In September 2018, the UK tax authority, HM Revenue and Customs (HMRC), issued a tax information and impact note on changes to VAT rules for businesses making supplies of digital services to consumers across the EU next year. These rule changes are summarised here.
In 2015, an EU VAT law change provided that businesses making supplies of broadcasting, telecommunications, or electronic services to EU consumers had to account for VAT and remit it to the relevant tax authority on the basis of the location of the consumer, rather than being based on the location of the supplier.
They were required to comply with that member state’s relevant VAT rules, and charge that member state’s applicable rate on the supply.
That requirement applied from the very first supply of such services by a VAT-registered business to a consumer, regardless of value.
Alongside the reform, the VAT Mini One Stop Shop (MOSS) scheme was introduced to simplify administration for businesses. This allowed businesses to fulfil their compliance obligations by registering with a single member state – typically their home member state – through which they could comply with all their EU VAT obligations. This was intended in particular to ensure that businesses needn’t register in every EU member state in which they provide services.
Subsequently, the EU determined that the regime was excessively burdening smaller traders and changes were agreed at EU level in December 2017.
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Summary of the Changes
Two changes are proposed:
- Businesses making supplies of electronic services to consumers worth less than €10,000 a year will be subject to the VAT rules of their home country only. If a business’s total taxable turnover is below the UK VAT registration threshold they will be able to de-register from VAT. Businesses will be able to continue to apply the current rules if they so choose.
- Non-EU businesses that are registered for VAT for other purposes will be newly allowed to use the MOSS scheme to account for VAT on sales of digital services to EU member states. This group are currently excluded from using the MOSS.
The changes will be effective from 1 January 2019.
According to HMRC, the measure is expected to have a positive impact on the approximately 1,200 businesses that make supplies worth less than €10,000 each year, as all their supplies of digital services (including those to other EU member states) will be treated as though those supplies were made in the UK. Non-EU businesses meanwhile will face a considerably lighter tax burden in being allowed access to the MOSS.