You asked us and now we answer your questions about the new EU VAT rules. The 20 questions in this blog post were posed by participants – online and in person – during Taxamo’s seminar in London. Our full EU VAT event is online here.
1. How is it determined who is making the digital service supply?
Article 9(A) of the implementing regulations outlines who will be affected by these new cross-border rules. For example, for apps sold through an online marketplace or platform, the business running the platform will normally be responsible for VAT. The app developer will not be responsible if the ordinary person in the street assumes that they are buying from the business operating the platform. The list of digital services in the implementing regulations is not exhaustive. As a guide: if the internet is required to access a paid-for service then that service will likely be within scope of the new rules. If you are a PSP/portal/gateway/aggregator it is very important to look thoroughly at your contracts with content providers. How do you deal with the customer?:
- Are you the one authorising the payment?
- Are you the one authorising delivery of the services?
- Are your terms and conditions being accepted or are those of the content provider also included?
2. Why have these rules been introduced?
The simple reason is that the EU Commission did not want a burden imposed on tens of thousands of small businesses who would struggle to identify where their customers are located in the EU. The rules – according to the EU Commission – ease the administrative burden on businesses in the digital services sector. It’s all about digital transformation. The effort to tax the digital economy goes back to a 1988 OECD report. Indeed in 2003 the EU introduced rules on the supply of e-services in the EU for non-EU businesses. However, a loophole in the 2003 legislation has allowed many digital service merchants to established themselves in Luxembourg, a low-VAT jurisdiction. Luxembourg, of course, was against these new rule changes. On February 20, 2008, these changes were adopted – the VAT regulation itself was adopted by the EU Commission on October 17, 2013. Earlier this year the Explanatory Notes were released.
3. How will a business determine the VAT status of a customer?
The rules only affect the B2C cross-border supply of digital services. It will be important to determine if your customer is a non-taxable person or a business. The Commission has attempted to make rules as sensible as is possible. If a VAT registration number (VRN) is supplied then its assumed to be a B2B transaction and, therefore, that supply is unaffected by these new EU VAT rules. If the customer does not supply a VRN then the supplier can assume they are dealing with an ordinary consumer (non-taxable person) and they just add VAT to the supply.
4. How will a business determine the place of consumption?
The permanent address of the customer is an indication. To help in this process, published legislation provides certain presumptions. If the supply, for example, is via a telephone box, landline or mobile network then the location of these will be accepted as a place of supply. If a UK SIM card is used in the download of a digital service supply then it will be assumed that the customer is a UK resident and UK VAT will apply. Other accepted pieces of evidence include IP address, billing address, and other commercially accepted information. There are three types of presumptions when determining the location of the B2C customer:
- Physical location – applies if it is necessary for the customer to be physically located to receive the service, e.g. at a hotel wifi hotspot.
- Additional indicators – SIM card, decoder. A device that is sent to someone.
- Over-the-top services – effectively all other digital services outside of first two criteria. If a customer downloads songs from app store that is over-the-top. Once it is this type of service then two pieces of non-conflicting evidence will need to be collected such as: customer’s billing address; credit card details; IP address; landline, and other commercially relevant information.
One accepted piece of evidence is self-verification by the customer. This is good for merchants, as it keeps the customer journey simple. If this journey is not simple – then traffic will be lost. Presumptions as to the location of the customer can only be disregarded if the business supplying the digital service collects three pieces of non-contradictory evidence rebutting the presumptions.
5. How does a business register for VAT in the EU?
As soon as a business provides e-services cross-border in the EU, they are – in theory – liable for VAT in each member state and, in principle, you need to register with each one. This is where MOSS (Mini One-Stop Shop) comes in. Registration for MOSS is via a web portal. It allows businesses to register with just one EU member state. MOSS is also optional. Affected businesses can also register individually with the tax authorities in each EU member state in which they have provided a supply of a digital service. Businesses must use MOSS for all their supplies, not for some. There are two schemes in operation in the EU:
- The union scheme is used for supplies from one member state to another member state.
- The non-union scheme is used for non-EU businesses supplying a digital service to a customer in the EU. This scheme – as mentioned previously – has been in operation since 2003.
Compliance with the non-union scheme has been inconsistent. With the changes to come in to effect on 1 January 2015 the non-union scheme will be upgraded and it will sit alongside the union scheme.
6. When can businesses register for MOSS?
Most EU member states will be ready to accept MOSS registrations from October 1, 2014. The UK portal opens for registrations on October 20, 2014. This is not because HMRC are late – this date for HMRC’s MOSS web portal has been set in stone for two years. The EU was told that HMRC had two large digital upgrades a year: one in April and one in October. If businesses are already registered for VAT then they will have to use their current VAT ID number when registering with MOSS.
7. When will a business have to file returns with MOSS?
Accounting periods are each calendar quarter. MOSS businesses must input their returns within 20 days of a calendar quarter. No supplies will equal a ‘nil’ return, they will still have to make this return so that the tax authority knows they are still intending to supply digital services cross-border. Businesses will make a payment to support their VAT return.
The existing template is akin to a multiple VAT return. The business will have to identify the country that the service(s) were supplied to and the appropriate VAT rate charged. A single figure totalling all services supplied is required in the return. The relevant tax authority will then split the return among all the EU member states. HMRC returns, for example, will be in sterling and they will also perform the currency conversions into euro, or other currencies depending on location of the supply.
8. If a Member State of Consumption (MSC) is not happy with a specific return value – what will happen?
Attempts are being made to co-ordinate responses among member states. The existing presumption is that other EU member states will approach the host tax authority, i.e. the tax authority where the supplier is established. At the beginning all approaches as regards MOSS return concerns will be via the host tax authority.
9. How will a business actually submit their return?
The SAF-MOSS file has been developed for a businesses to use. Business can provide the required information in an .xml file. SAF-MOSS stands for Standard Audit File (SAF) for the Mini One-Stop Shop (MOSS) system. The exact details required in the SAF-MOSS is to be revealed by the Commission in October.
10. How will audits be carried out?
The coordination of audits is a matter between EU member states. The preference is for requested audits to be carried out for all interested member states simultaneously. Businesses that supply digital services to customers in the EU must keep a record of these transactions for ten years.
The UK’s HMRC thinks this particular requirement is ‘somewhat excessive’. HMRC, though, has also stated that this may be something to worry about in a year or two from now.
Here’s our explanatory video on the new EU VAT rules:
11. If a merchant is not ready by January 1, 2015, what will happen?
Businesses need to be ready in some form. If they are making cross-border supplies of digital services then they will be liable for account for VAT in the place of consumption. If they are still setting up systems come the start of January, then they have – arguably – until the end of March (end of first calendar quarter).
These businesses will need to ensure that they capable of collecting critical transaction data from day one (ten-year storage requirement) so that they can file a MOSS return within 20 days of the end of the first calendar quarter. If they are not registered with MOSS then they must register with the individual tax authority in each EU member state where they have supplied a digital service.
12. If late in paying VAT will businesses be liable for 28 late payment fees?
The presumption here is that this business is supplying in 28 member states, that’s a good business. As it is the VAT of the MSC it is that member state’s tax – they will want the tax. It is an issue for that MSC. It is their rules and their penalty regime that apply.
The MOSS system is a means of simplifying life for business so that they don’t have to deal with all the member states in which they supply digital services.
13. Can businesses be audited by any EU member state?
Lets take the example used during the Taxamo event. HMRC are well aware of the nightmare scenario where six or seven EU member states may request an audit of one UK merchant. HMRC believes that this is unreasonable and unfair. They believe that they have come to an understanding – not in hard legislation – with other EU member states.
This understanding is based on co-ordination. If, for example, after six months a business registered with MOSS in the UK is the subject of an audit request from say the Spanish tax authorities then HMRC would have to be notified. HMRC would then notify the merchant of this audit request. However, prior to conducting the audit HMRC will notify all of the other EU member states with which this merchant has supplies to consumers. HMRC will ask those EU member states if they have an interest in the audit of this merchant? If they do then HMRC would expect them to explain why.
There will obviously have to be justification for this interest and if three other EU member states have similar concerns to those of the Spanish tax authorities then an audit will be arranged and conducted. All four EU member states would then be provided with the results.
If everything was in order HMRC would not expect a further audit of that business for a reasonable period.
14. Will businesses be required to provide invoicing?
It depends on the member state of consumption (MSC) i.e. the EU member state where the digital service was supplied. As of September 2014 some MSCs will require B2C invoicing. The invoicing requirements will differ from MSC to MSC. Some will make use of simplified invoicing.
It is very important for businesses to determine whether you need to issue invoices in the MSC. The EU Commission is due to publish invoicing guidelines for all member states on its website in October.
The EU tax authorities are committed to the explanatory notes. The fundamentals are in place and all EU member states have signed up to them. In the early months tax authorities are going to be flexible. They are not out to try and trip up businesses trying to make an honest living.
15. Are the new EU VAT rules just for e-services, will they be extended to physical goods?
The January 1, 2015, provisions cover broadcasting, telecommunications, and electronic services (digital services). The intention is to tax all digital services.
The original EU idea back in 2000 was for a One-Stop Shop that would cover all goods and all supplies. As time passed it was narrowed to B2C digital services. If this launches and works then the path will open up for the Commission to expand the rules to B2C for goods. Then all B2C goods and services would be taxed via a One-Stop Shop.
The supply of goods in the EU operate under the distance-selling rules. Businesses are required to determine how much they sell and once they reach a certain threshold they need to apply the VAT in a specific EU country. If there was a B2C for goods then it would replace these distance-selling rules.
16. Is it true that small businesses selling both digital and non-digital goods into the EU, but under the UK VAT threshold, will have to register and charge VAT on all their sales digital and non-digital?
If someone is making cross-border supply of digital services then they will have to register. HMRC has admitted that the registration threshold is a sensitive issue, but member states have agreed that there will be no threshold. HMRC are willing to revisit and discuss this with the EU Commission.
If micro-businesses are suffering because they need to register for VAT to make cross-border supplies then HMRC will try to help.
17. Can I restrict my sales to just the UK and not require MOSS registration?
If they are in business and selling to people I would hope that the business would know if they are making cross-border supplies, or just supplies within the UK. If they are making supplies solely within the UK then the normal rules apply but as soon as they make a cross-border supply then they will have to register either with MOSS or with the EU member states where they supply services.
In some areas – like in iGaming and gambling – businesses are restricting their scope. Some companies are saying: on one hand we need a licence to offer our services in certain EU member states but we are not ‘allowed to be there’. However, from January 1, 2015, in some member states these businesses will need to pay VAT. How are they going to pay VAT if they are not ‘allowed to be there’ in the first place? Sometimes these companies make the decision to close down certain markets. Businesses should not have to prove a negative.
These businesses are in business to make money. They should be keeping records and if its income stream is from a particular EU member state then it needs evidence of what it is selling to customers in that particular member state and it needs to support that.
18. Interested to know what would constitute human intervention in a virtual classroom so that my workshops are not classed as ‘digital services’?
Someone lecturing online in real-time is different to filming, packaging, and selling an online lecture. The latter would be regarded as a digital service. If there is no human intervention involved in the supply of the service then it is a digital service. If a business can not distribute online then they can not provide a digital service.
If the ‘virtual classroom’ is recorded, filmed and available to watch for a fee – then this would be classified as a digital service. Businesses must not be confused with using the internet and supplying a digital service.
19. Does it matter where the portal/gateway/website is located e.g. my business is in the UK but my website/portal/gateway is in a different country. Am I still under UK law?
A business operating in the EU has the option of registering in the country where it is established. If a business has establishments in two member states then they can make a choice, unless one of those establishments is a HQ. In this case they must register with the tax authority where their HQ is established.
20. After spending £2k on tax assistance for a mobile app I still don’t know how to deal with tax settings for countries and regions outside the EU. How do we sort this and will this ever be simpler?
This is outside of scope for EU VAT – these rules only apply to supply of services within the EU. A non-EU supply means there is no scope for EU VAT. This is the key driver for these changes. From a tax authority’s point of view they collect tax to support revenues. These rule changes – in the eyes of tax authorities – are about fairness and equity. Levelling the playing field between domestic suppliers and international suppliers. Businesses – as mentioned – have established themselves in Luxembourg because it is cheaper for tax reasons. That has damaged a lot of EU suppliers. After January 1, 2015, the VAT to be applied on the cross-border supply of digital services will be the same no matter where the business is established. These rule changes level the playing field. Tax authorities don’t want any business undercut because someone else is charging a lower VAT rate. Consumers may enjoy the fact that prices are low, but is that fair for business? No, it isn’t.
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Note: Taxamo content is created for guidance only, please consult your local tax advisor for professional advice.