Digital Services to European Customers from outside EU
If you are a Non EU Supplier selling into the UK or other European countries then you should read this article.
It is a little known fact that if you are selling certain goods or services to local private consumers in Europe then you may need to register for VAT in the country where the consumer belongs. There are no Selling thresholds for Non-EU Suppliers so even selling to one private customer in the case of Digital Services will mean VAT Registration becomes mandatory. It is apparent many Non-EU Suppliers are unaware of their VAT obligations in the European Union (EU).
What are Digital or Electronic Services for VAT purposes ?
- supplies of software and software updates
- website supply or web hosting services
- advertising space on a website
- supplies of images or text, such as photos, screensavers, e-books and other digitised documents, for example, PDF files
- supplies of music, films and games, including games of chance and gambling games, and programmes on demand
- online magazines
- distance maintenance of programmes and equipment
Basically, if you are supplier any of the above to EU individual consumers, you are responsible for charging, collecting, reporting and submitting VAT returns to each EU country where you do business in.
What are the steps to ensure correct procedure is followed:
Step 1: Choose a European Base from the 28 countries to register for VAT.
Many Non-UK companies choose the UK as their “VAT base” for obvious reasons i.e language, historical links etc countries. UK is seen as a gateway into Europe though following Brexit this may change.
For Digital or Electronic Services there is no VAT threshold and if you sell to individual consumers (B2C) then you need to charge VAT at appropriate country rate ie where the consumer is located. To prevent the arduous and expensive task of registering in each country luckily there is a system in place which means you can file one VAT return that takes into account all of your sales in the 28 countries. This is Called VAT MOSS (Mini One Stop Shop). See below for the registration MOSS process
The Non EU company may not have a business or fixed establishment for VAT purposes and will have to register under Non-Union Moss.
Step 2: Know your Customer
Business Customers will not be charged VAT but individual customers are likely to be charged VAT. You should request the VAT number to prove they are a business though this is not required as such. Just some other evidence the customer is a business will suffice (though this may not apply in all countries as some EU countries strictly expect the VAT number e.g. Spain)
EU Directives cover the VAT rules in the EU and each country in the EU is required to follow them strictly though some are the regulations are subject to interpretation resulting in inconsistency. For example, the requirement to have a VAT number to prove they are a business is not technically correct. Where is the customer based: Some of the checks can be carried out below to determine where the customer is from. Will need tow pieces of evidence:
- Billing Address
- Location of the Customers Bank
- Where the credit card was issued from
- IP Address
- Country of Sim Card
Step 3: Raise a VAT invoice and include the right amount of VAT
Business Customers No VAT and reverse charge:
Individual Consumers charge VAT at the correct VAT Rate
Invoice must be broken down and conform to the EU Directives.
How the VAT Moss Scheme Works
There are 2 types of scheme:
- Union VAT MOSS – for businesses based in the EU, including the UK
- Non-Union VAT MOSS – for businesses based outside of the EU
Union VAT Moss
To use the Union VAT MOSS scheme in the UK, your business must:
- be based in the UK, or be a non-EU business with a fixed establishment in the UK
- be registered for UK VAT
- supply digital services to consumers in the European Union
Non-Union VAT MOSS
To use the Non-Union VAT MOSS scheme in the UK, your business must:
- be based outside of the European Union
- have no fixed or business establishments in the European Union
- supply digital services to consumers in the European Union
How UK VAT MOSS works
Once you register your business for the scheme, you must account for the VAT due on any qualifying sales by sending HM Revenue and Customs (HMRC) a VAT MOSS Return and payment each calendar quarter.
This means you only need to send a single VAT MOSS Return, each calendar quarter. You don’t have to declare the VAT due separately in each EU member state.
HMRC will send the relevant parts of your return and payment to the tax authority of the country where your customers are based.
Selling Goods in EU: Distance Selling
Once you are in one EU Country, goods delivered to local private customers in another EU Country are governed by distance selling thresholds. UK has a distance selling threshold of £70000 and if exceeded will force VAT registration in that country and to charge local VAT rate as well.
Other Reporting Obligations
Intrastat. If you sell more than £250,000 from the UK to any EU Countries then Intrastat declarations are required
ES Sales List: Goods/Services sold to EU Countries need to be declared on EC Sales List
Recently, the evasion of VAT by Non-European suppliers has hit the headlines and the UK government has started to take action. It already has made Selling Platforms like Amazon and Ebay liable for any VAT unpaid by overseas sellers Further actions to clump down on illicit suppliers is expected in 2018 as HMRC will identify sellers who are not registering for VAT. HMRC has a designated unit (£22.5m per year budget) to tackle VAT fraud and the penalties for non compliance are severe sometimes 400% upto the VAT due as well as imprisonment.
Some UK Suppliers have complained at the unfair practices and competitive advantage achieved by Non-EU Ebay and Amazon Traders maybe have been the catalyst for HMRC to take action against Ebay and Amazon traders. Furthermore there are naming and shaming websites like www.vatfraud.org that HMRC use to pinpoint action to illicit traders. In the light of legislation that expected to through parliament soon – Non-EU Sellers are required to provide Amazon with a VAT number by 1ST MARCH 2018 or risk not being able to sell on their platform.
Non EU companies may face having to go go back to their records over several years and paying back any VAT due. This maybe a complex exercise as only sales to local consumers (B2C) would be liable for VAT. Business to Business (B2B) would not be liable for VAT as the UK Business Customer can account for the VAT through what is known as Reverse Charge though there are certain conditions to meet hence this area maybe exposed as non compliant.
While, the focus has been on Amazon and Ebay Sellers, the online software companies from USA and India should perhaps also take stock if they are compliant with the VAT regulations as they could be next on HMRC hit list.