How proposed changes to VAT could affect digital companies
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EU rules around digital services have long been a source of disquiet: so how is a government reacting to the changes brought in on 1 January 2015?
It was recently announced that there are to be changes to the much maligned EU VAT rules for digital services. Most businesses will welcome the prospect of simplification of the rules being considered by the EU Commission, however, it is highly unlikely that any meaningful changes will be implemented anytime soon.
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.
What is all the fuss about?
The rules for VAT on cross-border ecommerce provided by businesses to end consumers (the rules for business to business supplies remain unchanged) were changed on 1 January 2015.
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 music streaming or messaging services.
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 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.
These 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 will have 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.
The European Commission introduced the Mini-One Stop Shop (“MOSS”) 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.
What has happened?
The European Commission wants to help identify ways to simplify the VAT paid on cross-border ecommerce transactions. They are looking for feedback on how MOSS has been working and acknowledge that some simplification measures such as introducing a VAT registration threshold would be helpful for smaller businesses. This is all part of the EU’s plans for the EU Digital Single Market Strategy.
The Commission then launched a public consultation which aims to gather views and advice from business owners and representative parties ahead of legislative proposals aimed to herald new VAT rules after 2016.
The consultation focused on 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 and the possibility of extending MOSS to other intra-EU sales.
The EU commission has acknowledged that they promised to support businesses (especially smaller ones) to reduce burdens arising from different VAT regimes within the EU. As part of this commitment they decided to ask businesses and other stakeholders to help find the most effective and meaningful ways of delivering on this promise.
As part of the consultation the Commission 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.
It is unlikely that any changes will take place until 2017. 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.