Some UK businesses are ignoring or are unaware of the changes to EU VAT rules, which could mean significant challenges when they come to submit their VAT returns. Beginning the first of January, some UK merchants selling to other EU countries will no longer pay VAT at the UK rate. Instead, they will now need to pay at the rate of the country into which they are selling. If they don’t act now, they risk leaving themselves exposed to considerable costs in the long term.
The change is significant
Before this year, VAT in the EU was calculated based on the tax law in the country of the seller, rather than the country of the buyer. For example, in the UK, a 20 percent VAT rate would be charged on electronic services and products.
This is no longer the case.
Today, a seller of an electronic service or products must pay VAT in the EU country where the customer is based, rather than where the business is based.
For most effected companies this change will result in significant fluctuations in their VAT liability – sometimes to their benefit and sometimes otherwise. For instance, businesses operating from an EU member country with an already high VAT rate might find that the effects of the new law could result in lower overall tax liability. Regardless of the tax implications, there will be compliance costs and risks associated as merchants change their working practices to meet the new regulations.
Who is affected?
The changes will only affect B2C digital delivery transactions in the EU; specifically, digital products, telecoms, broadcasting and electronic services. In the UK, tax authorities will continue to allow companies with UK revenues below a threshold not to collect UK VAT – but in other countries, VAT is still required.
Retailers wondering if the changes will impact them should consider the following questions:
- Is your business transacting related online sales to consumers located in the EU?
- Does your business offer digital products, broadcasting or telecom services online?
- Are you the Seller of Record?
If the answer to all three of these questions is ‘yes’ than your business should begin adapting to the new VAT rules.
Businesses that need to comply with the new VAT rules will first need to know where their EU customers are located. In some cases, the new law requires businesses to supply two pieces of non-contradictory location evidence for every consumer, such as billing address, IP address or credit card issuer number (CCIN). Vendors are responsible for countering any consumer attempts to falsify their location in an effort to take advantage of a lower VAT, which will require robust systems in place to avoid VAT fraud.
Should you adjust prices?
Businesses that are required to make a change to their VAT calculations need to decide how they are going to modify their pricing structure. Businesses have three basic options:
- Absorb the increased costs and leave VAT-inclusive prices as they were in 2014, without passing on new costs to customers
- Increase prices for all customers to adjust for average increases in VAT liability;
- Implement net pricing to adjust prices according to each customer’s location.
Net pricing is the most transparent way to charge for the new regulations. However, customers may lose trust if they are caught by surprise by VAT at the checkout and legislation around clear pricing needs to be considered.
VAT MOSS will make compliance simpler
The law means that digital businesses must pay the VAT they owe to all the EU countries where they have customers – which could become a very complicated and time consuming task.
Fortunately the VAT Mini-One-Stop-Shop (MOSS) allows EU companies to file their VAT returns in a single country, thus avoiding up to 28 VAT returns for all the member states in which a business is trading in.
While filing with a single VAT MOSS return is much easier, there is lots of hard work to do before the return is filled. Companies must compute VAT correctly, determine and report the tax attributes of the buyer and seller, and defend against local audits.
Take action now
With the complexity of the changes and the significant risk involved with non-compliance, the new VAT system can be overwhelming for many merchants. However, one thing is for sure: the new VAT system isn’t going anywhere. The quicker a business takes action, the less risk there is. Whether they’re taking on the changes themselves or using an ecommerce provider to act as the Seller of Record – merchants are encouraged to act now to comply with the new law.
To find more information on the VAT changes, listen to Digital River’s free webinar on the new VAT.
Please be advised that the information presented above is a representation of Digital River’s interpretation of EU VAT changes. This information is to be used for informational purposes only and not for the purpose of providing legal or tax advice. You should consult with your legal counsel or tax advisor with respect to any particular issue or problem.