Britain’s micro-businesses are waking up to the full implications of new VAT ‘place of supply’ rules.
Whereas previously VAT has been applied on the basis of the location from which services are supplied, from 1 January 2015 it becomes payable based on the location where services are consumed. While the new rules apply only to suppliers of ‘broadcasting, telecommunications and electronic (BTE) services’, and only on ‘business-to-consumer (B2C)’ sales, this category does include a multitude of tiny but vocal micro-entrepreneurs supplying digitised documents (eBooks, PDF content), music, films, games, hosting and software services, as well as advertising space on websites – something that has sent to ‘blogosphere’ into complete frenzy.
As a piece of tax policy, the new rules have much to recommend them. Disparities in the tax rates applied across EU jurisdictions have been exploited by international digital suppliers – most notoriously in Luxembourg, where Amazon (eBooks), Apple (iTunes), Microsoft (Xbox) and others have been quick to benefit from the lowest VAT rates in the EU. In this context, the EC is to be commended for a clear intervention to level the playing field. An app producer in London’s Tech City, for example, subject to UK VAT at 20%t, has hitherto been at a disadvantage vis-à-vis a Luxembourg producer paying only 15, or even less. Indeed, some might argue that – with a £81,000 VAT threshold significantly in excess of the EU average (businesses in the Netherlands enjoy a threshold of only €1,345), Britain’s digital entrepreneurs have little to complain about.
But while major producers clearly have much to gain, the new rules appear to have introduced an unprecedented compliance, not to mention financial, burden on those businesses hitherto outside the VAT regime. From 1 January 2015 the sale of a single 99p e-book to a consumer in another EU country will now be enough to trigger full VAT registration and compliance requirements under the VAT nini one-stop shop (VATMOSS) scheme – with implications that regulators are only beginning to address.
A UK-based small eBook self-publisher, with a turnover below £81,000 would, hitherto, have been entirely untroubled by VAT – wherever he or she was selling. The introduction of the ‘place of supply’ rules from 1 January, 2015, however, changes all this, with such producers now required to apply VAT to all sales throughout EU member states.
VATMOSS is intended to offset the worst implications of the new regime, requiring only quarterly returns in respect of digital sales within the EU. HMRC have been quick to allay fears that registering for VATMOSS would result in micro-businesses losing their threshold exemption on UK revenue: no UK VAT will be payable provided that businesses can separate their UK and EU sales. The question, however, is how easily they can do this. Which leads, in turn, to two more complex policy issues on which regulators ought perhaps to be considering intervention: how far payment providers (PayPal, WorldPay etc.) can provide the data on which producers will need to rely; and whether liability for any breach should rest, as it currently does, with the producers rather than such payment providers.
Digital producers will now be required to provide two pieces of information (three in the event of any conflict) confirming the location of delivery. These may include the customer’s billing address, IP address, bank location or the national code of any SIM card used in mobile transactions.
Recently issued HMRC guidelines make clear thet HMRC considers this to be a simple and straightforward matter, something Britain’s micro-businesses have been quick to take issue with, however. HMRC guidelines state that:
'… if you use a payment service provider to obtain payment for your digital service, HMRC suggests the following two step approach:
'Step 1: When the customer places their order ask them to confirm either:
'Step 2: When the customer pays for the product using the payment service provider, arrange for that provider to transmit the following two pieces of evidence to you:
'For confidentiality the payment service provider can remove the house number and street name from the billing address.'
But as many in the blogosphere have been quick to point out, data collected by PayPal and others concerns the customer’s billing address and residence at the time of their registration. It does not, necessarily, guarantee their location at the time of purchase. Quite apart from the vexed issues of proxy servers, virtual private networks (VPNs) and international SIM cards.
Non-EU providers of such services have been obliged to account for VAT based on the location of their customers since July 2003, under the VAT on e-services scheme (VOES). Under VOES, they were obliged to choose one single EU location to register for VAT, but VAT was charged according to their customer’s country and remitted to the country of registration. As such, many choose to establish EU subsidiaries, with many selecting Luxembourg, with its lower rates than elsewhere across the EU. Alternatively many chose to use agents prepared to handle content, rather than just act as a payment collection agent.
Logically, of course, one could argue that the solution for small digital producers might be to sell exclusively through such intermediaries: indeed, in a recent, but potentially crucial development, two of the biggest providers of such services, Google and Facebook, have recently announced changes to their policies and will now follow Apple as content providers rather than merely collection agents, such that responsibility to account for VAT under the B2C arrangement will fall to them rather than the digital producers.
It remains to be seen, however, how far smaller platforms will wish to assume such responsibility. Thus far, Etsy.com and Folksy.com appear to be distancing themselves, with Etsy ‘considering’ its position, and competitor Folksy.com disclaiming any responsibility: ‘Folksy is a marketplace but the contract is between the buyer and the seller and we are not deemed to be an agent in that transaction and as such the seller is currently liable to comply with VATMOSS.’
In any event, a reference to the ‘30% transaction fee’ in Google’s instructions to developers points to an issue front of mind for many micro-producers: such additional costs could render many businesses unviable.
This does not hold out much hope for Britain’s smallest entrepreneurs and newest start-ups. While, at the policy level, the new VAT place of supply rules are an obvious attempt to redress a disparity that should, ultimately, benefit the major players in the digital arena, it would appear its immediate consequences are falling most heavily on those businesses least able to sustain them. Content and platform providers, for their part, might reasonably argue that they cannot be expected to cover additional compliance requirements at no cost; they might, indeed, argue that Facebook and Google’s recent initiatives could introduce a broader level of responsibility they would prefer not to embrace.
But this does point to another issue to which producers might be better advised to address their attention. Penalties for non-compliance could be crippling – as much as 15 per cent of tax due in the UK, and reaching a potential €3.7m in Poland. If it is indeed the case, as many smaller producers argue, that payment providers’ current systems do not deliver the facilities necessary to guarantee compliance, then is there an argument for regulatory intervention to oblige them to?
An attempt to shift greater responsibility onto payment providers – or at least an attempt to force them to provide the compliance services on which their clients will depend – might go some way to addressing current concerns. Failing which, an attempt to alleviate potential penalties for the very smallest businesses might, at least, put some entrepreneurs’ minds at rest.
Britain’s micro-businesses are waking up to the full implications of new VAT ‘place of supply’ rules.
Whereas previously VAT has been applied on the basis of the location from which services are supplied, from 1 January 2015 it becomes payable based on the location where services are consumed. While the new rules apply only to suppliers of ‘broadcasting, telecommunications and electronic (BTE) services’, and only on ‘business-to-consumer (B2C)’ sales, this category does include a multitude of tiny but vocal micro-entrepreneurs supplying digitised documents (eBooks, PDF content), music, films, games, hosting and software services, as well as advertising space on websites – something that has sent to ‘blogosphere’ into complete frenzy.
As a piece of tax policy, the new rules have much to recommend them. Disparities in the tax rates applied across EU jurisdictions have been exploited by international digital suppliers – most notoriously in Luxembourg, where Amazon (eBooks), Apple (iTunes), Microsoft (Xbox) and others have been quick to benefit from the lowest VAT rates in the EU. In this context, the EC is to be commended for a clear intervention to level the playing field. An app producer in London’s Tech City, for example, subject to UK VAT at 20%t, has hitherto been at a disadvantage vis-à-vis a Luxembourg producer paying only 15, or even less. Indeed, some might argue that – with a £81,000 VAT threshold significantly in excess of the EU average (businesses in the Netherlands enjoy a threshold of only €1,345), Britain’s digital entrepreneurs have little to complain about.
But while major producers clearly have much to gain, the new rules appear to have introduced an unprecedented compliance, not to mention financial, burden on those businesses hitherto outside the VAT regime. From 1 January 2015 the sale of a single 99p e-book to a consumer in another EU country will now be enough to trigger full VAT registration and compliance requirements under the VAT nini one-stop shop (VATMOSS) scheme – with implications that regulators are only beginning to address.
A UK-based small eBook self-publisher, with a turnover below £81,000 would, hitherto, have been entirely untroubled by VAT – wherever he or she was selling. The introduction of the ‘place of supply’ rules from 1 January, 2015, however, changes all this, with such producers now required to apply VAT to all sales throughout EU member states.
VATMOSS is intended to offset the worst implications of the new regime, requiring only quarterly returns in respect of digital sales within the EU. HMRC have been quick to allay fears that registering for VATMOSS would result in micro-businesses losing their threshold exemption on UK revenue: no UK VAT will be payable provided that businesses can separate their UK and EU sales. The question, however, is how easily they can do this. Which leads, in turn, to two more complex policy issues on which regulators ought perhaps to be considering intervention: how far payment providers (PayPal, WorldPay etc.) can provide the data on which producers will need to rely; and whether liability for any breach should rest, as it currently does, with the producers rather than such payment providers.
Digital producers will now be required to provide two pieces of information (three in the event of any conflict) confirming the location of delivery. These may include the customer’s billing address, IP address, bank location or the national code of any SIM card used in mobile transactions.
Recently issued HMRC guidelines make clear thet HMRC considers this to be a simple and straightforward matter, something Britain’s micro-businesses have been quick to take issue with, however. HMRC guidelines state that:
'… if you use a payment service provider to obtain payment for your digital service, HMRC suggests the following two step approach:
'Step 1: When the customer places their order ask them to confirm either:
'Step 2: When the customer pays for the product using the payment service provider, arrange for that provider to transmit the following two pieces of evidence to you:
'For confidentiality the payment service provider can remove the house number and street name from the billing address.'
But as many in the blogosphere have been quick to point out, data collected by PayPal and others concerns the customer’s billing address and residence at the time of their registration. It does not, necessarily, guarantee their location at the time of purchase. Quite apart from the vexed issues of proxy servers, virtual private networks (VPNs) and international SIM cards.
Non-EU providers of such services have been obliged to account for VAT based on the location of their customers since July 2003, under the VAT on e-services scheme (VOES). Under VOES, they were obliged to choose one single EU location to register for VAT, but VAT was charged according to their customer’s country and remitted to the country of registration. As such, many choose to establish EU subsidiaries, with many selecting Luxembourg, with its lower rates than elsewhere across the EU. Alternatively many chose to use agents prepared to handle content, rather than just act as a payment collection agent.
Logically, of course, one could argue that the solution for small digital producers might be to sell exclusively through such intermediaries: indeed, in a recent, but potentially crucial development, two of the biggest providers of such services, Google and Facebook, have recently announced changes to their policies and will now follow Apple as content providers rather than merely collection agents, such that responsibility to account for VAT under the B2C arrangement will fall to them rather than the digital producers.
It remains to be seen, however, how far smaller platforms will wish to assume such responsibility. Thus far, Etsy.com and Folksy.com appear to be distancing themselves, with Etsy ‘considering’ its position, and competitor Folksy.com disclaiming any responsibility: ‘Folksy is a marketplace but the contract is between the buyer and the seller and we are not deemed to be an agent in that transaction and as such the seller is currently liable to comply with VATMOSS.’
In any event, a reference to the ‘30% transaction fee’ in Google’s instructions to developers points to an issue front of mind for many micro-producers: such additional costs could render many businesses unviable.
This does not hold out much hope for Britain’s smallest entrepreneurs and newest start-ups. While, at the policy level, the new VAT place of supply rules are an obvious attempt to redress a disparity that should, ultimately, benefit the major players in the digital arena, it would appear its immediate consequences are falling most heavily on those businesses least able to sustain them. Content and platform providers, for their part, might reasonably argue that they cannot be expected to cover additional compliance requirements at no cost; they might, indeed, argue that Facebook and Google’s recent initiatives could introduce a broader level of responsibility they would prefer not to embrace.
But this does point to another issue to which producers might be better advised to address their attention. Penalties for non-compliance could be crippling – as much as 15 per cent of tax due in the UK, and reaching a potential €3.7m in Poland. If it is indeed the case, as many smaller producers argue, that payment providers’ current systems do not deliver the facilities necessary to guarantee compliance, then is there an argument for regulatory intervention to oblige them to?
An attempt to shift greater responsibility onto payment providers – or at least an attempt to force them to provide the compliance services on which their clients will depend – might go some way to addressing current concerns. Failing which, an attempt to alleviate potential penalties for the very smallest businesses might, at least, put some entrepreneurs’ minds at rest.
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