Ercan Demiralay FCCA explains the VAT rules within the EU and what B2C tech companies need to do.
A new law that will came into affect on 1 January 2015 throughout the EU that changed the VAT tax rates for technology companies supplying broadcasting, telecommunications and digital technology services. Countries in the EU have different VAT rates and historically this has resulted in companies setting up their headquarters in the strategic location where the tax is lowest.
However, the law was altered to create a level playing field so that any company in the EU selling digital services pays VAT at the rate in the customers (end users) country instead of the state they are based in.
Who this impacts?
The rules apply to all companies that supply digital technology services in the EU to customers that are private individuals. It is particularly relevant to small to medium size companies in the UK that previously fell bellow the minimum registration threshold of £81,000 and weren’t VAT registered. Since the rates are now based on where the customer is located and each country has different rules, the result is all companies must register for VAT.
How the changes affect you?
Businesses have to register and submit separate tax returns in each member state or sign up for a Mini One Stop Shop (MOSS). This is an online common registration form for all countries which means if you decide to use MOSS, one single VAT return will be submitted quarterly and one single payment will be made to every state your company has provided services in. You thus have to keep records of where the place of supply is and the evidence that will be used to decipher this includes:
The customer’s IP addresses
SIM card code
Credit card billing address
Since there are 28 countries and 30 VAT rates, this law creates a significant administrative burden and increases the potential for mistakes being made. It will require a bigger storage of data, audit possibilities, invoicing issues, pricing structures, budgets, legal issues and existing registrations.
What you need to do about it?
In the digital technology service industry, different technology platforms are categorised under different tax rules which makes filing VAT taxes somewhat intricate. You should consider reviewing the different VAT rates in the member states in which you sell your products. Then you need to apply this to the data capture and payment systems on your websites.
It would also be a good idea to test your systems thoroughly to ensure they are in good working order. Finally, you will have to decide on whether to take on the increase or decrease in the VAT tax rate or pass on the price difference to the end consumer. This will likely have implications for your profit margins.
The content of this post is up to date and relevant as at 07/11/2014.
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