I’m feeling a bit MOSSED out at the moment. Every where I go and everything I read seems to be about the new MOSS registration scheme for sales of digital services to consumers in other EU countries. There are a lot of articles in the accountancy and tax press and everyone has something to say about it.
Last week I was at a networking event and it was clear that a lot of people are confused about the MOSS scheme and how it interacts with normal UK VAT accounting and registration rules. And I’m really not surprised. Every time I look at HMRC’s guidance, I see another potential issue and it seems clear to me that despite a good attempt at covering all of the issues, even HMRC can’t identify all of the potential practical problems with the scheme . I suspect that a lot of problems won’t become apparent until businesses who are registered under the scheme start submitting VAT returns in April and even then I think it will take a long time to sort them out and ensure that all of the problems have been identified.
HMRC guidance
When I looked at HMRC’s guidance again last week, I identified 8-9 distinct issues that don’t seem to have been addressed in HMRC’s guidance. That means that businesses will have to find the information for themselves.
And as with all such situations, the problem isn’t what people don’t understand, it’s the issues that they don’t even consider that are probably going to cause the problems
Here’s a good example. Last year, HMRC published their main guidance about the rules in October. However this was updated in December LINK to address a few outstanding issues, but this included guidance for businesses who aren’t registered for UK VAT, but have to register for MOSS. I explained the way this works in my recent forum posting. However this is a fundamental issue and if HMRC can’t identify such important issues before the scheme starts, how are businesses supposed to cope?
I’ll be posting comments on the forum over the next few weeks about some of the issues that don’t seem to have been addressed.
Micro-businesses: what’s a business?
HMRC confirmed that if you’re not currently liable to register for UK VAT, but you make B2C sales of digital services to consumers in other EU countries, you have to apply to register for UK VAT before you can register for MOSS. You don’t have to pay UK VAT on your UK sales, but you have to register for UK VAT simply to enable HMRC to manage the scheme in the UK more easily and because the MOSS VAT registration scheme can currently only be accessed via their their current online services for VAT registered businesses.
HMRC explained this for the benefit of small businesses. But it got me wondering about those VERY small businesses; which I’ll call “micro-businesses” and how their activities could be properly administered. I suspect a lot of micro-businesses won’t even be aware that they have to register for VAT and/or may not even consider that their activities constitute a “business” for VAT purposes.
I’m thinking about people who perhaps write software, apps, ebooks or other digital products as a sideline to their employment or other business activity. They might sell their products to finance their hobbies or simply to generate additional income. They might be pensioners or school children or students. Does this mean they have to pay VAT on their “business” income?
So when does it become a business activity? Well if you follow HMRC’s guidance or the EU rules, it could apply to any such situation.
HMRC explain the term “business” in VAT Notice 700, the VAT Guide http://tinyurl.com/lxuf57o in section 4.6.2 as follows:
“4.6.2 business means any continuing activity which is mainly concerned with making supplies to other persons for a consideration (see paragraph 4.5). The activity must have a degree of frequency and scale and be continued over a period of time. Isolated transactions are not normally business for VAT purposes”
It doesn’t matter how big or small the turnover, it’s the nature of the activity that counts.
If you’re doing B2C EU sales of digital services, then the issue isn’t how HMRC defines the term, it’s the viewpoint of the governments in your customers’ countries that matters.
The EU legislation uses the term “economic activity” which is generally assumed to be broader than the term “business”, so it’s likely that other EU countries would expect micro-businesses to pay VAT on sales to their citizens regardless of its size. Also most EU countries have no “turnover threshold” for VAT purposes, so businesses of all sizes have to pay VAT on their sales.
I’m really not sure how this particular issue will play out over the next year or so, but I can’t help thinking that at some point, the EU governments who are administering the scheme will agree that there has to be some sort of EU wide registration limit, if only for MOSS.
Anyway, this is one of several potential problem areas about the scheme. I’ll be writing about some of the issues I’ve identified, but hopefully HMRC will pick up on these issues and will be issuing more practical guidance over the next few months.
Marie
January, 2015