This is a guest article by Mallory Wood from Accordance VAT.
2015 marks a dramatic change in the way that EU established suppliers of telecoms, broadcasting and electronic services account for VAT on B2C supplies, and many businesses will need to start planning for the change now. E-commerce businesses often sell a mixture of physical goods and electronically supplied services – e.g. an online retailer selling books may sell hard copies and e-books, while an online record shop may sell a combination of CDs and downloadable content. This means that e-commerce businesses must continue to stay compliant in regards to the distance selling regulations, and also make the changes necessary to correctly account for the VAT on electronically supplied services.
Move to Destination Principle
From 1st January 2015, the place of supply for VAT on B2C electronically supplied services will shift from the country of establishment of the supplier to the country of the consumer. This is to ensure that there is a level playing field for EU established businesses, unlike there is at the moment – where Luxembourg established businesses charge the reduced rate of 3% when selling e-books, therefore enjoying higher profit margins that an e-book seller located in Hungary, where they have to charge and collect 27% VAT.
Instead of charging a single rate of VAT for sales to private individuals (the rate of VAT applicable in their home Member State), businesses will have to charge VAT at the rate of the EU country in which their customer is located.
Introduction of Mini-One-Stop-Shop (MOSS)
The ‘Mini one stop shop’ will provide a mechanism for cross-border e-service providers to be registered in only one Member State and account for the VAT due in other Member States through one registration in the country of their establishment.
A similar one stop shop scheme has been available to non-EU established businesses that provide electronically supplied services to private individuals within the EU since 2003, and the introduction of the MOSS will create a level playing field for both EU and non-EU established businesses.
In the UK, HMRC has stated MOSS registration will be possible from October 2014.
However, it should also be noted that businesses that are required to be VAT registered for other reasons, such as distance selling, will not be able to use the MOSS for those transactions so will continue to need VAT registrations in other Member States and will have to submit local VAT returns. Depending on your circumstances, you may find it more beneficial to account for your electronically supplied services through your existing registrations.
What your business needs to consider:
- What VAT rate do you need to charge?
The standard VAT rates differ greatly across the EU – ranging from 15% in Luxembourg to 27% in Hungary. Also your business must be aware of where the standard rate or the reduced rate of VAT is applicable on the particular electronically supplied service that you are supplying in the country of your customer. You must be able to apply to correct VAT rate to your products when selling into other EU Member States so that you can account for and pay the correct sum of VAT.
- Review your current systems
Are you able to identify the location of your customers and apply the correct rate of VAT using the systems that you currently have in place? Do you need to implement new processes with your current coding system, or do you need to replace your system entirely with something more sophisticated? Your accounting system should be able to distinguish between the sales of physical goods that come under the distance selling regulations, and also the sales of the electronically supplied services simultaneously.
How will charging different rates of VAT affect your current pricing levels, profitability and level of sales across different EU Member States? If your business sells the same product in the UK at 20% and in Sweden at 25%, then your profits will be affected by 5% on the goods you sell to Sweden. Should you raise your prices in the countries where the VAT rates are higher and move to a differential pricing model, or will this discourage sales in those Member States? Should you simply take the loss in some countries and make it up in others where the VAT rates are lower? Your business needs to make these commercial decisions before the changes come into effect.
- VAT recovery
VAT cannot be recovered through the MOSS system so your business will have to make separate claims through the EU Refund Directive. This is an extra step in the process that you will have to plan for.