Contractors' Questions: Will VAT rule changes catch my software firm?

Contractor's Question: I need some clear VAT guidance about running a Hong Kong Ltd company, mainly in light of next year’s EU VAT changes, which shift the place of supply (and therefore the taxation) for B2C supplies from the place where the supplier is established, to the place where the EU customer is resident or located.

I’m confused as VAT rules appeared to change in 2010, and will change again in 2015, but the changes under both years seem the same to me.

When our company does a software development project for an individual in the UK, this ContractorUK piece suggests I do not have to charge VAT, as the place of supply, and where we’re based, is Hong Kong. Yet from January 2015, under the EU changes, would I have to charge VAT even to individuals? I’d also like to know if these rules are going to be the same for all countries of the EU? I ask this because otherwise it seems that I’ve got to familiarise myself with new rules each time we get a customer in a new EU country.

Expert's Answer: Some years ago it was decided that, in the EU, changes to the treatment of VAT on services would be made. These changes were generally called 'The VAT package' and were generally to be introduced in three tranches.

The first portion, in 2010, established the general concept your question describes. It was introduced for most services and differentiated between supplies of services between B2B and B2C services. As you mention, supplies to a business in a different EU state are not subject to a VAT charge by the supplier, whereas intra-EU supplies to a consumer are subject to VAT. As with many systems, there are variations to the general rule. For example, property-based services and transport are two items of a number that have specific rules.

In 2011, there followed changes that impact on the exhibition and conference sector. These do not apply to impact on your business.

The third portion, from 1st January 2015, will see changes to VAT come in regarding electronic, broadcasting and telecommunication services. You mention that you develop and supply software. While you may deliver such bespoke software by electronic means, it’s unlikely that you’re making an electronically supplied service. I imagine you simply convey it by electronic means and if that’s the case, the 2015 rules should not impact on your business. Delivering your software by email would not be an electronically supplied service.

However, if your customer used the internet to access the software, with the electronic interface being a substantial part, you could be seen to be supplying an electronic service. If you did supply an electronic service under the proposed new rules you would potentially have to register in all EU states where you made supplies to consumers.

To avoid this, you could use a facility called MOSS (Mini-One-Stop-Shop) - which is due to be introduced at the same time. This would enable you to register in one EU state, although you would still have to account for VAT, via that single VAT registration, for VAT on all the applicable EU states in which you are making such supplies to consumers.

If you fall into the category of services that changed in 2010 you would not, in the absence of an EU presence, have to worry about registration in the EU. However, if you supply electronically supplied services, from 1st January 2015 you may have to register in a number of EU states or register in one EU state and use MOSS.

Lastly, if you supply software on a disc you might have to consider the value of the disc, because a disc is unlikely to be seen as the supply of a service, and could be subject to import VAT and duty, depending on your terms of trade.

The expert was Adrian Houstoun, VAT partner at Top 20 chartered accountancy firm Kingston Smith LLP.

Thursday 24th April 2014