On the 1st January this year new rules came in which affect all businesses who sell B2C digital services to any country in the EU.
The new rules mean that all B2C businesses selling digital services to customers in the EU will have to charge the VAT rate of the country the buyer lives in. Rather than the country the seller is based in.
It was brought in to stop retailers basing themselves in countries with low VAT and paying as little as possible. For example, Amazon’s European headquarters are in Luxembourg. Where VAT is lower than many other EU countries.
The implications of the new rules can cause a real headache for small businesses selling digital products. As it will mean they have more paperwork to do.
What digital services / products fall under the new rules?
Services that are delivered over the internet with little to no human interaction fall under the new rules. For example, if a customer buys something they can download straight away. Or they receive an automated email which then allows them to download the product.
Gov.uk gives the following examples of e-services which fall under the new rules:
- Images or text, such as photos, screensavers, e-books and other digitised documents (such as PDFs)
- Music, films, games, including games of chance and gambling games, and of programmes on demand
- Online magazines
- Website supply or hosting services
- Distance maintenance of programmes and equipment
- Supplies of software and software updates
- Advertising space on a website
In you are unsure about whether your services might fall under the new rules visit the gov website for further information, contact HMRC or an accountant.
My services fall under the new rules, now what?
If your services fall under the new rules you will need to do two things as soon as possible.
The first is that you will need to apply for UK VAT registration. Gov say that if your business is below the UK VAT registration threshold, you will not lose this by registering. However, you will have to complete quarterly VAT returns whether you’re charging VAT on UK sales or not.
Secondly, you will need to register for the VAT Mini One Stop Shop (VAT MOSS). Which will allow you to apply for VAT in every EU state in one go. Rather than applying to each individual state. As with UK VAT, you will need to fill out quarterly VAT MOSS returns.
Many people have criticised how poorly the new rules have been communicated and advertised. Which means that a lot of businesses might not yet be aware that they need to comply with the new rules.
The Gov website states that your deadlines for applying for VAT MOSS are ‘the 10th day of the month following your first digital service sale. The registration will be back-dated to the date of the first cross-border digital sale.’
This means that, if you make a sale today, on the 19th January, your deadline for applying would be the 10th February.
Data collection and registration
The new rules require businesses to obtain and keep two pieces of evidence which proves which country the buyer lives in. To show that the right VAT rate has been charged.
This means that your business might be collecting and supplying data you didn’t previously and you will need to register with the Information Commissioner’s Office (ICO) as a data controller.
If your transactions take place through a third-party service such as PayPal, you will need to check with them to find out what you can do to gain the evidence you need and how you can ensure customers are charged the correct VAT rate.
There is still a lot of confusion about how best to comply with the new rules and it’s been reported that more than 200 small businesses have ceased trading because of the complexity of the rules. We recommend speaking to your accountant or a tax expert to find out exactly what you need to do.