There are some very important VAT changes when making B2C sales of e-services such as apps, music, games, ebooks and similar services to private individuals based in other European Union member states.
Currently, UK VAT registered businesses making B2C sales to private individuals in another EU state will charge UK VAT at 20%.
BUT from 1 January 2015, all businesses will need to account for, and pay VAT to, the country where the customer is located. So, a UK business selling an app to a private individual based in Sweden will have to charge VAT at Sweden’s standard rate of 25%, while the same app sold to a customer based in Cyprus will be subject to Cyprus’ standard VAT rate of 19%.
Importantly, these changes will affect all UK businesses making B2C sales to customers in other EU states even if they are not registered for UK VAT.
There’s good news for businesses selling through Apple’s App Store, but, further complications arise for those selling through Android/Google Play and also in-app purchases.
Selling on the Apple's App Store
Apple have structured its current agreement so that they act as your agent each time an e-service is downloaded. In effect, each download is effectively two sales; 1) UK business sell to Apple SARL in Luxembourg, and 2) Apple sell on to the EU customer.
The good news is that UK businesses only have one B2B customer, Apple SARL in Luxembourg, so for a vast majority of businesses selling on Apple’s App Store platform, these sales will be continue outside the scope of UK VAT and this change won’t affect them.
Selling on Android/Google Play or Directly to EU Customers
However, for UK businesses selling e-services on Android/Google Play, the agreement is currently structured in a way that the business sells directly to the EU customer. It will therefore be the businesses responsibility to account for, and collect, the correct amount of VAT based on each customer’s location and pay this over to the local tax authorities.
It is unclear at this stage whether Android/Google will implement a similar mechanism to Apple.
Businesses selling directly to EU customers, i.e. through their own website or in-app purchases, will also need to account for, and collect, the correct amount of VAT based on each customer’s location.
With 28 countries in the EU and 30 different rates of VAT the scope of confusion is obvious. UK businesses with significant EU sales should take this opportunity to review pricing structures i.e. quote prices exclusive of VAT then add VAT as part of the order process based on the individual’s location, or keep prices static then apply the appropriate rate of VAT which could reduce profits.
Either way, UK businesses will need to review their checkout process to identify exactly where the customer is located. HMRC have indicated that they would expect businesses to use information such as billing address or IP address to confirm where the individual is located or where the mobile or tablet devices is registered. The next step is to apply and collect the appropriate rate of VAT.
Having collected the VAT, businesses will be faced with a new and complex mechanism for filing a VAT return to each EU country. HMRC has announced the launch of a ‘Mini One Stop Shop’ (MOSS) for VAT registered businesses to prevent the need for multiple VAT returns.
However, some start-up and small businesses that are not registered for UK VAT (i.e. they are under the threshold) will be unable to benefit. Instead, they will be required to register and account for VAT in each EU state through a local VAT return.