2015 VAT changes

In place from 1 January 2015, UK microbusinesses selling digital services directly to customers in the EU will have to comply with a new VAT regime. VAT liability has switched from where the digital service is sold to the country where the customer is based, creating significant administrative problems for our smallest businesses.

Why has this change been introduced?

An EU Directive from 2008 is the precursor to this change. This was intended to tackle large companies avoiding tax by operating through subsidiaries in low VAT member states – such as Amazon funnelling its EU sales through Luxembourg.

All businesses selling digital services directly to consumers in other EU member states will however unfortunately be caught in this net, requiring data collection and accounting procedures which are simply not suitable for small businesses of this nature.

It’s worth noting that in a letter to Conservative MEP Syed Kamall, Treasury Minister David Gauke MP stated that during the negotiations at EU level the UK ‘had argued strongly for a cross-border threshold so that the smallest businesses would be outside the system altogether. But there was no support from other Member States or the Commission’.

What counts as a ‘digital service’?

A full list of what are considered “digital services’ and hence fall within the regulation is available here, but some examples are below:

  • supplies of images or text, such as photos, screensavers, e-books and other digitised documents eg, pdf files
  • supplies of music, films and games
  • online magazines
  • website supply or web hosting services
  • supplies of software and software updates
  • advertising space on a website

Using electronic communication to facilitate trading does not automatically constitute supplying digital services. Generally, those considered “live” services, such as consultancy, are not included. Government has clarified that the following sales are not subject to the VAT changes:

  • supplies of goods, where the order and processing is done electronically
  • 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 data will I need to collect?

In order for the seller to verify the customer’s location, you will need to collect certain data. You will need to collect at least two of the following, storing the information securely for ten years for auditing purposes:

  • Billing address
  • IP address of their device
  • Location of their bank
  • Area code of their SIM card or landline
  • Anything else relevant for a commercial transaction that reveals their location

However, government has decided to give microbusinesses six months to adapt to these requirements. Until 30 June 2015, businesses within the £81,000 annual turnover threshold will not be forced to manually collect information to verify their customer’s location. Instead, businesses will be able to ‘base their customer location VAT taxation on information provided to them by their payment service provider’.

How will I actually pay VAT?

By registering for HMRC’s VAT Mini One Stop Shop (MOSS) service, you will complete one VAT return and make quarterly payments which automatically cover all sales of digital services to EU customers. If you fall under the £81,000 annual turnover threshold, you will not need to charge VAT on sales to UK customers.

As noted above, until 30 June 2015, if you fall within the turnover threshold you will not be forced to manually collect information to verify your customer’s location – the onus in this transition period will fall on the payment service provider.

What can I do to make complying simpler?

Julie Hall, an entrepreneur, has written an excellent summary here of possible solutions to ease compliance, which include:

  1. Use a Simple Shopping Cart: There are lots of simple shopping carts that you can use where you can ask for the information you require at the point of sale. Government has suggested that all you need is the billing address for their credit card and their phone number including the country code. A couple of suggestions are: Easy Digital Downloads which has an extension or Woo Commerce, a more complex shopping cart that also has an extension.
  2. Use a Marketplace as your sales channel: If you sell digital courses, Udemy is a great option for video courses. They do charge you 30% of the price for the privilege, but you can create your own link for your community and they don’t take commission for sales from that link. There are lots of other marketplaces for different types of businesses, so check in your industry what is available.
  3. Redirect people from different countries to different pages. If you have a WordPress website, you can use a plugin called GEO IP, which redirects people based on their Country IP address to different pages on your website. The same developer has also created a second plugin which allows you to create country specific content from within the same Wordpress post called WP Country Content Shortcode. Using the GEO IP Plugin, you can redirect people from the EU countries to specific pages relevant to them. Your UK customers can be sent to a different page and International customers to another page again. Alternatively using the WP Country Content Shortcode you can create specific content for people from different countries all on the same page.

Is IPSE doing anything?

Yes. We are exploring whether it is possible to suspend the implementation of the new VAT regulations, given the crippling impact the regulations have been proven to have on many microbusinesses. We are working with various organisations such as Enterprise Nation, EU VAT Action and others to highlight the issues and urge government to take speedy action.

Specifically, we are in discussions with MPs around tabling Parliamentary questions to raise the issue. IPSE is also keen to see a joint letter signed by key business organisations sent to Treasury.

It is also important that in the meantime we work with government and other organisations to ensure the requirements are less of a headache to comply with - the introduction of a transition period for the data collection requirements is one example of such a small concession.

We will also use our contacts in Brussels to help bring greater attention to the problems that implementation of the EU Directive has created.

Parliamentary questions

IPSE raised this issue in January 2015 with David Morris MP, the ambassador for the self-employed. He then decided to submit a number of questions for Treasury to answer, enquirying if government was taking action to mitigate the impact that these changes would have on microbusinesses (both the questions and answers can be viewed here.

Treasury's responses were rather ambivalent, stating that HMRC would 'continue to engage with and provide support to UK businesses, particularly small and microbusinesses'. Treasury also outlined that HMRC 'have provided guidance...to ensure all businesses understand all their options'. 

This guidance includes advice on how small businesses can register for VAT in the UK to be eligible for MOSS and still benefit from the UK’s VAT registration threshold for sales to UK consumers'. Their response also remphasised the flawed rationale for the changes, arguing that the regulations 'remove a distortion of competition which unfairly favours businesses that locate to a member state with a lower rate of VAT than the UK. It therefore creates a level playing field for all UK businesses and helps protect UK revenue'.