On January 1st 2015, the EU is changing the rules governing the VAT charged by companies providing 'digital services' to consumers in the EU. If you are based in the EU and providing 'digital services' to customers in EU countries other than the one you are based in, these changes affect you. If you don't provide 'digital services' or only sell your 'digital services' to customers in the same country you supply them from, then you are not affected by this change.
What is changing?
Currently, companies based in the EU charge VAT at the rate of the country they are based in. For example, names.co.uk is based in the UK, so we charge UK VAT to our customers. From January 1st 2015, VAT must be charged at the rate of the country where the customer is based. This means a names.co.uk customer who lives in France will need to be charged VAT at the French rate instead of the UK rate.
What types of transactions are covered by the changes?
Sales to 'consumers' only. Business to business transactions are not affected by these changes. The EU defines a business to business transaction as one where the purchasing business has provided a VAT registration number to the seller. Everything else should be treated as 'business to consumer' and is covered by these changes.
What is a 'digital service'?
The EU defines a 'digital service' as falling into one of three categories: 'broadcasting', 'telecommunications' and 'e-services'. 'Broadcasting' covers the transmission of TV or radio programmes to a set schedule.
'Telecommunications' is a very broad category, covering broadband suppliers, domain name registrars, web and email hosting as well as older technologies like telephony, SMS, etc. This is the category that the services names.co.uk provides come under, so we are affected by this change.
'E-services' covers selling 'content' online, such as apps, videos, music, books, online training etc. If you are selling content that is delivered to customers in the EU electronically, then you need to be aware of these changes and take appropriate steps.
How do I decide what country my customer is in?
The regulations state that you must get and retain two pieces of information that indicate what country your customer is in. This could be a combination of (but not limited to):
- Customer's address
- Customer's phone number
- Customer's bank account details
- Customer's IP address
How will I pay the VAT each country is owed?
You have two options:
- Register to pay VAT in each EU country you have customers and file a tax return in each country every year.
- Use the VAT Mini One Stop Shop (VAT MOSS) portal so you just file a single return and pay HMRC each year.
With the first option, you need to understand that the UK has a very high threshold before businesses are require to register for VAT. At the time of writing, this is £81,000. Other EU countries have a much lower or zero threshold. Therefore while you may not sell enough to need to register for VAT in the UK, you may need to register in other EU countries if you even sell one 'digital service' to someone in that country.
The second option is only available if you are registered for VAT in the UK, which as stated you only need to do if you are selling more than £81,000 of services a year. You can voluntarily register for VAT if you wish.
You may well want to take professional advice on what is the best approach for you to take.
The likelihood is that this is going to represent a large amount of work for not a lot of benefit for people selling 'digital services' to customers in different EU countries. However it is important that you understand these changes and ensure you are charging VAT correctly to EU customers from January 1st 2015.