There will be some important VAT changes taking place as from 1st January 2015 in relation to the supply of broadcasting, telecommunication and electronic services to non business customers located in other member states, as discussed in our previous article.
In this article, we will discuss a few of the challenges that businesses might face in light of the forthcoming changes.
Determining the VAT status of a digital supply in each of the 28 EU member states
Currently certain electronically supplied services are exempt in the UK - although it is true that most supplies that are exempt in the UK will also be exempt in other member states, by virtue of the EC VAT Directive, there are three types of supply which may be taxable in other member states. These are:
- Online gaming and betting;
- Financial services; and
- Training services.
Let us take the supply of online gaming as an example. Currently the place of supply of online gaming to non business customers is determined by the location of the supplier. Where the supplier is based in the UK, the supply is exempt under VATA 1994, Sch 9, Group 4.
However, as from 1st January 2015, the place of supply will change to where the customer is located. This means that if the supply of online gaming is taxable in the member state where the customer resides, the UK business will need to register for VAT MOSS in the UK in order to account for VAT charged in that other country. Alternatively, they will need to register for VAT in that member state.
The challenge faced by businesses that are affected by the new rules is that they will need to be aware of the VAT status of their supply in each of the 28 EU member states.
We have quoted HMRC’s view following a recent seminar in London on the above scenario.
Question: It is my understanding that online gaming/betting companies may need to charge VAT if they happen to have any customers (players) established within an EU Member State that does NOT exempt online gaming / betting. This basically means that online gaming / betting companies will need to know whether the online gaming / betting service is VATable, or VAT exempt, in each of the 28 Member States of the EU and configure their systems and pricing accordingly. Is that the case?
Answer: Yes. The intention is to make this information available later this year on an EU MOSS Web-Portal prepared by the European Commission.
Compliance challenges
Businesses will only be able to register for the MOSS scheme in a member state if they have a VAT registration there. For instance, a UK business supplying electronic services to EU non-business customers will need to register for the MOSS scheme in January 2015. However, if it is not currently registered for VAT in the UK, by virtue of its turnover being under the VAT registration threshold, it will need to register for UK VAT before it is able to apply for the MOSS scheme.
Registering for VAT may adversely impact on its sales and profit margin as VAT will now become chargeable on its UK supplies. However, just as this article was going to press, HMRC has announced some amendments to the imminent EU VAT MOSS rule.
Following fierce lobbying from small businesses, HMRC has stated that small UK businesses trading below the UK VAT registration threshold will not need to charge UK VAT on their UK supplies, as a result of registering for UK VAT in order to use the MOSS scheme, as long as they are able to separate their UK supplies from their EU supply and keep records. A spokesperson for HMRC made the following announcement:-
“Businesses below the current VAT registration threshold that can separate their sales to UK customers from sales to EU customers can voluntarily register the cross border element of their business, and then use that registration number to register for MOSS. This means that their domestic sales will remain VAT free.”
Though this new development provides a much needed relief to small businesses, the further record keeping requirement and the length of time for which records need to be maintained (10 years instead of 6) will still have an adverse impact on businesses.
You can contact either Parvez Auhammud or Julian Millinchamp, our VAT experts, if you would like to discuss your requirements in light of the imminent VAT rule changes.