Who is affected?
The changes will affect all businesses that supply digital services to consumers (B2C), including broadcasting, telecoms and e-services.
If you supply digital services to businesses (B2B) only - including those who are self employed - then these changes do not affect you.
When do changes begin?
1 January 2015.
What are the old rules?
When invoicing a client in the EU, VAT is charged at the sellers location, so youre charged the UK VAT rate of 20%, but only if youre VAT registered.
What are the new rules?
The VAT rate will be set by the customers location, and will be charged whether or not you are VAT registered.
For example, if you sell digital games to a consumer in Germany, you will have to add German VAT to the sales invoice and pay this to the VAT authorities in Germany.
What counts as a Digital Service?
Supplies of images or text, such as photos, screensavers, e-books and other digitised documents
Website supply or web hosting services
Supplies of software and software updates
Downloads of pre-recorded videos
What doesnt count?
Supplies of goods, where the order and processing is done electronically
Supplies of physical books, newsletters, newspapers or journals
Services of lawyers and financial consultants who advise clients through email
Booking services or tickets to entertainment events, hotel accommodation or car hire
Educational or professional courses, where the content is delivered by a teacher over the internet or an electronic network (in other words, using a remote link)
Offline physical repair services of computer equipment
- Advertising services in newspapers, on posters and on television
What if I sell from an online store or gateway?
If the online store or gateway is acting in its own name, they will be considered to be supplying the consumer. This means that the online store or gateway will be responsible for declaring and paying any VAT due. You will be treated as supplying the store and so will be making a business to business (B2B) supply, rather than a B2C supply. If this is the case, these rule changes do not directly affect you.
You will need to check with your online store to see if they are acting in their own name, or merely as an agent. The latter might mean the supply is B2C and you will have to apply the local VAT rate to the final consumer.
What is a Mini One Stop Shop (MOSS)?
To save you having to register for VAT in every EU Member State where you supply digital services, you may opt to use the VAT Mini One Stop Shop online service (VAT MOSS). This will be available from 1 January 2015, but you will be able to register to use it from October 2014.
With MOSS you can declare and pay VAT to a single elected EU Member State for all your EU sales, avoiding the need to register for VAT in multiple countries.
What can I do now?
You should find out whether these changes apply to you as soon as possible, so you can start paying the correct rate in January. A list of VAT rates across Europe can be found here.
You should also register for VAT. Although using MOSS means you wont have to register separately for every EU country you sell to, you must be VAT registered in the UK to use it.
Updated guidance for non-registered UK businesses (10 December 2014)
HMRC released updated guidance for businesses that are not VAT registered in the UK due to falling under the UKs £82,000 VAT threshold (2015/16). Initially this left only two options: register for VAT in every EU country where you sell to, or register for MOSS. The second option also requires registering for VAT in the UK, which would mean you would have to account for your UK sales, despite falling under the threshold.
HMRC has no updated its guidance, saying now that if you who want to use MOSS and your turnover is below the UKs £82,000 VAT threshold (2015/16) then there will be a simplified registration arrangement. This will allow you to register for UK VAT and MOSS, receive a UK VAT number, but NOT be liable to pay VAT on UK sales.
Can I reclaim VAT on expenses and purchases?
As you will not be charging VAT on your UK sales, any VAT you reclaim on your business expenses and purchases must either be wholly attributable to your cross-border EU sales, or split according to the proportion which is attributable to EU sales.
For example, if you buy a computer to use as part of your business: if 60% of sales are UK sales, and 40% cross-border EU sales, you will only be able to recover 40% of the VAT charged on the purchase of the computer.
Do I still need to complete UK VAT returns?
You will need to complete a UK VAT return each quarter, even if you aren't charging VAT on your UK sales. This means when creating sales invoices you should mark the VAT in the Crunch App as out of the scope of VAT.
Unless you wish to reclaim VAT on business expenses or purchases in relation to your EU sales, you will have to enter all expenses as out of the scope of UK VAT. If you wish to reclaim VAT in relation to EU sales, you will enter standard VAT for all relevant expenses.