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VAT - The Digital Revolution

With effect from 1 January 2015 the VAT rules for broadcasting, telecommunication and electronic (BTE) services will be changing. This will have a direct impact on businesses making digital sales such as software and music downloads over the internet.

The current position is that a sale of digital services by a UK business to a non-business customer in another country is treated as having been made in the place where the business is located. So a UK business making digital sales, such as music downloads, to non-business customers will be VATable in the UK regardless of the location of its customers.

From 1 January 2015 the sale of digital services to non-business customers within the EU will be taxed in the customer’s country of residence, not the supplier’s. Meaning that a UK business making sales into France and Germany for example will, from 1 January 2015, have to apply VAT at the rate applicable in France and Germany to those sales and file a local VAT return.

A business can only benefit from a higher VAT registration threshold in the country in which it is established so with effect from 1 January 2015 a UK based business selling to multiple countries within the EU will be required to register for and file VAT returns in each EU country to which supplies are made. HM Revenue and Customs has recognised that filing multiple returns in other EU countries would be problematic. As a result it is possible to make a MOSS (Mini One Stop Shop) registration which would allow the business to submit a single return and make a single payment each quarter to HM Revenue and Customs in respect of both UK and EU sales.

In practice these changes could present a number of potential problems. For example, consider a UK based business making digital sales in the UK and across Europe. This business is operating below the UK VAT registration threshold and is not registered for VAT.

From 1 January 2015 this same business will be required to register for VAT in, let’s say, France, Germany, Italy and Spain in respect of sales made. This would of course result in a need to comply with the VAT charging and reporting requirements of four different countries.

As a result this business may wish to take advantage of the MOSS registration referred to above rather than dealing with 4 different tax systems.

However, the MOSS registration is only going to be available for UK VAT registered businesses so our previously unregistered business will now also have to register for VAT in the UK in order to manage its additional EU VAT responsibilities. This could have a considerable impact on the profit margin of this business.

If you are making digital sales outside of the UK it is imperative that you act now. Please contact your local Rothmans office for further advice.

Richard Hutchinson