How EU VAT changes affect UK eCommerce Websites

Back in 2008, an EU law changed affecting the calculation of Value Added Taxes (VAT) on broadcasting, telecommunications and e-services (collectively called ‘VAT on electronic services’ or VOES for short!).

These changes come into force on 1st January 2015 - the delay being due to resistance from EU member states (and I dare say lobbying from corporations) protecting their interests.

So, without getting too political, what is the main impact of the changes that EU member states (or corporations) would resist?

Current Scenario:

• Apple sell ‘electronic services’ via iTunes, which for Tax purposes, has its European HQ in sunny Luxembourg (as does Amazon and I dare say many other multinationals)
• Sunny Luxembourg has a VAT rate of 3%
• About 540,000 people live in sunny Luxembourg
• Apple sell their ‘electronic services’ via iTunes to other EU countries including UK
• UK has a VAT rate of 20%
• About 63 million people live in the UK
• All UK (and any other EU) sales are VAT-able at 3%... which goes to Luxembourg

From 1st January 2015:

• Apple sell their ‘electronic services’ via iTunes to other EU countries including UK
• UK has a VAT rate of 20%
• About 63 million people live in the UK
• All UK sales are VAT-able at 20%... which goes to HMRC

So, this is going to be bad for someone - but who?

1. Sunny Luxembourg? For sure, they stand to lose out on VAT revenues on non Luxembourg ‘electronic services’ B2C revenue
2. Apple/ Amazon? Maybe, but then this is a ‘sales tax’ remember, so for a 99p download, they keep (about) 96p and sunny Luxembourg get (about) 3p. After 1st January 2015, IF they don’t change their prices in the UK, they will keep (about) 83p and HMRC get (about) 16p - BIG DIFFERENCE!
3. The UK Consumer? Lets face it, Apple, Amazon et al are not likely to foot the bill for long… if at all! Expect some price hikes on your downloadable music, e-books etc etc. Look on the bright(ish) side - at least all that extra tax stays in the UK!

What does it mean for you?

• If you don’t sell anything defined as an ‘electronic services’, you don’t need to do anything (though I would advise you to check the HMRC definition of such services to be sure http://www.hmrc.gov.uk/news/one-stop-shop.pdf)
• If you sell ‘electronic services’ via a marketplace like Apple iTunes, you don’t need to do anything (again, I would advise you to check with each marketing place to ensure they are the ones responsible for charging and remitting consumer VAT).
• If you sell ‘electronic services’ directly to consumers, then you do need to do something… and here’s what:
• Sign up for Mini One Stop Shop (or MOSS for short). This is a scheme whereby you can register with a single tax authority, submit a single return to that tax authority, and pay all of the tax due to that one place (Registration for this new scheme starts in October 2014)
• You are still required to charge VAT at the rate applicable in the customer’s country, and in various respects the rules in that country will still apply. This means you will need to update your e-commerce & accounting systems to reflect the correct prices (taking into account the VAT rate for each of the 28 EU member states) and account for the correct amount of VAT.
• You will need to retain two “non-conflicting” pieces of evidence to identify the location of your customer. Fortunately, HMRC has indicated, at least for UK sales, that they will be relaxed about this evidence. For example, some customers may declare false information or if you use IP geolocation, it may not be 100% accurate. All you need is 2 independent data sources, demonstrating which EU state the customer has come from.

We don’t provide legal advice or tax accounting services, but we can help you with the e-commerce, systems integration and reporting to ensure compliance.