A new start with the one-stop shop

VAT rules changed on 1st January this year and there are important implications for businesses supplying digital services to consumers outside the UK.

As part of a strategy to create a level playing field across Europe, rules about VAT on digital services have recently changed.

Instead of accounting for VAT in this country when selling to consumers, you need to account for it in the country the customer is based. And while in the UK there’s generally no obligation to register for VAT unless your turnover is £81k or above, there is no lower threshold when you’re supplying services to consumers in another EU member state.

The change has led to a considerable amount of commentary on social media, particularly as many people thought that they might need to account for VAT on everything they sold, just because of one or two incidental sales of digital services supplied overseas. This isn’t, in fact, the case.

It’s true that a UK VAT registration number will be needed, as this allows you to sign up for the new VAT Mini One Stop Shop (VAT MOSS) platform. But once you’re on the VAT MOSS system, you can account for the tax in any European country via one return and you don’t need to pay VAT on sales within the UK unless you go over the £81k turnover figure.

A statement was issued by HMRC in December 2014, attempting to make the situation crystal clear:

“If you make taxable supplies of digital services to customers in other EU member states, and your UK taxable turnover is below the UK VAT registration threshold, you may use the VAT MOSS to account for the VAT due in other EU member states but you do not need to account for and pay VAT on sales to your UK customers.”

It’s important to remember that the new rules only apply if your services are being bought by consumers. There are different regulations in place to account for VAT in business-to-business transactions.

The term ‘digital services’ is obviously fairly broad and covers everything from telecommunications and broadcasting and e-services. It’s the latter category that is perhaps most likely to affect smaller businesses, which may be involved in selling apps, music downloads, e-books and games. (The definition of an e-service is one which is fully automated and requires little or no human intervention.)

If you’re supplying a service of this type, there’s an onus on you to identify the country in which your customer is based, so if your website currently doesn’t gather this information, it’s something you need to address.

You then have to account for VAT at the rate applicable in the customer’s location. That’s where the VAT MOSS system is going to prove useful, as it simplifies the process and means that you don’t have to register numerous times in different jurisdictions.

Although your accountant can’t take responsibility for the actual registration on VAT MOSS, they’ll be able to guide you through the process and can file returns for you once you’re set up.