Selling e-services? 12 tips on how to avoid VAT MESS

The new VAT MOSS regime: for many businesses the mere mention of this clunky acronym brings them out in a cold sweat. Many have dubbed it 'VAT MESS' for the reasons set out in our background post yesterday.

A considerable amount of micro-businesses in particular have fallen within the scope of VAT for the very first time.

In essence, as from 1 January 2015, businesses supplying digital services have been obliged to account for VAT in the country where the customer is located and not where the business is based. This means that the various VAT rates of the EU’s 28 member states now need to be applied as opposed to the simple one rate that was previously applied.

So what should you, as a lawyer, be thinking about when advising a client on this tricky area?

Here are 12 tips to ensure compliance and avoid the pitfalls:

HMRC guidance

Always check the latest guidance from HM Revenue & Customs, in particular:

European Commission guidance

Check the latest guidance from the European Commission although, that said, be very careful when using these resources. Some of them are not up-to-date and therefore are incorrect.

The 'FAQ' page below, for example, refers to the standard UK rate of VAT of '17.5%' despite the site stating that it was last updated on '09/12/2014'. (As I'm sure most Britons are aware, the standard UK rate of VAT has been 20% since 4 January 2011):

VAT rates

If the new rules apply to the business, you'll need to know the VAT rates in the EU. These are published by the European Commission although, unhelpfully, these tables in the link above are only up-to-date as at 1 July 2014.

The Commission should be putting together a real-time API (application program interface) for this so that businesses can access real-time rates. Some businesses already offer this service although query why this (relatively) simple information is not already available from the Commission: if, for example, VAT numbers can currently be validated in real-time, why not the rates?

ICAEW guidance

The VAT MOSS helpsheets from the Institute of Chartered Accountants of England and Wales (ICAEW) are quite handy (although some of these are not currently available). Helpsheet 3 was provided to ICAEW by HM Revenue & Customs

Electronically supplied services?

Check whether the business actually supplies 'electronically supplied services'. It may be able to avoid the new rules by relying on an exemption (see HMRC's flowchart on supplying digital services). Indeed, some smaller businesses are hoping to get around the issue of supplying electronic services by sending their products to consumers on a CD-ROM etc. (a horribly backward, but perhaps understandable, step)

Business or consumer?

Consider who the supplies are to. If they are businesses only, as opposed to consumers, the VAT MOSS scheme doesn't apply

HMRC Registration

If there are no applicable exemptions, details of how to register for the VAT MOSS scheme are here: Register for and use the VAT Mini One Stop Shop.

Alternatively, consider whether selling through an intermediary is feasible (ie an intermediary company sells the services and is therefore responsible for any VAT liability)

ICO Registration

If the business needs to comply with the new regime, it may have to register with the Information Commissioner's Office (ICO) as it will collect data on the customer's location. In its guidance, HM Revenue & Customs says that businesses should register with the ICO although confusingly the ICO says otherwise (see below).

It may be worth calling the ICO on 0303 123 1113 (9am to 5pm Monday to Friday) to double-check the latest situation. In any event, consider how the business is going to collect and store the required data? Even if a business doesn't register it would still need to adhere to the principles of the Data Protection Act and understand best practice for managing information.

Terms and conditions

Check the business's terms and conditions. Do they currently refer to a specific rate of VAT (eg 20% or—hopefully not—17.5%)? If so, consider changing this to 'VAT at the applicable rate'. Consider explaining how the new VAT regime works, say, on the business's website (and even in the terms and conditions): 'if, for example, you do not live in the UK but in another EU country, the VAT rate will be the applicable rate of the EU country where you live and not the applicable UK rate'

Business systems

Check the business's systems to ensure that they are compliant including any 'shopping carts' on a website. There are companies that sell compliance solutions to deal with the new regime such as ones which provide for drop-down menus where a customer can specify their country of residence with the system automatically calculating the applicable VAT rate. Does the shopping cart also include an opportunity for customers to self-certify certain information such as:

  • 'I confirm that I am a consumer and not a business'? and
  • 'I confirm that [country name inserted here] is where I am established, where I have my permanent address or where I usually reside'?

Record keeping

Make sure that all records are kept (businesses are required to keep information on the customer's location for a minimum of 10 years)

Take specialised advice

Liaise with an accountant specialising in this area and check the latest guidance. The law and guidance in this area is changing constantly. It is alarmingly easy to get caught out or to miss new developments. Keep your eyes out for developments!

So what do you think?

Should the system be scrapped and the authorities start again from scratch? Can it be tweaked and made to work? Do you have any tips? We would love to hear your thoughts below.

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