From 1 January 2015, some technology companies will need to make major changes to the way they charge VAT on the services they provide – in many cases this will result in increased VAT costs. Those affected should begin planning ahead now, says Moore Stephens VAT expert Robert Facer.
The changes result from new rules being implemented across the European Union, and addressed in the UK in the Finance Act 2014. Technology companies based in the EU providing electronically-supplied services (e-services) to private/non-business customers in other EU member states will be affected. For example, these could include services where private customers download software, music, films or information over the internet for a fee.
From 1 January 2015, such e-services will be deemed to be supplied in the customer’s EU member state, not that of the supplier. Therefore, EU suppliers will need to charge VAT at the rate applicable in the customer’s jurisdiction, not that of their own country, as is now the case. Given that there are currently 28 EU member states with VAT rates ranging from 15% to 27%, in many cases the rate of VAT applicable under the new rules will increase.
The rule change comes in response to the trend for companies to locate in low-VAT locations such as Luxembourg, where the current VAT rate is 15%. In future, a Luxembourg-based company supplying e-services to a private / non-business customer in the UK will need to charge UK standard rate VAT (currently 20%). The additional 5% VAT charge will either need to be passed on to the customer, therefore increasing the cost of the e-service, or absorbed by the supplier, resulting in reduced profits.
Action required now
Although the 1 January 2015 effective date may appear some way off, the rule change could have a substantial impact on many businesses. Beginning to plan ahead now is highly recommended due to the considerable complexity that the new rules will introduce.
Areas to address include:
Taking the MOSS option
- Systems capability: supplier systems will need to be able to determine the country in which each individual customer is located.
- Governance: how will your company prove that your customer is providing accurate information on their location?
- Pricing information: it will no longer be possible to provide one VAT-inclusive price on your website and other marketing material.
The rule change would require EU suppliers to register and account for VAT in every EU member state where they have private/non-business customers. This would clearly create a substantial administrative burden. Therefore, a ‘mini one stop shop’ (MOSS) is also being introduced from 1 January 2015, allowing affected suppliers to register just once in their own EU member state. This single registration will then allow them to account for VAT in all the other EU member states. HMRC has announced that businesses will be able to register under the MOSS from October 2014, effectively giving them three months to complete their registration before the rule change applies.
Watch this space
In the run up to 1 January 2015 we plan to issue a series of articles highlighting specific aspects such as the place of supply changes, the MOSS rules and record-keeping requirements.
If you require any additional support or advice on this matter please contact our VAT team.
UK VAT team