How new EU VAT rules might cost contractors
The headlines are eye-catching: they’ve sunk at least 200 businesses; attracted charges against the taxman by one of his former staff that he’s arrogant and defensive -- and they’re causing headaches for firms in the UK and 27 other European countries.
It’s clear then. The EU’s new VAT rules have had a tumultuous two-and-three-quarter months, and that’s even before there’s been any real consideration about the penalties for firms found not to be following them, writes Jason Piper, technical manager of tax and business law at the ACCA.
Although that’s what I’ll explore in this exclusive piece for ContractorUK – the penalty regime tied to the VAT ‘place of supply’ rules – let’s begin with some background. It’s necessary to outline the context first because although it’s been around for a long time and is a staple tax for most contractors, VAT is complex -- and it got more complex on January 1st 2015.
Background to the EU’s new VAT rules
Since 01.01.15, VAT law across Europe has changed for electronic services that are supplied digitally to non-business customers – that is, ‘e-services’ such as video-on-demand, downloaded apps, music downloads, gaming, e-books, anti-virus software and online auctions. Bespoke or personalised services (e.g. a real-time online discussion or a specifically commissioned piece of code) are NOT caught by the new rules, while sales to businesses remain under the old rules.
Retail customers must now pay VAT at the rate that applies in the country where they receive the e-service. It’s the supplier’s responsibility to work out the VAT due, and pay it over to the local tax authority. The threshold for application of VAT is nil – so, regardless of your current UK registration position, if you make supplies anywhere else in Europe you need to account for that VAT to the relevant local authority.
The UK has set up a Mini One-Stop Shop (MOSS) to collect and pay over the overseas VAT payable by UK-based suppliers on their behalf. This is, strictly speaking, a simplification compared to the original position of needing to register locally for each market you sell to. On the other hand, it’s undeniably far more complex for businesses which fall below the UK’s unusually high VAT threshold (so haven’t been registered here), but now need to register because of their EU sales.
In order to use the VAT MOSS system, a UK business must first be registered for UK VAT. But, in a change to the existing law, the UK business doesn’t need to account for VAT on its UK supplies as long as they remain below the UK threshold, while it need return EU sales only through the VAT MOSS. Only one business entity will exist, but it will need to file nil VAT returns in the UK every quarter, and VAT-MOSS returns for the overseas VAT collected in each calendar quarter.
Sting in the tail?
However, there is a further sting in the tail of the rules, and that is around how the supplier complies with its obligation to account for tax in “the place of supply”. According to the rules, the business has to collect “two non-contradictory pieces of information” to confirm where it has made the supply, under what’s known as ‘the customer location rules.’ Now that’s fine if the customer’s credit card/payment method aligns to the IP address from which they’re logging into your website (provided you have the time/technology to check it). But what to do if you don’t? Well, fortunately, until June 30th this year HMRC has relaxed the requirement, so you can rely on a payment provider’s assessment of the customer location. But it’s only a temporary fix, and there’s no current indication it will be extended.
Penalty regime is now set
So, as far as application is concerned, the rules haven’t fully bedded down yet. However the regulations that put in place the penalties if you fail to abide them are set. Suppliers are therefore understandably asking whether they will be liable for VAT penalties. They’re also asking about the Data Protection Act – how does it interact with the all that ‘customer location’ information that suppliers must store for no less than ten years?
One little bit of good news regarding this latter question has come from the Information Commissioners Office. It has confirmed that the information suggested by HM Revenue & Customs for customer location purposes (billing address, IP address, bank details, SIM or Landline country code) falls within the exemption for “accounts and records”, so while you need to comply with the Data Protection Act standards for looking after the information (which you always have done anyway), you don’t need to register with the ICO.
The taxman cometh – at home and away
But HMRC record-keeping penalties for VAT MOSS users will still apply. And if you want to stay in the scheme, you need to comply with all the rules – so for example, missing payment deadlines for 3 consecutive periods could see you lose your registration with MOSS.
Standard VAT penalties will apply as well. But of course it’s not UK VAT that’s at stake, so it’s not the UK regime that matters. If you have opted for VAT MOSS then you will need to submit returns to HMRC – one for your UK (nil) return, and one for your “rest of EU” supplies. It’s here that you could wind up with a UK VAT penalty on the UK return, whereas the VAT MOSS transactions would all trigger penalties in the relevant sales venue. If you’ve not opted for the VAT MOSS route, then your penalties for mistakes or failure to register will be implemented by the authority whose VAT you have failed to account for.
With your patience in mind, I will refrain from now setting out all 27 other EU VAT regimes and the penalties for non-registration. But be aware -- in some jurisdictions they can be severe, theoretically over €1m in some cases. All this leaves you as a supplier and other smaller businesses with some pretty unpalatable decisions to make around how you are going to update systems or processes to deal with the obligations, assuming you want to continue to supply digital services to consumers. Guidance from HMRC is available, as are webinars.
Lisbon, Leipzig or London?
One final issue needs to be emphasised about the difference for you, from a penalty perspective, if the tax office that covers your business in relation to the rules is in the likes of Lisbon and Leipzig or London. If the tax authority you’re going to report to is in the UK capital, then there is currently a question mark over how HMRC will actually apply penalties for breaches of the new rules, mainly due to the significant amount of confusion (and disquiet) about them, which I touched upon at this piece’s opening.
And if you’re supplying consumers in, say, the Portuguese or German city, the current chance of each respective taxman leaving his jurisdiction to go after your one-person business in the UK for a few Euros may be slim. There may even be a feeling among tax administrations that if they start grabbing VAT from their neighbours, then their neighbours will start doing the same back to them. This is the thinking at present; unlike the new VAT rules themselves, small businesses will be hoping that nothing changes.