Last month, HMRC published a reminder (PDF) to businesses on forthcoming changes to the treatment of VAT on digital services such as e-books, music, streaming services, online newspaper subscriptions, mobile apps, games and other software. The changes come into effect on 1 January 2015.
The new rules will affect all businesses supplying digital services across the EU, including those currently not registered for UK VAT. This is because under the new rules, the turnover threshold for VAT registration is £nil.
With just over two months to go, it is important that businesses are taking steps to comply with the new rules.
Under the new rules the rate of VAT payable will be based on the consumer’s location.
Whilst VAT is an EU wide tax, VAT rates and exemptions vary between member states. Under the new rules, the rate of VAT payable will vary depending on where the consumer is. For example, if you sell a mobile app to a consumer in Italy, then Italian VAT (currently 22%) would be applicable. If that same app was sold to a consumer in Luxembourg, the rate of VAT would be 3%.
So how do you know where your consumers are located?
The new rules require that two pieces of non-contradictory evidence be provided to determine consumers’ locations.
While this might seem straightforward, modern technology and the ability to access the internet on the go means that this may not be an easy question to answer. The rules try to accommodate for this by providing various presumptions. For example, if a download of an e-book is made through a mobile phone, the country code of the SIM card can be used to presume the consumer’s location.
The difficulty from a business perspective is that the systems through which digital services are supplied will have to ensure that they are designed in a way that captures customer location data.
Currently, the VAT regime is based on the place of establishment of the seller, meaning that businesses presently have little need to capture customer location data. As a result, systems may require modifications in advance of 1 January 2015.
Not only will systems have to cope with capturing consumer location data; businesses will also have to cope with being able to identify whether the consumer or transaction is VAT exempt under VAT laws in the relevant member state. Systems will also need to be able to apply the applicable VAT rate, deal with currency exchange and be able to issue invoices in accordance with the relevant local law requirements.
All of this will require businesses to review and update their online terms and conditions of sale, and to review the information provided to consumers during the sales process.
I sell through an app store marketplace – does this still impact on me?
If you sell your content or services through a third party platform then you should check whether that third party simply acts as your agent in the sale, or whether they are responsible for dealing with VAT on the sale.
The good news is that if you sell your content through the Apple App Store (or iTunes) then Apple will take care of VAT on end user sales. Google has recently announced that Google Play will now follow the same approach too. If you sell through another marketplace then you should check the terms of the service offered by the marketplace operator.
Costs of services
It is expected that the changes to VAT rules will result in an increase in the cost of digital services. UK businesses will have to ensure that they account for differences in VAT rates and decide whether they will absorb any additional costs or pass it on to their customers by increasing prices.
For example, should businesses take a simplified approach applying a universal VAT inclusive price throughout the EU, or should they provide country specific pricing, showing the VAT inclusive price for each country?
Current contracts with supply chain
Given that digital services are often supplied through intermediaries and platforms such as app stores and other content aggregators, who in turn often operate cross-border, UK businesses may also need to review their supply chain and distribution arrangements to understand how those contracts deal with those changes, and whether any additional costs (or cost savings) will be passed on to the content originator.
Once you know where you stand contractually, you’ll want to think about whether you need to review or change the prices that you sell your goods at to cover any additional costs.
Registration for VAT
UK businesses have two options in terms of VAT registration:
- register in each member state it supplies into, (which would require the business to complete different tax returns and ensure that it acts within the local legal requirements of each member state); or
- sign up for the one-stop-shop MOSS scheme which enables a single registration for all sales across the EU and submission of quarterly returns.
In deciding which to opt for UK businesses will have to weigh up the pros and cons of each option in light of their business operations.
While having to register for VAT within multiple countries may seem like an administrative nightmare, it may be less burdensome for businesses who only sell digital services in one or two countries. It is also worth noting that the MOSS registration does not cover input VAT and only enables businesses to pay output VAT on cross border B2C supplies. This means that a domestic VAT return would be required in the relevant country or via the EU cross Border VAT refund procedure, which may be considerably lengthier than under a domestic VAT registration.
There are a number of other pros and cons to consider with each approach. Brodies’ VAT experts can help you navigate through these options and help you to decide what is best for your business.
To find out more, or for help with working out how best to comply with the new rules, please get in touch.
On November 14, 2014