Small firms may be only just waking up to the new year, but, if they operate online selling digital services, they need to make sure they are fully aware of current VAT rules that could determine how firms report and pay that tax. If they haven’t already acted on these rules they could risk facing punitive fines.
What the rules mean
Recently, EU legislation came into force requiring businesses that provide electronically supplied products and services, such as music downloads, online courses, or e-books to private individuals living within the EU to charge and account for VAT dependent on where the digital services are sold. It used to be the case that VAT was calculated in accordance with the country of the supplier. In other words, if you were a UK company selling downloads to France, then VAT was charged in accordance with British rates. However, from the recent changes, if a UK firm sells a digital service to a customer in France, and then provides the same to an end user in Germany, the two consumers must be charged VAT at different rates relevant to their own native country.
The intention of the law change was to crack down on tax avoidance by big corporate technology players such as Google, Amazon, and Twitter, which channel their European sales through low-VAT countries, including Luxembourg. But small enterprises have been disproportionately affected by the recent method of tax collection.
- About 34,000 SMEs in Britain are expected to be caught by the recent laws, according to HMRC.
- Critics claim that, in fact, hundreds of thousands of small and medium firms in the UK could be hit by the change.
Worryingly, many businesses have no idea about the recent system – two out of three SMEs remained ignorant of the revised rules, according to research by accountant KPMG. Otherwise, they were oblivious to the fact potential penalties exist for non-compliance. As said previously, it’s only firms engaged in providing digital services that are affected, so many of those currently in the dark may not be affected at all. But there’s a fear that some in the tech field may still be unaware of their new foreign VAT obligations.
How it works in practice
SMEs having to register for VAT in all of the EU countries with which they do business is clearly madness, so the tax authorities have set up a VAT Mini One-Stop Shop (VAT MOSS), which allows smaller companies to file information once every quarter to cover all tax jurisdictions, then make a single quarterly payment. But further complication exists even within this VAT MOSS system.
- Businesses with a turnover above £81,000 – the threshold at which companies are eligible to register for VAT in the UK – can use their existing HMRC online user ID and password to register for the VAT MOSS scheme.
- British firms below the £81,000 VAT turnover limit haven’t had to apply for UK VAT registration before now, but in order to use the VAT MOSS service they will need to do so. However, importantly, once they’ve registered for UK VAT, they can still avoid paying VAT on their sales in Britain.
This latter point has caused some panic in the small business community. Until recently, it appeared that micro firms not currently paying VAT on sales in Britain would have to do so to use the cross-border VAT registration system. But UK business owners scored a small victory against this change, when the authorities conceded late last year that British enterprises must apply for VAT registration on home sales, but will be exempted these extra costs in practice. This works as follows:
- When micro businesses register online for UK VAT they must add VAT MOSS as an additional service.
- The system will then prompt them to search for ‘Business Activity’, when they should enter ‘Digital Services’, and opt for ‘Supplies of Digital Services’ (below UK VAT threshold) under MOSS arrangements.
- Companies can then restrict any VAT refund claims submitted to the UK taxman to those linked to cross-border EU sales that will be accounted for VAT via MOSS.
More red tape – and some tough decisions
Inevitably, all of this will mean more admin for small companies. As well as maintaining VAT records, SMEs now have to keep customers’ addresses and telephone numbers, which means registering with the Data Protection Act, and complying with its rules. Bosses will also have to consider how different VAT rates in varying countries might affect their pricing structure, and profit margins. Some may even decide some territories are no longer cost-effective places to do business.
- Three out of four of smaller firms affected by the new VAT system have said they’re raising prices to cope with the change, the KPMG survey found.
- About 28 per cent claimed they planned to restrict sales in certain EU countries to limit their exposure to the new regulations.
In essence, it’s vital that companies that come under this VAT regime ensure they’re compliant. Firms using the VAT MOSS system that haven’t already registered their first digital services supply are breaking legislation. In other words, if you provided a digital product or service to a customer, within a day you need to register for VAT MOSS.
The Government has a more detailed outline of businesses affected, services coming under the recent legislation, and how to define whether a customer qualifies as a ‘private individual’ on its website. Also, talk to your accountant to get more advice. The cost of not doing so could be severe. Penalties are set in accordance with local VAT laws in the EU, with fines ranging from double the VAT owed in Denmark, to bills potentially running to the millions in Poland. So, get organised now to avoid a financial headache later.