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EU VAT: 1 year on


EU VAT: 1 year on

It has now been a year since the EU VAT rules came into effect. The legislation has had far-reaching implications for UK businesses. Data protection issues, knock-on effects on UK VAT and additional administrative burdens have all complicated the process of selling digital services to consumers in EU member states.

The EU has now said it could introduce an exemption threshold for the smallest businesses but they are yet to announce when this would be brought into effect. In the meantime, HMRC has modified some of the rules in order to help firms comply with the rules. We look at what these changes could mean for your business.

A recap

On 1 January 2015 EU VAT legislation came into force, requiring businesses selling digital services to EU consumers to collect and account for VAT. The rate of chargeable VAT is based on the customer’s country and must be paid to the relevant tax authority.

In a nutshell: digital services businesses must establish the location of the customer, charge the corresponding VAT rate and pay it to the right revenue service. Understandably many small and micro businesses found this a complex and time-consuming process. Thus the VAT Mini One Stop Shop (VAT MOSS) was born.

VAT MOSS attempts to streamline the process by eliminating the need for businesses to file returns and pay tax to each EU member state. Instead, HMRC acts as the middleman; UK businesses pay the tax and submit quarterly returns to HMRC who then send it on to the correct revenue service.

Simplifying the process

In response to feedback from businesses and campaign groups, HMRC has decided to simplify the process for businesses in 2 ways:

·         Customer location

In order to know what rate of VAT to charge, digital services businesses need to record the locations of their customers. HMRC previously held that 2 pieces of location evidence needed to be collected from each customer. This rule has now been simplified to allow businesses to only gather 1 piece of information. In cases where the payment service provider does not provide location information, address details may be used.

·         Frequency of trade

There is not yet a threshold on EU VAT which means that all businesses trading digital services in EU member states are subject to the rules. However, HMRC has now said that occasional trading will not be seen as a chargeable business activity because it classifies as a ‘hobby’. It is hoped that this will allow businesses who don’t trade often in the EU to be exempt from EU VAT compliance.

Will this make compliance easier for businesses?

Although it is impossible to say at this early stage whether this will lessen the burden on businesses, campaign group EU VAT Action believes that the changes do little to solve the legislation’s major problems. Although HMRC has shown more flexibility on how businesses evidence their customers’ locations, businesses may still find it challenging to gather addresses while remaining compliant with data protection laws.

The group has also questioned HMRC’s distinction between ‘business’ and ‘hobby’ which it says is ambiguous. It is unclear what constitutes ‘occasional’ trading and HMRC will grant exemptions only on an individual basis. EU VAT Action is instead arguing for new EU legislation that would introduce a formal exemption threshold for digital services businesses across the continent.

Need help with EU VAT?

EU VAT rules present business owners with significant challenges. From submitting the quarterly returns to identifying customer locations, compliance demands time and resources that many businesses simply don’t have. That’s why we’re here to help you every step of the way.

Contact us on 01628 631 056 or email geoffk@knightandcompany.co.uk for assistance with EU VAT regulations.