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On 1 January 2015, the new “place of supply” rules for sales of digital services to EU consumers (“B2C”)means that many UK businesses will have to change their VAT accounting. Instead of charging UK VAT, businesses will now have to charge VAT in their customer’s country. So if you sell digital services to a customer in Italy, you have to charge Italian VAT.
This means that you either have to register for VAT in Italy, or alternatively you can use the new “Mini One-Stop Shop” registration arrangement (“MOSS”) whereby you register with HMRC as a B2C supplier of digital services (which is separate to your normal UK VAT registration) and pay your Italian VAT to HMRC using the MOSS VAT return. HMRC will then pay the VAT to the Italian tax authority.
The scheme is explained in detail by HMRC here https://www.gov.uk/register-and-use-the-vat-mini-one-stop-shop. CHECK OUT THIS INFORMATION IF YOU MAKE ANY B2C SALES OF DIGITAL SERVICES in case you have to register for VAT from 1 January.
Charging the right amount of VAT
One of the main problems for all B2C businesses will be charging the correct rate of VAT, as each member state has its own VAT liability rules. HMRC explain where to find information about rates in other countries in their guidance https://www.gov.uk/register-and-use-the-vat-mini-one-stop-shop or you can check out the guidance on the EU Commission Europa website here http://tinyurl.com/2sj4hc .
You don’t have to charge VAT if the services concerned are “exempt” from VAT, as defined in the rules of the country concerned. In practice this is usually the same as “zero-rated” in the UK, for example children’s clothing, food and drink or books.
Most of you who are accountants or bookkeepers will understand the difference between the terms “exempt” and “zero-rated” in UK VAT law and I’ve explained this below. However as I’ve explained below, the term “exempt” can mean either in EC VAT law.
Exempt
In both EU and UK VAT law, the term “exempt” means that supplies, i.e. sales of goods and services, are not liable to VAT. “Taxable” supplies are liable to VAT.
EU VAT law also use the term “exempt with credit”, which normally applies to sales similar to the UK zero-rating. I’ll explain this more blow.
UK law
This is how the terms are used in the UK:
TAXABLE supplies are those charged at 20%, 5% or 0%. Businesses making taxable supplies can claim VAT on goods and services used to make those supplies, with certain exceptions such as buying cars, staff entertainment etc.
EXEMPT supplies are not liable to VAT. Businesses making exempt supplies cannot normally recover VAT on goods and services used to make those supplies.
Businesses which make both taxable and exempt supplies can normally only recover VAT on expenditure used to make the taxable supplies, unless the VAT on costs used to make exempt supplies falls within certain “de minimis” limits. These businesses are “partly exempt” for VAT purposes.
The important thing to remember is the difference between zero-rated supplies and exempt supplies. You don’t have to charge VAT on either type of income, but you can normally only recover VAT on expenditure used to generate zero-rated income BECAUSE ZERO-RATED INCOME IS TAXABLE INCOME.
EU law
The EU VAT Directive also uses the term “exempt with credit”.
This normally means that the business doesn’t charge VAT on the income but can claim VAT on the expenditure, so in practice it’s the same as “zero-rated”.
However, as with all things European, every member state has different ways of using these terms in their own legislation. Some will use the term “exempt with credit”; others will have a “zero-rate” of taxable supplies as we do in the UK. So check out the guidance on the EU Commission Europa website here http://tinyurl.com/2sj4hc .
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