VAT changes for digital services
New VAT changes for digital services being introduced from 1 January 2021. We discuss the existing and new rules for digital services below.
Which businesses are impacted by the new rules?
The VAT changes for digital services affect suppliers of digital services to non-business customers and consumers receiving these supplies. You can see HM Revenue's definition of digital services here. However, essentially they are as follows:
Therefore, those businesses selling apps, e-books, streaming services, radio broadcasting, dating services and electronic subscriptions of newspapers etc are most likely to be affected.
What are the existing rules?
For many years, supplies of digital services to non-business customers within the EU were subject to VAT in the member state where the supplier belonged.
Because numerous suppliers were based in EU jurisdictions with low VAT rates, HM Revenue changed the rules from 1 January 2015. This was in order to combat what they perceived as wide scale VAT avoidance.
The new rules changed the member state where the VAT was due to the state where the consumer belonged. This means that UK consumers of the services above, now pay UK VAT regardless of where the supplier of those services belongs.
Therefore. a business supplying digital services has to charge VAT at the appropriate rate for the EU territory where their consumer is based.
Without special rules, suppliers would need to register for VAT in all EU member states where they have customers. As there are no minimum VAT thresholds, supplying a single customer within one member state would require VAT registration in that state.
To avoid the necessity for multiple VAT registrations in each EU member state, UK businesses supplying digital services can opt to use a Mini-One Stop Shop online service, MOSS instead.
For suppliers within the EU, the ‘Union MOSS’ allows a single VAT return to be submitted and for the payment of VAT on those supplies, to be made in the member state where the supplier belongs. This means suppliers don't have to pay tax separately in each country where they do business.
It is not compulsory to register and operate MOSS, but the change of supply rules mean that the alternative is individual VAT registration in each member state where one or more customers are located.
EU based businesses making B2C digital supplies to EU consumers can choose to use the Union VAT MOSS online service. Non-EU suppliers of digital services, currently making supplies to EU consumers, are required to register for the non-Union VAT MOSS Scheme
Who can register for MOSS?
You will be allowed to register for the scheme if you make (or intend to make) one or more qualifying scheme services (see below) as a business and you are established in the UK. Alternatively if you're not registered in any EU member state, though your business has a fixed establishment in the UK, you potentially qualify to join the scheme.
What are qualifying scheme services?
Qualifying scheme services are where the recipient of your digital services, is a consumer (non-business customer) based in a EU member state other than the UK.
VAT Registration for MOSS
It should be mentioned that you cannot include UK VAT for UK sales on a MOSS VAT return. This must be accounted for on your UK VAT return. Once registered for VAT and MOSS you must use the same VAT registration number as you currently use for your UK VAT return.
MOSS VAT returns
Once you're registered for the scheme, a VAT return must be submitted for each reporting period. A reporting period can each whole or part calendar quarter while registered for the scheme. The MOSS VAT return is in sterling and conversions from other currencies need to be made using the exchange rates published by the European Central Bank.
MOSS VAT Returns must be submitted electronically within 20 days after the last day of the reporting period to which it relates. Any VAT due is paid on the filing date.
In order to comply with the rules of the scheme it's particularly important to establish where your consumer is based. You can see further details about this in HMRC's guidance here.
Changes from 1 January 2019
It was eventually accepted that the process could be arduous for a business with relatively modest sales of digital services to other EU member states
Therefore a new €10,000 (£8,818) threshold was introduced. This change meant that businesses would only be subject to their home country's VAT rules if their relevant sales across the EU in a year (and the preceding year) fell below the above threshold.
If you're no longer required to file MOSS VAT returns and your VATable turnover is below the UK VAT registration threshold you can de-register for UK VAT. However you can continue to apply the current rules if you choose.
Further changes from 1 January 2021
Unfortunately, any sales of digital services made on or after 1 January 2021, no longer qualify for the MOSS scheme detailed above.
The final return period for the UK’s VAT MOSS system will be the period ending 31 December 2020. You should include sales made before 1 January 2021 on your final return.
The UK's VAT MOSS system can be used to amend your returns until 11pm on 20 January 2022. You can also the system to update your registration details until 31 December 2024 and view previous returns.
What are the options from 1 January 2021?
From 1 January 2021, you'll either need to register for either VAT MOSS in any EU member state or for VAT in each member state where you sell digital services to consumers.
Registering for VAT MOSS in an EU member state
If you wish to continue using VAT MOSS you'll need to register for the VAT MOSS scheme in an EU member state by the 10th day of the month following your first sale to an EU customer.
So, for example, if you make your first sale on 18 February 2021, then you must register by 10 March 2021. However you cannot register for VAT MOSS in an EU member state before 1 January 2021
VAT registration in an EU member state
If you prefer not to use VAT MOSS from 1 January 2021, you'll need to register for VAT in each EU member state where you sell digital services to consumers. However, it's important to mention that the digital services threshold referred to above, no longer applies.
You can find further details on how to register for VAT in an EU member state here
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.