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The small business guide to the new EU VAT regulations

To note

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New EU VAT regulations came into place on January 1st which, since announced, has been considered controversial and worried many small business owners.

But fear not! We spoke to Rob Martins, on behalf of Carol Cheesman, of Cheesmans Accountants regarding what the changes are, how you may be affected, and what preparations you should make. 

BusinessesForSale: What are the principal differences between the old VAT and the new VAT?

Rob Martins: Under the old EU VAT rules, VAT was charged and accounted for in the state of the seller. So wherever the business is selling the digital products, they were charged VAT at the rate where they’re based, effectively, which is quite standard for VAT.

The new VAT rules changed this – so the VAT is now accounted for in the state where the services are consumed. So it’s effectively the VAT rate of where the customer is located. So quite a big change, really.

What’s also important to know that it’s only applied to digital products, so electronically supplied services like communications, broadcasting, and online services. Things like ebooks are a good example of something that it will apply to.

BFS: Why was it changed in the first place?

RB: Well, I think the reason was was to avoid the distortion of competition with selling online services to customers within the EU.

The reason for that being that a lot of businesses, particularly big businesses, would set up their office or their location in a country that had low VAT rates. Luxembourg is quite a good example – I’m not sure of the exact VAT rate, but many online services in Luxembourg would take advantage of the lower VAT rate.

So it was really to stop businesses from going to and setting up in the member state of the lowest VAT rate. That’s why they changed it, effectively: to avoid what they called was ‘distortion of competition.’

BFS: Why was there only an alteration in the regulations for digital products and services?

RB: I’m not entirely sure, but I think it’s because of the nature of digital products; it’s electronically-supplied services. So it is a different kind of industry to selling wholesale, and things like that. I think, because of the nature of online business, that’s why they did it.

 If they rolled this out to other products it would be even more difficult for smaller businesses to comply with.

BFS: Who do you think will be most affected by the change?

RB: Well, I suppose in the broadest sense any business selling digital services to customers in the EU. But I would assume that smaller businesses would probably be more affected by it in terms of implementing systems in order to comply with the new regulations.

One would expect the bigger companies to be able to deal with that quite easily, but the smaller businesses will probably find it harder.

BFS: A lot of small business owners have said that they would have stopped selling to the EU because of it.

RB: Yes, that’s something else that I looked into. Small businesses are now going to have to consider the additional costs of complying with these rules – which is effectively registering for UK VAT and MOSS return.

They’ll obviously have to file a MOSS return on a quarterly basis, and that’s not the only think that they’ll have to do: they have to be aware of the different VAT rates in the different countries.

So, they have to actually look at the country they’re selling to and what the applicable VAT rate is. When you consider that there’s 28 countries in the EU, there’s potentially 28 different VAT rates, if not more. So that’s quite a big administrative burden on those small businesses to be able to identify what rates of VAT they should be charging.

They also have to, again, get two bits of confirmation of why they’re charging that VAT rate to that specific customer. So, for example, they might have to have the location of the customer’s bank, IP address used by the customer, billing address of the customer, location of the customer’s fixed landline. They have to use these as evidence of why they’re charging the VAT rate to that client, and they’re supposed to uphold this information for up to 10 years.

So it’s not just about filing the return, it’s the VAT rate you’re supposed to be charging – and also evidence of why you’ve charged that VAT rate. I think a lot of small businesses will need to weigh up what’s the cost of doing this, and what’s the cost of their EU sales, because it’s not an easy thing to do for a small business.

BFS: HMRC has recently tweaked the VAT MOSS (Mini One Stop Shop) regulations following lobbying, so that micro companies are still obliged to register for VAT in the UK, but will no longer be forced to charge UK VAT on their domestic sales. Why is this better?

RB: This is a very good question. As you say, initially the idea was that, to use the Mini One Stop Shop (or, shall we say, MOSS return) you’d have to register for VAT in the UK… and, if you’re registered for VAT in the UK, you’re obliged to charge VAT on your sales in the UK. Quite straight forward – that makes sense.

But the problem was, what a lot of the mini businesses were saying, was basically ‘Well we don’t have to be registered for VAT in the UK because we don’t go over the VAT threshold.’

So, the way it was at the beginning, they were effectively being told that – ‘Ok, you’re not over the VAT threshold, but you need to register for VAT in the UK so that you can utilise the MOSS return, and therefore you’re going to have to charge VAT on UK sales.’

You’d effectively be increasing the cost of your product to your customer – or, alternatively, the business would have to take the hit.

So, either way you look at it, it was really a bad thing for small businesses. Then the lobbying came in to try and change it. Thankfully, they decided that yes – you’ll need to register for UK VAT in order to submit this MOSS return but by registering for UK VAT, but that doesn’t automatically mean that you have to charge VAT on a UK sale.

It’s still not ideal, because they still have to do the MOSS return which is another hoop or two to jump through, but at least now they don’t have to charge VAT on their UK sales.

So that’s the difference. Obviously, if they go over the VAT registration threshold they will need to charge it anyway – they’ll be obliged to by law.

BFS: What advice can you give to small businesses to increase their competitive capacity amid the new EU VAT regulations?

RB: I think the most important thing is a simple thing, but undertake planning on the matter as soon as possible.

Don’t leave it late – forward planning, as with anything, is the best thing to do. I would be suggesting to speak to the people who they use for their sales; what kind of position do they have? Is there an in-house system that processes all their sales? Or do they have a third party do it for them? They would either need to have good discussions with the third party or the people who provide their software for their sales to find out what they’re going to implement into their software with regards to these changes.

Because if you’re paying someone for your software to make your sales, and so on and so forth, one would think that they should be able to have something built into that software which will identify the relevant VAT rates and do that automatically. Or with the third party – how are they going to deal with it? Can they take the burden off you?

So I would hope that the people who can buy that kind of stuff will be one step ahead of the game and would be building that into their system. So really: forward planning and really looking at your sales system and how that can be adapted to the EU regulations.

BFS: After January 1st, what will business owners need to do when selling digital products in the EU?

RB: Firstly, they’ve got two choices. They can either register to submit the MOSS return, or the other alternative is to be registered for VAT in every country which they sell their goods. Now, the latter is a lot more erroneous than the former – so they need to decide which one they want to do. I would be suggesting that they should be submitting MOSS returns.

They also need to make sure that their sales system is compatible with the new EU VAT rules, and that it will charge VAT rate depending on the VAT rate applicable in the state of the customer. And that’s all kind of a part of the planning.

They should also be looking at the system to see whether it can store information for ten years to prove why they charge VAT at the relevant rate where the customer’s based. 


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