18 December 2014
Small businesses that trade below the VAT-registration threshold in the UK may need to consider their options under the new supply of digital services rules that take effect on 1 January 2015.
Since I last wrote about the supply of digital services, there have been some developments, as traders, their advisors and HMRC try to make the new rules workable. One perceived pitfall in the original rules was that businesses that were not required to register for VAT in the UK, as they fell below the UK’s comparatively high VAT registration threshold, would be forced to register for VAT in the UK in order to take advantage of the Mini-One Stop Shop (MOSS) facility. Using MOSS means that traders who do business with consumers in other EU countries, which may have much lower registration thresholds than the UK, do not need to register separately for VAT in each those countries. For that reason MOSS is attractive administratively.
However, MOSS is less attractive if it forces a UK trader to have to charge VAT on its supplies, which, if made to a UK consumer, would cause a 20% hike in price, a significant erosion in profits, or some combination of the two. HMRC helpfully suggested that such traders could do something that it’s tried to eliminate for the last 40 years and split their trades. A trader can now register for VAT in respect of its digital service supplies in the EU and keep its UK turnover free from VAT until such time as that UK turnover exceeds the UK VAT threshold. Details of this can be found in Revenue & Customs Brief 46 (2014) here .
Also included within the Brief is a short table of what HMRC considers to be digital services. This has highlighted the requirement that, in order to qualify as digital, services need to be delivered automatically with minimal human intervention. Some commentators have suggested that the sales routines adopted by businesses could be changed to increase the level of human involvement, which might then take the services supplied outside of the digital definition. Whilst automation might be an essential for larger businesses, it may be possible for small businesses with relatively low volumes of overseas sales to make these sales less automated and avoid any involvement with the new rules. However each business will need to look at its supplies and processes in order see if this approach is viable. This may only be a short-term solution, as businesses with growth ambitions may exceed the registration thresholds and, eventually, it’s likely that VAT on all services provided to consumers will need to be accounted for in the country of consumption.
If there are any issues with regard to the supply of digital services and VAT that you would like to discuss, please contact John Sheehan from our Letchworth office or a VAT adviser at your nearest location. Alternatively, you can complete our online contact form.