The new EU VAT regulations – what do they mean?


Shopping is something most people in the UK will be used to. In fact, we're more than used to it - we're brilliant at it. Not that it had been a challenge before, but the internet has made things immeasurably easier for those on both side of the counter. Consumers can browse and buy from the comfort of their own homes, while retailers capitalise on a wealth of new money-making opportunities online - everybody wins.

New year, new businesses

This new online world has also blurred the lines between business and consumer. No longer is retail success the preserve of big business CEOs and investors, it's something that anyone with a computer, a little money and an organised mind can achieve.

With the economy looking up once again, small businesses are popping up all over the digital place, and their ambitious owners are - in most cases - reaping the rewards. To ensure that remains the case, they must stay on top of any new or altered legislation that may impact their day-to-day operations. The latest change, which is perhaps the most prominent of its kind to hit in years, involves VAT.

The big EU VAT shake-up

On January 1 2015, the lives of small online business owners across the UK became a little more complicated. It was on this day that the European Union (EU) put its new value added tax (VAT) legislation into action, and it's caused a little confusion to say the least.

Under the new regulations, any company supplying digital services is required to ensure that VAT is paid in the consumer's home country. Before, this would have only been paid in the supplier's location - a much simpler way of doing things.

'Digital services' is admittedly a grey area, and the definition continues to evolve. According to the UK government, present examples include electronic services such as on-demand video content, non-physical music, software downloads and e-books; the supply of radio and television programmes; and telecommunications services.

This, as you might expect, has a number of ramifications for independent retailers to consider. In a nutshell, it's going to create a lot of extra work - work that could threaten profit, and even their very existence in some cases.

New responsibilities

For a start, retailers are now expected to detect the physical location of each buyer. This part isn't particularly difficult given the technology available, but the purpose is to ensure the correct tax is paid. With all of the EU member states having their own tax rules, this is quite a task for someone who only set out to make a bit of extra cash on the side. To put things into context, the rate payable could be anywhere from 17 per cent (Luxembourg) to 27 per cent (Hungary). By the old rules, VAT would always be charged at a simple 20 per cent (the UK standard) - and even then, this would only be applicable for those with revenue above £81,000.

Now, sellers must register for and charge VAT as soon as they sell their first item to a country in the EU - be it something for £1 or £100,000.

As if this wasn't enough hassle already, business owners must also think about the admin that goes with it. Tax returns have to be completed each year - in multiple countries and regardless of income - meaning sellers are required to keep vast amounts of data on their customers. This information must be held securely for ten years, or in some cases even longer.

Dealing with the changes

With regards to ensuring the right VAT is paid during each transaction, sellers have three obvious options. They can:

- absorb the cost themselves and leave prices as they were before the change - potentially boosting sales but lowering profit
- increase prices across the board to cover all costs (this requires careful calibration to ensure everything remains balanced)
- adjust pricing individually based on buyer location, meaning each buyer absorbs the real amount of VAT for their own purchase

The option each seller chooses should depend on their own business's circumstances, but it pays to research each one to ensure the best fit.

Businesses can also make things easier for themselves by register for HMRC's Mini One Stop Shop scheme - also known as VAT MOSS. This requires sellers to submit a single return and VAT payment to HMRC on a calendar quarterly basis. HMRC then sends the correct information and payment to the relevant countries' tax authorities. UK VAT thresholds are also protected for sellers in the UK who register for the scheme.

Should a business owner decide they want to avoid all of the hassle that comes with the new EU VAT rules, they can choose to sell their digital products through an intermediary platform that handles transactions and is accountable for all payable taxes. Downsides may come in the form of smaller profits and consumer bases, plus terms & conditions should be read carefully as they will differ between platforms.

Looking ahead


It's early days, but major change is clearly afoot. The government has announced a six-month grace period that will make it a little easier for companies to get used to the transition, but immediate action is advisable for anyone who wants to avoid disruption. Of course, the ruling applies only to digital services at present, but it seems almost inevitable that it will be extended to the sellers of other products and services in the future. Anyone looking for more information on the latest goings on in relation to the EU VAT legislation should head to the UK government's relevant pages.

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