#VATMESS: New EU VAT regulations, 1 – Sanity and good sense, 0
The reason for withdrawing the downloads is due to a change in the way value added tax is handled in the EU for the sale of digital goods and services that are delivered online via an automated process. The change is to where the ‘place of supply’ is made – and it is the place of supply that determines the VAT rate that is applicable, and to which member state the resulting VAT liability is due.
Previously, the place of supply was the country from where the sale was being made – so for a business based in the UK, the place of supply was the UK and, therefore, it was the UK’s rate of VAT (and VAT threshold) that mattered. From today, however, the place of supply is where the customer resides, so for a business based in the UK who sells something to a customer based in France, the place of supply is now France and, therefore, it is the French rate of VAT that matters. For the same business selling to someone based in Germany, it is the German rate of VAT that matters. And so on.
And for those cross border EU sales, the VAT threshold in the place of supply doesn’t matter – even for a single cross border EU sale, there is now a VAT liability on that sale, irrespective of the VAT threshold in the relevant country.
Once a sale is made that is covered by the new rules, the seller – big or small, VAT registered in their own country or not – has a limited amount of time to properly account for the VAT on that sale, which can be done in one of two ways:
- They can register for VAT in the EU member state into which the sale was made, and then submit regular VAT returns there.
- They can register for a scheme called a ‘Mini One Stop Shop’ (or ‘MOSS’). This is a service provided by the relevant EU member state governments and tax services, whereby a resident business can register just once, in their own country, rather than in each country into which they make any sales, and have the cross border VAT dealt with via the regular VAT return submitted to the MOSS system.
The second approach is clearly intended to be the simpler option, and to mitigate the impact the new rules will have on smaller businesses – but in practice, it won’t be that simple because of certain burdens and requirements being placed on them, such as the information they have to collect and retain for each cross border sale in the EU. (An added complication is that to register for MOSS, the business must first become VAT registered – although in the UK, at least, HM Revenue and Customs have clarified that affected businesses whose UK turnover is below the threshold can register without then becoming liable for VAT on their UK sales).
The simplest solution of all, though, is the one Ben has chosen to adopt: Avoiding cross border EU sales that will be affected by the changes, by removing the ability for customers to download software.
This is possible because guidelines published by HM Revenue and Customs indicate that if there is enough manual input in the process of fulfilling an order, such as by manually attaching the purchased goods to an email and supplying it that way, then the sale isn’t one covered by these regulations (while if the items sold remain on a website and a link is emailed to the customer, then the sale is covered).
Unfortunately, though, this is only a temporary solution. As Ben notes in his announcement, “You are welcome to continue to place orders because, at least for the time being, the VAT regulations can be sidestepped as long as the software is delivered by other mechanisms, such as by manual email.” This is because the intention is for the VAT for all cross-border EU sales to be accounted for in the same way, not just on digital items – and this might be in force as early as 2016.