Complying with the new VAT rules on digital content
Those of you involved in the sale of digital content may have been alarmed by some of the press coverage of the new rules that came into force on 1st January which have suggested that they are so difficult that all but the largest companies should give up trying to trade outside their own EU country. Well the first thing is to follow Corporal Jones’ advice “Don’t Panic”.
The new rules are designed to stop countries losing out on VAT revenue where large companies set up in a small low VAT country but sell most of their goods in other countries by changing the basis of the VAT payment so that the VAT rate is set and paid in the country where the customer lives rather than the seller. This brings digital services into line with other inter EU trade. Greenwich Consulting claimed in a report last year that the London Olympics could have been funded out of the revenue lost to the UK with change left over so we are talking about big numbers.
For a small company that is not registered for VAT in the UK as its turnover is below the VAT threshold this all looks very daunting but there is a lot in place to help.
First of all although under the new system if you want to make the most of the huge EU market then you will have to be registered for VAT but you will not if you are still under the threshold have to charge your UK customers VAT. In relation to the UK your only obligation will be to file a nil return quarterly. Secondly unlike traditional traders you will not have to register separately in each of the EU countries where you want to sell. HMRC will handle this element for you.
So how then does it work? Firstly if you are not registered for VAT you must register and then add MOSS as a secondary service. If you are already registered you simply register additionally for MOSS. MOSS is HMRC’s Mini One Stop Shop. Basically you will fill in a single form each quarter ( first report is due in by 20th April for Q1 sales) and send it in with a single payment covering all your non UK EU sales and then HMRC will divide it up for you and make the appropriate payments and filings to the individual VAT offices around Europe. You can find out more and use the links to register at https://www.gov.uk/register-and-use-the-vat-mini-one-stop-shop
On a practical level however you are going to have to know where your customer is based and what rate of VAT to charge them and this may mean changing your order form or process to ensure it collects suitable evidence. Until June you are going to be able to rely on your payment processor to check where the customer is based but thereafter current rules mean that you will have to be able to verify this for yourself and here is probably the biggest issue for the micro business – you are going to have to hold two non contradictory pieces of evidence as to where your customer is usually based. The sort of evidence that is suggested includes:
- Their bank details
- Their billing address
- The country code of their SIM
- The location of their fixed telephone line through which the service is to be delivered
- Some sort of country specific product coding that ties in with the country of use.
A process you might use to ensure compliance is suggested in the following HMRC guidehttps://www.gov.uk/government/publications/revenue-and-customs-brief-46-2014-vat-rule-change-and-the-vat-mini-one-stop-shop-additional-guidance/revenue-and-customs-brief-46-2014-vat-rule-change-and-the-vat-mini-one-stop-shop-additional-guidance
Another aspect of the new rules which has been rather overlooked is that you will have to register with the ICO ( data protection regulator) You can do this here https://ico.org.uk/for-organisations/register/
So there are undoubtedly administrative burdens with the new system but these are not insurmountable and small business organisations are working with government to address these and further guidance will almost certainly be forthcoming over the next few months. If you have specific queries you can also contact HMRC for help directly and generally they really are very helpful and will talk you through your problem. Most importantly there are opportunities too not just a market of around 507 million people but also to produce products and services to small digital suppliers to make it easier for them to address these administrative issues.