VAT rules for digital businesses could be changing – Have your say now

New VAT rules for ecommerce businesses were introduced this year which applied to cross-border transactions between businesses and end consumers (business to business transaction VAT rules were unchanged).

These changes were not welcomed by the majority of businesses involved; however, it has recently been announced that there will be a review of these rules at EU level and a public consultation (closing on 18 December) has now been launched allowing businesses to have their say. But what is all the fuss about?

New “place of supply” rules were introduced for telecommunications, broadcasting and electronic services, levying them where the customer belongs, rather than where the supplier is located. This affects all services delivered through apps as well as other similar digital services provided to individuals such as in app purchases for additional content and services and online streaming of videos and music.

As a result, businesses providing cross-border digital services within the EU must account for EU VAT based on where their customer belongs (if their customer is not a business).

Having to account for EU VAT on sales made in various EU member states at different VAT rates has understandably exasperated many digital businesses providing services to individuals. Many smaller UK start-ups are initially not even required to be VAT registered as they are trading below the VAT registration threshold.

The measures were widely criticised by business lobbying groups because of the impact on small businesses, start-ups, and the potential to deter EU trade. Businesses end up having to budget, account for and pay EU VAT at several different rates for the same digital services provided within the EU. This has a detrimental effect on the budgeting process, accounting, administrative burden and ultimately, of most importance, the profit margins for many smaller start-ups and small businesses.

As a result, the European Commission now wants to help identify ways to simplify the VAT paid on cross-border ecommerce transactions. Through the consultation, they are looking for feedback on how MOSS (the ‘Mini-One Stop Shop’) has been working, and acknowledge that some simplification measures – such as introducing a VAT registration threshold – would be helpful for smaller businesses. A service that the EC introduced in 2015 to ease the administrative burden, MOSS enables businesses to declare and pay VAT for each EU member state through their own home country portal rather than registering for VAT locally in each EU member state separately. This is all part of the EU’s plans for the EU Digital Single Market Strategy.

The public consultation will gather views and advice from business owners and representative parties ahead of legislative proposals aimed to herald new VAT rules after 2016. The consultation will focus on the following:

  • The current VAT rules for cross-border supplies of goods and services
  • How the implementation of this year’s VAT changes to the place of supply went
  • How MOSS has been used
  • The possibility of extending MOSS to other intra-EU sales

As part of the consultation, the Commission has announced plans proposing recommended simplification measures for small businesses including a VAT threshold, allowing cross-border businesses to be audited only by their home country and removing the VAT exemption for the import of small consignments from suppliers in third countries.

What next?

This consultation presents a real opportunity to ensure that IT businesses can help shape the future of VAT treatment for the digital economy. We would urge all businesses involved in digital services to make a contribution and take part in the consultation which can be found here.

Legislative changes are not expected until 2017 with draft legislation being introduced in 2016 and therefore small businesses and start-ups in the UK are unlikely to see any real benefits for some time yet. However, that said, the more people that take part in the consultation, the better the chance that positive changes will be enforced.

Even then, we will need a high level of co-operation and political willing from the majority of all 28 EU member states to actually maintain traction for change and to facilitate the propelling of VAT into the digital age, but a promising move for all ecommerce businesses which could soon reap the financial benefits.

Kamlesh Chauhan, Senior VAT Manager in the Creative, Media and Technology team at haysmacintyre

Image source: Shutterstock/bleakstar