Taxing tech: VAT on consumer e-services

Wednesday, September 14, 2016

The UK’s digital economy is thriving and accelerating, gaining us a reputation as a hub for technological excellence.

Whether it’s ecommerce, software development, fintech, web development, or the many other breeds of businesses, digital companies are responsible for employing some 1.46 million people in the UK.

Given that 98% of digital businesses are SMEs, the likelihood is that many of the CPAA’s members will have clients working in this sector. Many exist in the B2B space; supplying anything from web services, to payment solutions to other businesses. Others also cross into B2C, or solely supply digital goods to the public, and it these consumer-facing groups that were subject to HMRC VAT changes.

From January 2015, the rules changed for businesses making cross-border supplies of digital services to consumers in other EU member states. The change saw the place of taxation for digital services defined as the location of the consumer and not the location of the business.

In ensuring your clients are playing by the rules, you need to know who the end users of their products or services are. This tax ruling does not affect business to business sales, nor if sales are not being made as a business, i.e. as a hobby with occasional sales rather than a serious commercial venture. 

In establishing whether the supply is a B2C or B2B, they need to run a check on the customer’s VAT status. If the customer does not apply a VAT registration number, then it can be treated as B2C. While not conclusive, using the VAT number as a reference point is acceptable to all EU member states.

So which of your clients might this be relevant to? It applies to businesses supplying services that are delivered electronically to a consumer audience; it is more than likely to apply to online retailers and those delivering services via the internet. Keep an active watch on new additions, as it is a growing sector; but currently the definitions are:

  • e-Services: video on demand, download apps, music downloads, gaming, e-books, anti-virus software and online auctions
  • Broadcasting: supply of television or radio programmes, and live broadcasts over the internet
  • Telecoms: sending or receiving signals by wire, radio, optical or other systems. It includes fixed and mobile telephony, fax and connection to the internet.

Businesses need to retain the following (or as many as apply in the type of transaction) to prove where the tax should be directed: billing address of the customer; Internet Protocol (IP) address of the customer; location of the bank; country code of SIM card used by the customer; and the location of the customer’s land line through which the service is supplied.

VAT is charged at the rate due in the consumer’s country when it comes to cross-border digital sales. To settle the tax owed, the business can either register for VAT in each EU country where their services are supplied to consumers, or use the VAT Mini One Stop Shop (VAT MOSS) online service provided by HMRC. VAT MOSS enables them to submit a single return to HMRC (but they must be VAT-registered in the UK), which obviously eases the admin burden of registering for VAT in multiple countries.

For small businesses, MOSS registered businesses are required to collect and to keep in their records two pieces of evidence of where each customer normally lives. This can be problematic for some small businesses, so HMRC suggests that when the customer places their order, the supplier asks them to confirm the EU member state they usually live in and their billing address. Or when the customer pays, they request that the payment service provider send the customer’s billing address and the country code of the customer’s bank or card.

In April of this year, it was announced that some additional help for business trading below the VAT threshold, which micro businesses will benefit from. A single piece of evidence will be enough to demonstrate where the customer lives. HMRC will also contact businesses to see whether in VAT terms they might be regarded as hobby traders and therefore not required to account under MOSS.

To establish how your clients need to navigate the complex matter of ‘taxing tech’, the steps to arriving at the correct treatment are as follows: determine whether the supply is a digital service as defined by these rules; determine the member state in which the supply is made using the place of supply rules; and consider whether the supply is one which is exempt in the EU state concerned.

The fact is that digital employment forecasted to grow by 5.4% by 2020; so business is booming. Increasingly practitioners will find digital firms amongst their client mix, or accounting for a greater proportion of their client base, so knowing these relatively new tax changes and keeping abreast of updates, is crucial.

VAT on e-services was a topic covered in some detail within the Latest VAT Changes document from 2020 Innovation. The CPAA has a partnership with the training provider, which provides members with access to a catalogue of online webinars and briefing documents within the renowned CPD portal on our website www.acpa.org.uk/cpd/ .