Don’t let new EU VAT rules ruin your New Year’s Party

That celebratory champagne on January 1, 2015, might taste somewhat flat if you’re part of a digital service business that has somehow failed to comply with new EU VAT rules that will come into effect on - you guessed it! - January 1, 2015.

However, luckily for you it doesn’t have to be that way. We take a quick look at how these new rules might affect businesses that supply digital services to customers in the EU. Be smarter and you can enjoy that New Year celebration without the painful aftereffects.

What is the definition of digital services?

The new EU VAT rules affect digital services - so before we go any further let’s just define this term. ‘Digital services’ include the supply - for download via the internet - of images, music, movies/TV shows, software, games, and apps. Of course, this is a condensed version of services affected. Once a service requires access to the internet to be supplied, customers that download these digital services will be charged VAT.

Only business to customer (B2C) sales are affected by these new rules. Sales of physical goods are unaffected.

What changes on January 1, 2015?

The 2015 VAT Directive becomes law on this date. The major change is the way in which VAT is applied to the B2C sale of a digital service in the EU. The existing rule is that VAT is applied based on where the supplier of the service is located. This changes post-January 1, 2015, when VAT will have to be applied based on where the EU customer is located.

Who do the new rules apply to?

Any business that supplies software, images, music, films, games, and apps for download to customers in the EU will be affected.

Impacted businesses will have to identify where their customer is so that they can apply the correct VAT rate. Remember, there are 28 EU member states and the standard VAT rates range from 15% in Luxembourg to 27% in Hungary. These VAT rates are also subject to change so affected businesses will have to implement a system whereby their checkout page is regularly updated to reflect ‘live’ EU VAT rates.

Understood, but how will a business locate their customer?

First, it must be established if the sale is B2C or B2B: only B2C sales are affected. The 2015 VAT Directive clearly explains the process that a business must follow to prove where their end customer is located. They need to verify their customer’s EU location so that they can apply the correct VAT rate to their digital service. The business (and the burden by the way is squarely on the business here) must collect two pieces of ‘non-conflicting’ evidence.

Accepted pieces of evidence include:

  • The billing address of the customer.
  • Their IP address.
  • A mobile phone SIM card country code.
  • The customer’s bank details.
  • Other commercially relevant information, i.e. loyalty cards.

And how will a business know what VAT rate to charge?

The nature of the digital economy is that a digital service can be downloaded anywhere and at anytime. Simply put: e-commerce systems will have to cater for all 28 EU member state VAT regimes.

Are all businesses that supply digital services affected?

If the service is supplied B2C to a customer in the EU then that business will have to comply with these new rules. Also, there is no minimum registration threshold for VAT. For example, in the UK a business does not have to register for VAT unless its turnover exceeds £81,000 - this rule does not apply when dealing with these new EU VAT rules. All businesses that have B2C sales of digital services to customers in the EU must register for VAT and comply.

Right, we’ve ticked all these boxes - how do affected businesses register?

There are two options available. The first one is to register for VAT is each EU member state where the business has sales. Potentially, this can mean registering with 28 tax authorities. For many this may prove problematic from a resources, language, and logistical point of view.

The other option is to register with a new system called the mini One-Stop Shop (MOSS). MOSS has been created by the VAT Directive to ease the administrative burden on businesses.

Anything else?

Yes, actually. There are a host of other requirements to which businesses must adhere. For instance, businesses must store transaction data for ten years from the point of sale. They must do so as at any time within this ten-year period any EU member state can request an audit of the transaction data. There are a stream of other requirements, such as invoicing and foreign exchange conversion. For example, there may be 28 EU member states but ten of these countries are outside the Eurozone and use their local currencies. A business will also have to implement a system that applies FX conversion on all their sales.

So, in short, there is a lot to take in and not a lot of time left to comply.

Taxamo is a technology company that has developed a Software as a Service solution to enable affected merchants comply with the new EU VAT rules come January 1, 2015. 

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