The new VAT MOSS regulations implemented by the HMRC on the 1st January have been grabbing the headlines over the last week for all the wrong reasons. A large number of small businesses have been showing their discontent and reporting a number of problems with the new regulations. Under the new rules any company trading digital products in any of the 28 EU member states are now required to charge VAT based on the place of purchase, rather than the place of supply. The days of having one fixed VAT rate based on business location are largely over.
The challenge for many small businesses lies in the additional and often complex administration that’s needed to comply with the new procedures. In short, if a customer in France purchases a digital product from a UK business, the French VAT rate will apply. If your customers are from multiple locations across Europe, the accounting practices needed to apply and report on the potential 30 VAT variations can be both extensive and costly.
Businesses that have relatively low sales across European are opting simply to trade in the UK, rather that face the additional administrative burden of the new VAT MOSS scheme. When one of the key principals of the EU is to promote easier trading across borders, it seems a shame that the new legislation is having the opposite effect.
Unlike the standard UK based VAT regulations where a threshold of £81,000 applies VAT has to be registered, MOSS sales have no minimum threshold and is to be applied to all EU sales regardless of your yearly turnover. Businesses also need to provide information and proof as to the location of their customers that can be supplied by:
- Asking the customer which member state they are a resident of at the point of sale.
- Providing a billing address.
- Providing an Email address (this method is suitable for country specific prefixes e.g. co.uk, but more difficult for .com based addresses)
These requirements are not only cumbersome and time intensive, but in certain instances it can be very difficult (if not impossible) to correctly identify where an online customer is based. The good news is that the HMRC has recognised the need to refine the process and is unlikely to prosecute sole traders who have demonstrated an effort to comply with the guidelines.
Communication from the HMRC has also come under criticism with businesses not clearly understanding if the new processes apply to them. It’s therefore important to reiterate that the VAT MOSS regulation applies to digital products only, including the selling of eBooks, apps, downloadable training, tutorials, images, games, telecoms, broadcasting, website supply (and hosting), gambling and even distance teaching and any electronically-supplied services to consumers.
If your business sells digital products, there are essentially two ways to comply with these new VAT guidelines.
1 – Registering for VAT in each country
You can individually register for VAT in the country’s where you have customers, and apply the country specific VAT rates. Problems reported with this approach is the need for additional accounting software to cope with the various VAT codes; not only an additional business expense, but is likely to make accounting administration much more prone to error. Completing VAT returns without a robust system in place is now much more complicated.
Additional commercial business considerations will be how you potentially market your products on your website. If a customer from France is browsing your site and wishes to buy a product, will you display the French VAT costs (a potential development fee to make changes to your online booking system), or will you display a flat rate VAT for all locations? Trying to find a happy medium where some countries pay a little more, while others pay a little less can be a tricky balance to find.
2 – You can register in the UK and submit an EU wide VAT return known as the Mini One Stop Shop (MOSS)
To avoid registering for VAT in each country, you can choose to take part in the MOSS scheme where you make a single quarterly payment to HMRC. They will then make payments on your behalf to the other European tax authorities. Companies opting for MOSS will need to submit both a normal VAT return and a MOSS return.
If you sell digital products through an established store (e.g. App Store or Google Play) you won’t need to submit a MOSS return as the store will already be complying with the regulations. While this may seem simpler, businesses are facing the prospect of using these larger retailers to sell their products rather than dealing with customers directly; a change to the supplier chain that’s pushing prices up and removing the all-important relationship between a business and their consumers.
In response to the wide spread criticism, evaluations of the programme are scheduled for mid-May after the data for the first quarter of Moss data has been completed and compiled, but it’s expected to be some time before significant revisions are made.
This post was written by Russell Lebe, Managing Director of VAT Experts In Europe.com. We offer assistance to both individuals and companies on a wide range of VAT issues within the European Union.