VAT Reforms May Result in Higher Costs for SMEs

From 1 January 2015, companies selling electronic services such as music downloads, books, apps and games will have to charge VAT on the basis of where the customer is resident – rather than, as currently, where the company itself is based. Contact the Corporate and Commercial team at IBB for immediate advice.

The move is expected to net the Treasury as much as £300m a year, as it targets companies based in low-VAT countries supplying British customers, but will involve compliance work for all companies selling online. Small and medium-sized enterprises (SMEs) affected by VAT reforms face potential higher costs and the added pressure of being prepared for the new rules. Online retailers could pass on those costs to consumers in the form of higher prices.

Loophole closed

The closing of the tax loophole followed negative media coverage of large multinational companies being able to offer reduced prices by basing digital content services in Luxembourg, for example. Companies have been able to benefit from the more attractive rates of VAT there — just 3% for digital services like ebooks. This is much cheaper than the UK's 20% VAT rate and the rate in many other European markets — generally between 15% and 20%.

The relevant part of the Budget said: "As announced at Budget 2013, the government will legislate to change the rules for the taxation of intra-EU business to consumer supplies of telecommunications, broadcasting and e-services. From 1 January 2015 these services will be taxed in the Member State in which the consumer is located, ensuring these are taxed fairly and helping to protect revenue."

Billing systems will need to cope

Businesses need to ensure that their billing systems can cope. One tax expert advised that a full analysis of where the sales are being made and how that will impact the margins in the various countries and how best to handle compliance would be a good idea to begin preparations. Many businesses will need new accounting software, better data storage facilities and more external advice.

MOSS system may simplify process

The shift to collecting VAT based on where the consumer is located would normally require businesses to register and charge VAT in each country in which supplies are made to consumers.

However, to avoid multiple registrations, Mini One Stop Shop (MOSS) will allow businesses to have a single VAT registration in the member state of establishment. VAT should be charged at the applicable rate of each country and declared via MOSS online. A single payment is also made through the system and this is then remitted to the relevant member states.

In the UK, HMRC has stated MOSS registration will be possible from October 2014.

Our experienced Corporate and Commercial team provides a wide range of transactional services. For advice, contact a member of the team, call us on 08456 381381 or email corporate@ibblaw.co.uk.