What You Need To Know About The New EU VAT Policy
A helpful guide for Small and Medium Sized Enterprises
Please note this article is intended for guidance purposes only and does not constitute tax advice. Reliance upon this information is solely at your own risk.
Major changes to the European Union’s Value Added Tax (VAT) laws are taking many small and medium sized businesses by surprise, leaving them reeling as they prepare for significant new administrative burdens. Beginning 1st January 2015, all businesses selling supplies of broadcasting, telecommunications and e-services (i.e. ‘broadcasting, telecommunication or electronic (BTE) services’ or “digital services”) in the EU to consumers must charge VAT based on the VAT rate of the EU Member State in which the consumer primarily resides. This is a complete reversal from the current VAT policy, in which businesses collect VAT at a single rate - the rate of the EU Member State in which the business is registered.
These changes will have the most significant effect on small to medium sized enterprises (SMEs) the hardest, creating large operational and administrative challenges that include maintaining VAT registration with as many as 28 different Member States, managing transactions across up to 75 different VAT rates, and obtaining the necessary data to verify the primary location of each consumer.
Many SMEs were largely unaware of the planned changes and are scrambling to meet the 1st January 2015 deadline. All EU enterprises will be required to submit their first quarterly VAT returns using the new policy in April 2015, with those failing to comply facing significant fines and other penalties.
Why the change?
EU officials note that the new VAT policy is aimed at closing tax loopholes and confronting questionable digital sales practices. Big players in digital markets regularly funnel the majority of their digital sales in the EU through low VAT Member States. This practice yields major savings for these large corporations, but EU officials note that this loophole unfairly burdens other EU Member States. EU officials believe the new VAT policy will more accurately and fairly distribute tax revenue across Member States.
What you need to know
Only applies to digital services
The new policy only applies to businesses selling supplies of broadcasting, telecommunications and electronically supplied services (BTE) to consumers. How do you know if your services fall under this definition of digital services? Transactions involving downloadable products, such as software, media and information are the clearest examples. Generally, the sale of any product or service using information technology in which the seller need not be present is considered a digital service. For example, providing graphic design services digitally, in which you are actively engaged with the customer to create a unique end product, is not subject to the new VAT policy. However, if you sell downloadable graphics or templates, these transactions are subject to the new VAT policy. Similarly, if you provide live training or consulting services over the Internet these services are not covered. But downloadable training materials, guides or interactive training tools would be subject to the new VAT policy. The easiest way to determine if your services are subject to the new VAT policy is to consider if a representative from your business is actually involved in the transaction of information/services - or if that transaction fully takes place digitally. Please note that this is a complex area and the above are provided only as examples. If you are in doubt as to whether the BTE services you supply fall within the new policy, it is recommended that you seek independent tax advice.
Only applies to Business-to-Consumer (B2C) sales
Business-to-business (B2B) transactions will remain under the existing B2B VAT policy, in which the purchasing business is responsible for accounting for VAT due in their own VAT return through the Reverse Charge rules. However, the only way to verify that purchasers are indeed businesses is to obtain their unique VAT registration number. Many SMEs and freelancers are not VAT-registered and thus transactions with these purchasers must be considered B2C and VAT collected based on the new VAT policy.
Small victory: Domestic threshold exemptions reinstated
The original VAT changes would have removed the domestic threshold exemptions that many SMEs enjoy in their home States. In essence, businesses would have chosen between managing VAT registrations and returns for each destination state, separating out domestic transactions in order to retain domestic VAT exemption, or opting for the simplified VAT MOSS registration and losing the valuable domestic exemption. Following organised protests and petitions, the EU opted to reinstate domestic thresholds. Businesses registering with the VAT MOSS can choose to separate their domestic transactions and take advantage of domestic VAT threshold exemptions. For example, in the UK, businesses with turnovers of currently less than £81,000 a year are exempt from registering for UK VAT - a benefit enjoyed by an estimated 460,000 SMEs in the UK.
New Burdens for SMEs
VAT Registration in Multiple Member States
Under the new VAT policy, businesses selling to a consumer in a different Member State must then register for VAT with that State regardless of the amount of the transaction and must file quarterly VAT returns for each State. Because it is nearly impossible to control digital sales from other EU Member States (i.e. If you sell downloadable PDFs, it is nearly impossible to prevent non-domestic downloads) businesses could end up maintaining VAT registration and returns for up to 28 EU Member States and as many as 75 different VAT rates.
EU’s VAT Mini-One-Stop-Shop
Recognising this administrative burden, the EU created a VAT Mini-One-Stop-Shop (VAT MOSS), which opened on October 1, 2014. Using the VAT MOSS online service means that a business can submit a single VAT MOSS return and payment covering BTE supplies, in respect of all its EU supplies of services, to just one Member State. For example, a business registered for the VAT MOSS online service in the UK, will be able to account for the VAT due on its B2C BTE sales in any other Member States by submitting a single VAT MOSS return and any related payment to HMRC. HMRC will send an electronic copy of the appropriate part of the VAT MOSS return and the related VAT payment to each relevant Member State's tax authority.
However, registering for the VAT MOSS still leaves SMEs with two major burdens:
Verifying Location of Consumer
Whether registering with individual Member States or through the MOSS, SMEs will be tasked with verifying the primary location of the consumer. This challenge is complicated by digital payment platforms such as PayPal, in which the location information may be incorrect or out of date. This means that SMEs must implement a thorough pretransaction questionnaire to collect necessary data to verify the actual location of the consumer.
Data Storage and Compliance with The Data Protection Act
SMEs will now be collecting customer address, phone number and other data as proof of customer location - and this data must be kept on file for up to 10 years in case of a future audit. In addition to the new costs of data storage infrastructure, this makes SMEs subject to the Data Protection Act creating another new administrative burden.
SMEs Faced with Tough Choices
These burdens created by the new EU VAT policy leave SMEs with difficult choices. Taking on the administrative challenges in-house may put a serious strain on the already lean resources of a smaller enterprise. For many of the smallest enterprises, this might prove impossible - there is simply not enough time in the day. On the other end of the spectrum, fully outsourcing your VAT administration through the implementation of a full on eCommerce solution may be an option that is too costly for your business model.
What You Should Be Doing Now
Get to know the changes
The first step is making sure you fully understand the changes to the EU VAT policies. Determine which (if any) services fall under the new VAT policy and consider how the changes may affect your enterprise.
Conduct a system audit
Make sure you are prepared to capture the right information to verify customer location, to store that data for the mandated 10 years and to comply with the Data Protection Act.
Analyse your options
Look closely at the administrative costs of complying with the new EU VAT policy and consider if you are able and willing to take on these responsibilities in-house, or if you will look for an outside solution.
Look for a trusted partner
There is certainly a good bit of urgency in this issue and for SMEs, it can seem overwhelming to tackle this challenge amid the daily responsibilities of running a successful business. That’s where a trusted business partner can prove truly invaluable. Count on us to help you gain a firm grasp on these changes, to help you take a close look at how it might affect your enterprise, your processes and to help you find the right solution to minimise the time and cost burdens of this big change. Email us at firstname.lastname@example.org