VAT SERVICES
(scotland) Limited
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Urgent action must be taken now by businesses supplying online, digital, telecommunication or broadcasting services to EU non-business customers in light of the Place of Supply change from January 1 2015.

Further to our news article of 6 May 2014, we are finding that a number of UK and overseas businesses are not ready and, alarmingly, not fully considered the impact for them in relation to one of the most significant changes to EU VAT since 2010.

The change in the place of supply of services rule will have a wide-reaching and significant impact on all parts of the business including: VAT accounting requirements, pricing, IT system upgrades, marketing, customer experience, legal contracts and data privacy issues where businesses are supplying internet services, or any digital products and services direct to non-business customers (e.g. private individuals and non-business organisations).
We are increasingly noticing that businesses, regardless of size, incorrectly believe they are not affected by the changes without fully recognising the implications of the new rules that are taking effect from 1 January 2015.

What's changing – the current and future state

From 1 January 2015, the country of taxation for supplies to EU resident non-business customers is changing for selected services i.e. telecoms, broadcasting and electronically delivered content. The VAT liability to business customers in other EU Member States is not changing;

  • Instead of VAT being paid in the country of the supplier, it will become payable where the customer belongs;
  • This means that affected businesses will have pricing and information challenges and significant VAT reporting obligations in every EU Member State in which they have non-business customers;
  • Businesses below the UK VAT registration may be caught as the thresholds for VAT registration in almost all other EU Member States is basically nil; and
  • Addressing how the change will affect ALL elements of the supplier's business will be essential.

What is a telecommunication service?

Examples Include:

  • Emails;
  • Basic access to the internet and World Wide Web;
  • The provision of email addresses and chatline facilities;
  • Transmission, or delivery of another person's materials by electronic means;
  • Satellite transmission services, which includes uplinks and downlinks; and
  • Voice over Internet Protocol ('VoIP') is regarded as a telecommunication service.

What is an electronically-supplied service?

A list of what constitutes an e-service is laid down in EU law. Examples include:

  • Website hosting;
  • Accessing or downloading software, desktop themes, photographic images;
  • Subscription to online newspapers;
  • Online advertising and online automated training;
  • Accessing and downloading music, jingles, ringtones, films and games ; and
  • Radio and TV programmes distributed via internet are considered broadcasting services only if they are broadcast (i) live or (ii) simultaneously to being transmitted over radio or TV network (otherwise, they are an electronically supplied service).

Where is the location of a B2C customer?

  • Specific rules are now in place to determine what can be used as evidence of customer residence. For example, where the physical presence of the consumer is required in order for the services to be provided, such as a phone booth, Wi-Fi hot spot, internet cafe, restaurant or hotel lobby, VAT is due at the location where the services are used;
  • However, where e-services are delivered over the internet, the process for determining the customer's location is more complex. At least two pieces of non-contradictory evidence documenting a customer's location must be collected by the supplier and used to determine the place of supply; and
  • Additionally, there are further rules informing that the country of departure is to be presumed the place of supply for telecoms/broadcasting/e-services supplied on board aircraft on intra-EU journeys.

How can my business deal with potential multiple EU VAT registrations?

  • The EU has agreed on a Mini One-Stop Shop ('MOSS') scheme which shall provide a business with a possibility of dealing with all its VAT obligations in one EU Member State (for example, the UK);
  • Under this scheme, businesses would account for the VAT due on the provision of these services in other EU Member States by using a web portal in the EU Member State where it is established or identified;
  • Once adopted, the scheme will mean that businesses supplying telecommunications, broadcasting and electronic services to non-taxable persons in other EU Member States may mean it will no longer need to register for VAT in those EU Member States; and
  • If eligible, this provision could significantly lower the administrative burden and VAT compliance costs for businesses in this sector.

What happens if businesses fail to act now?

  • Penalties and interest are applied by local tax authorities for VAT not accounted for, failure to register for VAT, incorrect record keeping etc. resulting in reduced profit margins. Penalties can be as high as 200% of the VAT not accounted for. This could also impact the relationship with the local tax authorities;
  • Where the business is an intermediary and is not proactive in addressing the 1 January 2015 changes and contracts are left unrevised, the business rather than its contractual counterparties may be liable for VAT incorrectly accounted for. Counterparties may also not be contractually obliged to provide the business with the required customer information to meet compliance obligations;
  • Systems cannot capture the necessary information to comply with local VAT rates. Systems can require a large turnaround time for amendment;
  • Local tax authorities may initiate legal and / or criminal proceedings where a high value of VAT has not been declared; and
  • Businesses may be forced to stop selling to customers in countries until it is capable of complying with local VAT rules.

1 January 2015 is looming fast – 5 key considerations

1. Pricing and customer experience

  • The business will need a strategy to protect revenues and profit margins.

2. Systems

  • For every transaction, from quote to cash, systems must recognise the customer's country and apply the correct rate of VAT;
  • Systems must also be configured and maintained to ensure that the correct amount of tax is paid to each country residence and other local requirements are met. The VAT rules in the EU Member States fluctuate between 15% and 25%;
  • Systems changes should be designed, implemented and tested ahead of 2015 to ensure timely, accurate and efficient management of VAT across multiple countries; and
  • There may also be a need to run marketing and communications campaigns about the changes to consumers.

3. Contracts with partners, third party vendors and intermediaries

  • Contracts should be reviewed and re-negotiated to ensure that the VAT accounting responsibilities of each party are clearly defined.

4. Corporate structure

  • The business should consider whether the current corporate structure is appropriate for 1 January 2015 from a commercial and a tax perspective and to review the potential to relocate to countries (if registration can be done under MOSS) that are 'open for business' (such as the UK).

5. Compliance

  • The 1 January 2015 changes will significantly increase the VAT compliance burden for the business;
  • The impact of local VAT rules will need to be addressed so that all relevant VAT compliance obligations are met efficiently and in time, and penalties for non-compliance are avoided; and
  • The operating model for this needs to be defined.

How ready is your business?

Businesses affected by the 1 January 2015 VAT changes should be urgently giving attention to the following areas within its business:

  • How to deal with the significantly increased VAT compliance;
  • How to cope with the additional VAT processes;
  • Consider its pricing strategy and margins and whether universal or differential pricing will be used;
  • Where are the gaps in the business' current systems' functionality to cope with overseas VAT charges and accounting;
  • How the business can accurately capture the necessary EU residence data;
  • The impact of additional data capture and validation requirements and their impact on customer experience;
  • Amending sales invoices to meet record keeping requirements in each EU Member State;
  • How the business' systems can support VAT audit requirements for each EU Member State; and
  • Whether existing contracts need to be renewed and new contracts set up.

Who is potentially affected?

  • Online content, software and digital providers, including those selling Apps;
  • Online book and magazine publishers, hotels, internet cafes and restaurants, retailers, airlines and membership clubs providing online subscriptions; and
  • Telecommunication, broadcasting and other media organisations.
  • We have included a flowchart to assist you in determining whether your business is likely to be affected. This is not a complete list and is for example purposes only. Please do contact us if you have any doubt around the supplies made by your business. 

 

How can VAT Services (Scotland) Ltd help you?

  • Assist with the preparation and implementation of a strategy to cover VAT compliance, contract reviews, systems advice, pricing and other support to ensure your business is fully aware and has considered the commercial impact of the changes and, importantly, are ready for the changes by 1 January 2015.

 

Contact us

Should you wish further information on the above, please do not hesitate to contact Gary using the details outlined below.

 

Gary Moore
Direct line 0141 636 9353
Mobile 07812 061 582
Email This email address is being protected from spambots. You need JavaScript enabled to view it.