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EU VAT changes and MOSS!

Posted on December 5, 2014 by James Duncan under Sales and Marketing, Theimagefile
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We updated the way theimagefile handles EU digital download sales December 30. 2014 

Catchy title… I know!  Firstly, I’m sorry to bring up VAT on a Friday during the run-up to Christmas!  It’s not a great subject at any time, but with the changes in VAT at the end of this month it is REALLY IMPORTANT that you understand what changes are afoot and if you need to make any.  It is a long post for which I am also sorry, but I can assure you it’s better to read it now than when it’s too late!

The changes are due to VAT on digital services in the EU. It affects everyone; VAT registered or not so please read carefully, understand the implications and edit the settings if required. This is by no means a comprehensive guide to VAT, you should contact your accountant or HMRC for expert help if needed!

 

So, what’s changing?

From 1st January 2015 there are new place of supply rules for value added tax (VAT) on the supply of digital services by businesses to consumers in the EU.

VAT on digital services will be paid in the consumer’s country, not the supplier’s country. It will be charged at the rate that applies in the consumer’s country.

 

It all sounds pretty complicated, I know, so here it is in my own words…

How Things Are Now

Currently, if your sales (in the last year or in the next 30 days) are over the VAT threshold (right now, £81,000 but check current rate) you should be VAT registered.  VAT is then charged on all sales to customers within your own country and to customers abroad (unless they are a company with a sales tax number).  On your VAT return you need to give a breakdown of your sales both at “home” and abroad to explain your income and pay the due VAT to HMRC.  The VAT is charged at the national rate where the supplier (you) is based.

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Here are some very simplistic examples…

Currently if you are VAT registered:

Business to Consumer (B2C) –  You are in the UK and VAT registered and your customer (not a company), is also in the UK. They buy a digital product from you for £100, you have to charge £100 plus VAT (20%). Your customer pays you £120.00.  You pay £20 VAT from that sale to the HMRC.

Business to Consumer (B2C) –  You are in the UK and VAT registered and your customer is a normal person (i.e. without a sales tax number) in another EU country. They buy a digital product from you for £100.00. During the transaction they will pay VAT at the UK rate (20%) and you will pass that £20.00 to HMRC when making your VAT return.  When you submit your VAT return you state the sale value in another special area to the HMRC.  HMRC sort out the tax payable on that sale with the tax officers of the other EU country

Business to Business (B2B) –  You are in the UK and VAT registered and your customer (a VAT registered company)  is in the UK also. They buy a digital product from you for £100.00. You charge your customer £100 plus VAT (20%). Your customer pays you £120.00.  You pay £20 VAT from that sale to the HMRC. Your customer claims £20 from HMRC.

Business to Business (B2B) –  You are in the UK and VAT registered and your customer (a big company with a sales tax number) is in another EU country. They buy a digital product from you for £100.00. During the transaction the customer has to enter their sales tax number and the VAT is not charged on the sale.  When you submit your VAT return you state the sale values in special fields to the HMRC.  HMRC sort out the tax on EU sales with the relevant EU countries.


 

Currently if you are NOT VAT registered

Business to Consumer (B2C) –  You are in the UK and not VAT registered and your customer (a normal consumer), also in the UK buys a digital product from you for £100, you charge £100. The customer pays you £100.00.  You do not need to make a VAT return or payment.

Business to Business (B2B) –  You are in the UK and not VAT registered and your customer,  a VAT registered company, also in the UK buys a digital product from you for £100. You charge £100 and the customer pays.  You do not need to make a VAT return or payment.

Business to Consumer (B2C) –  You are in the UK and not VAT registered and your customer (a normal consumer),  in the EU buys a digital product from you for £100, you charge £100. The customer pays you £100.00. You do not need to make a VAT return or payment.

Business to Business (B2B) –  You are in the UK and not VAT registered and your customer,  a VAT registered company, in the EU buys a digital product from you for £100, you charge £100. The customer pays you £100.00.  You do not need to make a VAT return or payment.

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So, How Are Things Changing?

From the 1st January 2015, businesses supplying digital services to consumers will have to charge the buyer VAT at the rate of the country where the customer buys the service from.  This is the case whether you are VAT registered or not.

NOTE: The three big differences are:

  • EVERYONE must charge VAT on digital sales to another EU country.
  • The VAT is calculated at the percentage rate set by the country that the customer is in at the time of purchase.
  • There is no threshold. A sale of £1.00 still counts

* Yes, understand this bit!  Even if your customer lives in the same town as you, but is on holiday in Spain when they make their purchase, you need to charge the customer VAT at Spanish VAT rate and pay that tax to the Spanish VAT office!

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Back to the simplistic examples….

Starting 1st January if you are VAT registered:

Business to Consumer (B2C) –  You are in the UK and VAT registered and your customer (a consumer, not a company), also in the UK buys a digital product from you for £100, you have to charge £100 plus VAT (20%) . Your customer pays you £120.00.  You pay VAT of £20 from that sale to the HMRC.

Business to Consumer (B2C) –  You are in the UK and VAT registered and your customer is a normal consumer in another EU country. They buy a digital product from you for £100.00. You must charge £100 plus VAT at the rate of the country the buyer is in. The customer pays you £100.00 plus VAT. You need to register voluntarily for VAT in the UK for the cross border part of you business and for MOSS (VAT Mini One Stop Shop).

Business to Business (B2B) –  You are in the UK and VAT registered and your customer (a VAT registered company) in the UK buys a digital product from you for £100.00. You charge your customer £100 plus VAT (20%). Your customer pays you £120.00.  You pay £20 VAT from that sale to the HMRC. Your customer claims £20 from HMRC.

Business to Business (B2B) –  You are in the UK and VAT registered and your customer (a big company with a sales tax number) in another EU country buys a digital product from you for £100.00. During the transaction the customer has to enter their sales tax number and the VAT is deducted from the sale.  When you submit your VAT return you state the sale values in special fields to the HMRC.  HMRC sort out the tax on EU sales with the relevant EU countries.

 


 

Starting 1st January if you are NOT VAT registered:

Business to Consumer (B2C) –  You are in the UK and not VAT registered and your customer (a normal consumer), also in the UK buys a digital product from you for £100, you charge £100. The customer pays you £100.00.  You do not need to make a VAT return or payment.

Business to Consumer (B2C) –  You are in the UK and not VAT registered and your customer (a normal consumer),  in the EU buys a digital product from you for £100, you charge £100 plus VAT  at the rate of the country the buyer is in. The customer pays you £100.00 plus VAT. You need to register voluntarily for VAT in the UK for the cross border part of you business and for MOSS or register for VAT in that country and make a VAT return and payment.

Business to Business (B2B) –  You are in the UK and not VAT registered and your customer,  a VAT registered company,  also in the UK buys a digital product from you for £100, you charge £100. The customer pays you £100.00.  You do not need to make a VAT return or payment.

Business to Business (B2B) –  You are in the UK and not VAT registered and your customer,  a VAT registered company based in the UK but currently working/ on holiday/ passing through an EU country buys a digital product from you for £100. You charge £100 plus VAT  at the rate of the country the buyer is in. The customer pays you £100.00 plus VAT. You need to register voluntarily for VAT in the UK for the cross border part of you business and for MOSS or register for VAT in that country and make a VAT return and payment.

Business to Consumer (B2C) –  You are in the UK and not VAT registered and your customer (a normal consumer),  in the EU buys a digital product from you for £100, you charge £100 plus VAT at the rate of the country the customer is in when making the purchase. The customer pays you £100.00.  You need to register voluntarily for VAT in the UK for the cross border part of you business and for MOSS or register for VAT in that country and make a VAT return and payment.

 

What You Must Do (if you are not using theimagefile)!

You need to register voluntarily for VAT in the UK, for the cross border part of you business and for MOSS.

If you are not VAT registered in the UK you can not use MOSS without registering. Currently there are 28 countries in the EU so you could end up having to register and pay VAT in many countries– but not your own!  If you wish you can register for VAT (even with a threshold lower than the required turnover), and use MOSS for the cross-border part of your business.  You would not need to charge VAT on UK sales until your turnover has reached the threshold but you will need to submit a VAT return each quarter.

If you are VAT registered you will need to account for and pay VAT either using VAT Mini One Stop Shop (MOSS) or register for VAT in each EU country you sell digital products. Businesses will have to submit separate VAT returns for their cross-border digital services and pay tax due every three months.

It seems to be an accounting minefield that would be easy to make errors leaving you with (potentially) big penalties.

 

Here is a (quite hard to read) flowchart from HMRC to help you…

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What You Have To Do (if you are using theimagefile)

Nothing!  Read on…

 

What has theimagefile done?

The simplest resolution for many would be to not have the problem in the first place! For example, you might not have many EU sales, or the ones you do have don’t warrant the aggravation and costs that the changes in EU VAT law are going to create. However, this seems counter productive when trying to grow your business, so we have taken the step to manually handle all EU download sales, so you are not effected by the new EU rule. You continue your same tax accounting as before (i.e. account for downloads the same as physical print sales). Behind the scenes, we automatically fulfil hundreds of orders every day. Each day, however, a few orders have problems and enter our manual fulfil queue. Typical reasons include mismatched image file sizes, or communication errors with a payment provider, lab or mail servers. Our staff investigate and resolve broken orders every day, which sometimes involves significant labour. We quietly fix things at no charge to you, as part of the overall service we provide. We sometimes route all orders into our manual queue when first integrating with a new feature , partner or provider. With this new workflow, you see nothing different, other than a few-hours delay in the confirmation emails. We will manually fulfil the order for you at no extra charge.

We expect that this is just the beginning of a raft of changes that will start to be implemented on UK to EU and EU to UK sales.  Therefore we are keeping our options open for changes going forward,

To assist with tracking of EU sales, from 1st January the customer IP address, Country and device language will be included in all new sales invoices.

 

 

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To register for VAT Mimi One Stop Shop (MOSS)

Go to:  http://www.hmrc.gov.uk/online/new.htm

Click:  Do It Online > Register New Users

vatreg1

 

Register for Mini One Stop Shop and that will take you to the option to register for the cross border part ONLY! (At the bottom of the screen).

vatreg2

 

This is by no means a comprehensive guide to EU VAT as the laws and regulations are changing rapidly at the moment due to lobbying. We would advise you that if you have any query you should contact your accountant or HMRC for expert help.


Once again, I’m really sorry to have to share this with you on a Friday just before Christmas! However, it is incredibly important so we would advise you to look at it carefully and get any changes sorted before the New Year. If you hear of any changes then let us know!

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