B2C Digital services and the new VAT registration rules from 1 January: MOSS: New scheme for retailers of digital services
MOSS: New scheme for retailers of digital services. I understand the principles behind the new VAT registration system for businesses making B2C sales of digital services from 1 January. I really do. It’s the latest step in integrating a common system of indirect taxation across the EU. But I can’t help wonder if these latest rules are just a step too far in terms of application, management and administration. And it seems to me that they could be a huge deterrent to SME businesses.
Maybe I’ve misread all of the guidance, maybe I’m alone in thinking it’s going to be difficult. But if you’ve been at all confused about the scope of the new VAT rules for B2C sales to EU customers and the “Mini One-Stop System” VAT registration, you’re not alone. And the fact that HMRC has, at the last minute, issued some final guidance, isn’t surprising. See R&C Brief 46/14 http://tinyurl.com/pc7e6br.
One issue that had caused a lot of confusion is how the various EU country VAT registration limits will apply, especially if the value of your UK sales is below the UK VAT registration limit (“VRL” for short”), which is currently £81,000 in any 12 month period.
HMRC has now confirmed that you can register in the UK, but your MOSS VAT registration will only apply to UK sales if the value of those sales exceeds the UK VRL. However, you have to register if the value of your B2C sales to customers in other EU countries exceeds the VRL IN THE COUNTRY CONCERNED. Some countries have limits, others don’t, while some countries have limits that only apply for businesses established in that country. 
This means that you may have a UK VAT registration under the MOSS scheme but only be charging VAT to customers in those EU countries where the value of your sales exceeds the VRL IN THAT COUNTRY.
The best place to find information about VAT registration limits, VAT rates and other practical issues in other EU countries is the European Commission website http://tinyurl.com/nr9l9o. But I’ll warn you, it’s not an easy read. And I really wonder just how many SME business owners will just give up doing B2C sales to EU customers altogether because of the fact that they not only have to understand their own country’s VAT rules, but also the rules of their customers’ countries AND have to deal directly with tax authorities in those countries.
One of the things I’ve been thinking about is how HMRC and tax authorities in other EU countries are going to police, never mind administer, the new VAT registration system from 1 January.
Of course, the EU and the national tax authorities have been planning the introduction of this new system for several years and there are a variety of safeguards to monitor the effectiveness/how well it’s being applied/anti-avoidance provisions. The EU Commission has issued detailed papers about the system and how tax authorities are required to police the system. Here’s the most recent/final report/document which sets out the detailed requirements for EU member states in terms of administering the system and agreements between the member states for policing the system.
But it is an unusual situation because as far as I can see, this is the first time that tax authorities are required to implement and administer a VAT system which requires businesses to declare and pay tax for the benefit of a tax authority in another EU country. In principle, every tax authority will have a vested interest in ensuring that their administration/policing of the system is robust so that all the VAT on sales to consumers in their country is collected and paid.
At least you’d hope so, but we all know that different countries have different ways of implementing common rules and different ways of dealing with underdeclarations of tax, whether deliberate or not. Also, it’s much more difficult to administer and/or police a system for sales to consumers because there are no inbuilt safeguards into the system.
Whether or not you’re keen on the whole concept of the EU “Single Market”, it’s difficult to argue that one of the very good things about it is the whole system of rules for EC B2B sales of goods and services. The combination of the invoicing rules, the European Sales Lists and Intrastat declarations provide a very robust system for policing sales between businesses and deterring avoidance. But when we’re talking about the new B2C VAT system It’s difficult to see how tax authorities can be confident about the effectiveness of the new rules when there are few if any similar inbuilt mechanisms for validating the accuracy of declarations and preventing avoidance.
We’re now only 2 weeks away from the date on which the system goes live and I thought it would be interesting to summarise the main problem areas. You may already have addressed these issues if you’re required to register under the scheme, but if not, just give some thought to how you might deal with these issues should they arise.
These are some of the main issues where I think there could be real problems:
How can the tax authorities police the system effectively?
• Failures to register: how can tax authorities be certain that every business selling digital services
• At what point does a teenager coming up with a funny app that goes viral become a business for VAT purposes? There’s no de minimis limit for new rules but how on earth is any tax authority supposed to be able to identify everyone doing B2C sales?
• How are national tax authorities supposed to monitor correct VAT liabilities for sales in several other countries?
How are B2C businesses supposed to deal with VAT issues for sales in several EU countries?
• What exactly IS a “digital services”? There’s a lot of information in the EC guidance, but every EU country has some latitude to its own interpretation of what is or isn’t a “digital services”.
• If you’re selling to customers in a number of countries, you have to find out the correct VAT liabilities for each type of “digital service” in each country. It’s difficult enough understanding UK VAT rates, but if you’re doing B2C sales, you have to apply the correct VAT liability for each type of service in each country. There is a lot of guidance on the EU website, but you might still have to contact tax offices in other EU countries if you’re confused or uncertain.
• What about national rules for invoicing consumer sales? What sort of document is required under national law?
• Is the VAT value affected by discounts, e.g. introductory pricing or continency discounts, in each country?
• How to account for VAT on returns or refunds?
It’s one thing expecting the global giants to deal with these issues – the mega internet businesses probably employ a large proportion of the tax professionals in every EU country, plus it’s a lot easier for them to access the tax authorities in any country to discuss practical issues.
But SMEs who have to register under the new rules may wonder whether it’s worth the hassle and potential for problems to continue selling to consumers throughout the EC.
If you have to register and deal with VAT for your B2C sales, you have my sincere sympathies. Good luck and, for once in my life, I really hope that my predictions are totally wrong!