation to store personal data such as addresses and phone numbers brings its own problems.

What can small businesses do? 

The options are limited unless someone at HMRC or the EU has a change of heart.

The basic choice is between losing sales from Europe and thus remaining VAT exempt in the UK, or having to pay an extra 20% on all earnings in the UK. This decision may well depend on the split in sales between Europe and the UK. 

Chris Spooner runs a business selling resources for designers, and is currently VAT exempt due to UK rules.

He posted a letter on Twitter that he had sent to HMRC about the issue, which outlined three possible options in the light of the new rules. 

  • Register with VAT MOSS to pay a small amount of VAT to EU states and lose the UK VAT exemption. 
  • Ban any European customer from joining or buying from the site. Ethically unsound and technically difficult. 
  • Run the site illegally. Obviously not a real option. 

The small business view

I asked Chris a few questions about the rules and how they might affect his business... 

How much of a threat do the new rules pose to your business? 

I risk losing thousands of pounds from my overall income for the sake of a couple of hundred pounds per year earned from EU customers.

The major flaw in this new rule is that the existing tax thresholds in the UK and across continent are not upheld, therefore anyone under the VAT threshold (like myself) must register for VAT regardless and suffer the loss of income in tax.

My business in particular relies on affiliate based earnings, so I can't feasibly recoup the VAT by adding it onto my sales, nor do I have many expenses that I can reclaim the VAT on.

Even though these affiliate earnings and my freelance design services aren't targeted in this law, I still risk losing income from these avenues because of the requirement to register for VAT to use the MOSS service, and in turn pay 20% VAT on my entire UK based income.

Do you currently receive many orders from Europe? 

Until now I haven't collected any user data from my customers other than an email address, so it's difficult for me to say for sure how many sales are from Europe.

I recently began to collect country info from signups, and I can see around 10-15% are from European countries in the past couple of weeks.

You're required to find out and store two pieces of data to determine the customer's location. In practice, is this possible? 

If I continue to use PayPal as my payment gateway it will be very difficult. My only option is to add extra fields to my website sign up form to ask for a home address.

However, even this isn't enough to qualify as evidence for the HMRC/EU, I'd also need to acquire an IP address, customer's bank address or land line telephone number.

This rule only affects Business to Customer sales, so any EU customers who run their own businesses are exempt, except to prove they are a business, I'd also need to collect their VAT registration number.

That's if they have one of course! If they aren't VAT registered, as many small businesses aren't, they're classed as B2C sales that I'll still have to pay tax on.

You mention three options in your letter, I presume number two is the most realistic? 

Mr Webb from HMRC kindly sent a response to my letter. He suggested that I set up a separate business for my EU or international sales, which could be registered for the VATMOSS scheme without risking my UK based income.

I found this very interesting though, as this suggestion was brought up in a meeting with my accountants a couple of months ago, but it was immediately dismissed because they cited that HMRC were cracking down on this style of tax avoidance.

Even if I did follow Mr Webb's advice, the admin behind submitting quarterly VAT returns for this second business, alongside yearly returns for two businesses and the hassle of collecting the required evidence we've already talked about still pushes me towards simply banning EU citizens from registering on my site. 

This rule will literally affect millions of people worldwide (not just the EU/UK). A teenager in the USA who records a song and sells it online to someone in France will be incriminated if they don't register for VAT in said country, even if they don't have a job!

The number of people who will be doing business illegally come January 1 will be vast. It tempts me to just bury my head in the sand and treat it like the EU Cookie Law, but there's always the chance of unlimited fines if you happen to be audited by UK, French, German, Romanian or Bulgarian authorities!

In summary

All in all, this seems to be another case of legislators creating laws with little understanding of their real impact, and how the digital economy works. 

It is reminiscent of the Cookie Law, though in this case it is small businesses alone who are effected, those with the fewest resources to challenge or adapt to it. 

We also have a similar paucity of information and advice about the new rules and the various options for dealing with them. 

There's a petition on Change.org if you'd like to let Vince Cable know what you think of this... 

Graham Charlton

Published 25 November, 2014 by Graham Charlton

Graham Charlton is the former Editor-in-Chief at Econsultancy. Follow him on Twitter or connect via Linkedin or Google+

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Comments (8)

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dan barker

dan barker, E-Business Consultant at Dan Barker

Thanks a lot for writing this up, Graham, and thanks to Chris for the insights.

This feels very much like something that's been written up completely without the web/internet in mind.

I've tried a few times to ask various people from the EU about it (eg. the former EU digital agenda commissioner) about it but got nowhere.

Hopefully this, and the articles from Chris & Heather will help push it up the agenda.

If anyone wants to nudge the various EU people for a response on Twitter, the best contacts may be:

@GOettingerEU (http://twitter.com/goettingereu) - Digital Economy Commissioner
@Ansip_EU (http://twitter.com/ansip_eu) - VP Digital Single Market (!)
@jyrkikatainen (http://twitter.com/jyrkikatainen) - VP Jobs & Growth.

dan

over 2 years ago

Graham Charlton

Graham Charlton, Editor in Chief at ClickZ Global

Thanks Dan - I'll see if they respond.

over 2 years ago

Michelle Gerrard-Doyle

Michelle Gerrard-Doyle, UI/UX Designer & Front-end Developer at Personal

We sell downloadable software and have been trying to think of a way around this. One suggestion was to ship CDs to EU customers, in theory moving towards a physical rather than digital product. I'm not sure this would suffice though as we would still need to provide the download link via email for customers to receive instant access, or risk losing sales to our non-EU competitors.

over 2 years ago

Pete Austin

Pete Austin, CINO at Fresh Relevance

B2C, not B2B:

"From 1 January 2015, changes will be made to the European Union (EU) VAT place of supply of services rules involving business to consumer (B2C) supplies of digital services (broadcasting, telecommunications and e-services)."
https://www.gov.uk/government/publications/vat-supplying-digital-services-and-the-vat-mini-one-stop-shop/vat-supplying-digital-services-and-the-vat-mini-one-stop-shop

I assume this is to close the loophole where consumers buy from a Website that appears to be resident in their local country but is really based somewhere with lower tax rates. The change levels the playing field vs genuinely-local competitors. Shame there's not a exemption for micro-businesses though.

over 2 years ago

Graham Charlton

Graham Charlton, Editor in Chief at ClickZ Global

Yes, it is B2C though, as Chris points out in the answer to the third question, they have to be VAT registered to be classed as B2B, and many small business customers aren't.

over 2 years ago

Pete Austin

Pete Austin, CINO at Fresh Relevance

@Graham Charlton: actually no, customers don't have to be VAT registered to be counted as B2B. A trivial example is that many countries don't have VAT.

The situation according to HMG is, "You, as the supplier, may choose to accept alternative evidence of business status although this may not be acceptable for all member states."

It's obviously absurd that countries will require micro-businesses to register for VAT (as pointed out in your article), so I assume that all governments will accept alternative evidence where this is sensible, to avoid disadvantaging their local businesses in search of tiny amounts of tax. We'll know within a few months.

over 2 years ago

George Palmer

George Palmer, Founder at SendOwl

For anyone reading this a few weeks later you no longer have to register for UK VAT if you're below the Threshold: http://www.telegraph.co.uk/finance/businessclub/11268706/Victory-for-UK-micro-firms-as-HMRC-tweaks-EU-VAT-MOSS-rule.html Looks like HMRC gave in on that one.

Re easy ways to handle this we have a solution built into SendOwl for those selling digital goods. We take care of the evidence capture and storing although sadly we can't submit the reports or pay the tax for you! Full details available on our blog post which explains the new rules in detail too: https://www.sendowl.com/blog/new-eu-vat-rules-2015.html

over 2 years ago

Avatar-blank-50x50

beth roberts, marketing at lyquidity

Hi, I am across your blog regarding the new EU VAT rules and wanted to let you know about our product which helps business owners comply. There’s more information at http://www.lyquidity.com/wpstore/ but in essence the plugin will help ensure you collect the evidence needed to justify the decision to select one country as the user’s country of supply and so the VAT rate used. Because a user must use the VAT rate of the country of supply, the plugin also helps by allowing the user to import rates for each country at the press of a button.

• User’s profile can be updated to include a status indicating whether VAT should be collected
• VAT can be enabled based on the site visitor’s location
• Capture and validate any EU VAT number entered
• Exclude VAT if a user enters a valid VAT number
• Updated templates for PDF Invoices to include VAT if appropriate
• Report to produce information for the quarterly VAT Sales List
• Include the term ‘VAT’ at checkout and on invoices

It's designed to help small businesses comply

over 2 years ago

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