From 1 January 2015, businesses selling digital services to private consumers (B2C) in the EU must pay new VAT, the Mini One Stop Shop (MOSS) in the customer’s country and at their rates. We explain how this could affect your online sales.
Who does it affect?
This change affects you if you are a business selling a digital service to private consumers who are in an EU member state other than your own.
Digital service includes ebooks, downloaded software, video on demand, music downloads, gaming, or online auctions. The service must also be automated (or with a minimal amount of human intervention) for it to count – so sending documents to a client by email is not a digital service. (Non-digital services continue to be taxed based on the place of supply.)
Private consumer means an individual who is not running a business. If your customer provides a VAT Registration Number or other proof of being “in business” then VAT is paid in your own country as before.
Note that there is no minimum turnover threshold, unlike UK VAT – all EU sales, no matter how small, now require VAT to be paid.
For more detailed information, read the GOV.UK guide and their flowchart for determining if you are affected (PDF).
Why has this been changed?
The law has been changed as a result of EU legislation, to prevent large companies registering their digital service business in a country with a lower tax rate (e.g. Luxembourg – 15%). This will create a more level playing field for smaller businesses in the UK (20%), as all businesses now have to charge the same VAT rate.
How is the VAT paid?
The easiest way to pay VAT due to the EU member states is to register for a new government service called VAT MOSS (Mini One Stop Shop). You can then submit a quarterly VAT MOSS return (separate to your UK VAT return) and a single payment which is distributed to the appropriate countries.
If you are not already VAT registered (turnover below £81,000), you will need to register for UK VAT, but you do not have to start charging VAT to UK customers as long as your sales stay below the threshold. (This is a late change from the original plan to require small businesses to start paying VAT on all sales if they registered for VAT MOSS.)
The alternative options are to register for VAT in each of the EU member states where you have customers (up to 27 of them!), or stop selling digital services to customers in the EU.
(Note that if you sell on certain platforms, e.g. Apple App Store, they may handle VAT payments on your behalf – and in that case you do not have to do anything. If you’re unsure, do check with your provider.)
What do I need to do?
If your business is affected by this change, you need to modify your website and/or business processes to:
- Determine which of your customers are businesses and which are consumers
- Collect 2 pieces of evidence to show where each consumer normally lives (e.g. a verified credit card address plus a declaration from the customer) and ensure that they match
- Keep this evidence (and other information about the transaction) securely for 10 years (which also means you may need to register as a data controller with the Information Commissioner’s Office)
- Register for VAT MOSS – note that there is a deadline of 10 February 2015 if you take any EU payments in January
- Submit a VAT MOSS return and pay the appropriate VAT each quarter (within 20 days)
Note that you don’t necessarily need to charge a different amount to customers in different countries – you can choose to charge a flat rate and absorb the variable VAT rates.
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