Today sees the introduction of new European Union VAT legislation for businesses supplying digital services such as e-books, software and web services, to EU consumers, and a not inconsiderable amount of faff for thousands of micro-businesses as a result.
The UK government’s reasoning for the introduction of VAT MOSS (mini one stop shop) is:
“The changes will create a level playing field for UK businesses by removing the current competitive advantage of EU member states with lower rates of VAT.”
The full text of the rules and all its twisty-turny dimensions can be found at the HMRC.
N.B. While the principle audience for this blog post update is UK based businesses, the EU change actually impacts any business supplying digital services to EU consumers, wherever they are in the world.
Why the change?
I concede there is a good bit of sense in attempting address the tax avoidance scenario I’ll now describe. For example, I remember the first time I received a bill from Skype I was confused about why the VAT rate shown was only 15 percent and not the UK’s 20%. I then noticed the bill had originated from Luxembourg. In an instant and on behalf of the entire population of the United Kingdom I momentarily felt like I’d been legged-over by a smirking accountant at Skype, with all due respect to the fine people of Luxembourg.
So, it’s sensible – I think, but I’m totally not a tax expert – to brick up some of the gaps in existing EU VAT legislation to try to level the playing field between each of the EU’s finance ministers individual tax raising powers, but there has been a good deal of discussion in recent weeks about the collateral damage the universal imposition of these new VAT MOSS rules will bring to micro businesses as a result.
Concern has been growing because the new rules don’t just impact large, well resourced organisations who locate their billing operations in low VAT territories inside the EU to deliberately to reduce their tax bills, but they also impact every size of business from the tiniest, kitchen table freelance writers up.
Quick example : if you’re a freelance writer and have a couple of sideline projects, including one that generates say £10k a year (well below the UK’s domestic VAT threshold) by selling your works as e-books online – (because, why wouldn’t you?) – you are now required to systematically gather and handle extra information at the point of sale, accurately record (and retain those records) the locations of your customers (also working out it they are consumers and not businesses and in the EU), and then calculate and charge the different rates of VAT based upon their locations, not yours. And then report and deal with those different aspects of EU VAT on a regular basis.
It sounds like a simple enough change, but the implementation is likely to be complex. And remember, you’re a self-employed writer whose biggest operational challenge to-date was when your local coffee shop changed the password to its free WiFi service one fateful Wednesday afternoon in 2011, costing you four minutes of lost productivity and your train of thought. Plus the fact you became a freelance writer of eBooks precisely because you didn’t want to have to deal with systems and back ends, and processes and policies and cumbersome EU VAT rules.
The government says that a tiny minority of UK micro businesses will be adversely impacted by the new VAT MOSS rules but that sort of misses the point, and it also hugely diminishes the contribution that small businesses collectively make to the economy. It’s feared that the added burden of managing the rule change will many small businesses to shut up shop, and that’s a real shame.
my site is being hammered as providers detail their #VATMOSS changes in the last days of the year. There was no awareness of this.
— Rachel Andrew (@rachelandrew) December 31, 2014
The #VATMOSS hashtag is depressing atm. So many creators shutting up shop tomorrow due to stupidity of EU. Mind you, I shut up shop already.
— Suw (@Suw) December 30, 2014
Since the UK’s press finally shone its light on this aspect the UK’s tax authority HMRC, has taken steps to soften the impact since it was apparent that awareness of the new rules among the UK business community was woefully low. But on the whole it still feels like an unnecessary burden for many micro business owners to have to take.
Here comes the science bit
So if that’s the why about VAT MOSS – here’s a summary of some of the key aspects to be mindful of if you’ve just heard about it.
- VAT on digital services will be paid in the consumer’s country, not the supplier’s country. It will be charged at the rate that applies in the consumer’s country.
- There are some huge variations between VAT rates across the EU, for example Luxembourg has 15 percent, the UK has 20 percent and Sweden 25 percent. These new rules have been brought in the level the playing field across the board.
- These new rules have been controversial, are complex, open to interpretation and even at this late stage being changed. Many twitter thread and blogs have been cover this subject and can be easily found online. If you’re still unsure, it’s good sense to get professional advice to help guide you through the process.
- Simply if you are selling broadcasting, telecommunications or e-service to consumers in another EU country without using a marketplace then this will affect you and it’s likely you will need to register for the VAT MOSS Scheme. Look at the HMRC VAT MOSS flowchart for help to decide on whether this does affect you.
- MOSS, standing for Mini One Stop Shop, is what is saving you from registering for VAT in every single country you supply to. For example, if you were supplying eBooks in Italy, Spain and France, you would need to register for VAT in all three of those countries, and complete all of the VAT filing within those countries, on top of your UK VAT returns!
- The VAT MOSS scheme cuts away all the added admin, and requires just one quarterly report (VAT MOSS Return), totalling what you have supplied each country and at which rate. The total VAT collected is then paid to HMRC who then distribute it to the various EC countries based on the figures from the VAT MOSS Return.
We made changes to Xero in early December to help UK customers more easily record and report their VAT MOSS sales.
Details of these changes can be found in Xero Help.