My client runs a business from the UK. They sell patterns online. People from all over the world subscribe to my client’s website and pay to download the patterns they want. At the moment, my client only has a turnover of £50,000 and is not required to register for VAT. I’ve been reading about the new VAT rules for certain services supplied online, but I don’t think they apply to my client as they supply patterns, not services, and their turnover is below the VAT registration threshold. I’m having second thoughts now though, as online suppliers are saying they might be driven out of business by these new VAT rules. Am I right to think my client isn’t affected?
This issue is more complex than might at first appear. The sale of patterns online, which requires minimal human involvement, is an e-service. Getting things wrong in respect of the new VAT rules covering e-services could be very expensive for your client and it might even put them out of business.
The new VAT rules
From 1 January 2015, the supply of certain services made to individuals (i.e. B2C supplies) is subject to VAT, not in your client’s country (i.e. the UK) but in each customer’s country. VATA 1994 provides provides for registration for a non-Union MOSS scheme as set out in Sch 3B and registration for a Union MOSS scheme in Sch 3BA. The UK provisions implement article 58 of the Principal VAT Directive.
The first question therefore is whether your client’s supplies are affected.
The new VAT rules apply to services supplied to individuals electronically, as well as broadcasting and telecommunication services. Article 24 of the Principal VAT Directive states that the ‘“supply of services” shall mean any transaction which does not constitute a supply of goods’. Supplies which are automatically downloaded online cannot be considered to be goods and are categorised as services. It will therefore be necessary to identify the extent to which your client is personally involved in delivering each pattern to each customer, and how automatic the downloads are.
If, as expected, a customer simply downloads a pattern which is supplied automatically without the personal involvement of your client, your client’s supply will be a service and it will be delivered digitally. As the supply is an electronically delivered service, the new rules will apply to your client from 1 January 2015.
The new rules will change the place of supply of your client’s service from the UK to the country where each customer is located. For customers located in another EU member state, unless your client has an establishment in that member state, no VAT registration threshold will apply to your client’s supplies in that member state and your client should expect to be required to register for (and charge) VAT there from the very first downloaded pattern.
MOSS
This is bad news for your client. They will presumably not wish to register for VAT in every EU member state where they have a customer. The administrative burden would be enormous. To reduce the impact of the new rules, there is a simplification measure called the ‘mini one-stop shop’ (MOSS). This will enable suppliers to avoid registering for VAT in other EU member states and have a single VAT registration (e.g. in the UK) from which they will be required to raise invoices and charge VAT under the rules and VAT rates applicable in those member states.
There is, however, a complication in that the MOSS requires suppliers to be registered for VAT. Your client is not UK VAT registered and, with a turnover below the VAT registration threshold (currently £81,000), they are not required to be. Should your client register for VAT voluntarily, they would ordinarily be required to begin charging VAT to all their UK customers immediately.
However, on 10 December 2014, HMRC announced a relaxation for micro businesses. Revenue & Customs Brief 46/14 confirms that HMRC will allow micro businesses selling digital services to VAT register, split their business between UK supplies and other EU supplies and only account for VAT on their other EU supplies. Naturally, this will only apply to digital suppliers, while other businesses that have split their businesses and not accounted for VAT will still be subject to the disaggregation rules.
HMRC confirms: ‘If you make taxable supplies of digital services to customers in other EU member states, and your UK taxable turnover is below the UK VAT registration threshold, you may use the VAT MOSS to account for the VAT due in other EU member states but you do not need to account for and pay VAT on sales to your UK customers.’
Further points
There are other administrative difficulties, including the requirement to identify each customer’s location and to charge VAT at the rate in force in their EU member state. This will be an adverse change as, until 31 December 2014, your client was not charging VAT on its supplies of downloaded patterns to any customer.
In addition to all the administration requirements placed upon your client, which any small business would find it difficult to cope with, your client’s supplies will become more expensive to the public due to the addition of VAT, and profit margins might suffer as a result.
In any case, this solution will only solve one part of the issue for businesses such as your client. It will still be necessary to identify the location in which each customer resides, retain the evidence received, confirm their status (business or non-business) and charge VAT at the rate in force in the customer’s EU member state.
Alternative measures could be taken, such as selling the patterns through a platform, i.e. B2B, which would not require either VAT registration or accounting for VAT on the supplies by your client, but clearly this will come at additional cost and, with already tight margins, it may not be sustainable. Perhaps there could also be some human intervention in the supplies made? This would remove the sales from the digital supplies category, and as a consequence, subject to their turnover level, outside of VAT registration altogether.
Given the additional burdens placed upon micro businesses, it is hoped that HMRC will use a ‘light touch’ when dealing with small businesses and the changes to the place of supply.
