On 1st January 2015, new legislation came into force that affects the rate at which VAT is accounted for on the sale of ‘digital services’ to customers in other EU countries.
Under the new rules, when you sell digital services to someone in another EU country, the VAT is charged in the country where the customer is based. For example, if your business is based in the UK but sells an app or e-book to a private individual based in Italy, you must charge the Italian VAT rate (which is currently 22%) instead of the UK rate of 20%.
However, the new legislation does not apply to sales to another business (B2B) in the EU or on sales to customers located outside of the EU.
As technology makes it easier to run a business from anywhere with an Internet connection and to have customers from numerous different countries, the new legislation means some small and micro business owners are now faced with the extra admin burden of calculating and recording different VAT rates for each of their sales even if they aren’t currently VAT-registered in the UK.
Unfortunately, although the change in VAT rules was agreed by EU member states way back in 2008 and Vince Cable (Secretary of State for Business, Innovation and Skills) believes the UK Government has “done a lot to communicate it to businesses”, it appears that the message didn’t get through to the majority of people until November 2014 when an online petition appeared on Change.org and a flurry of Tweets, blogs and Facebook Groups started appearing online with the #VATMOSS hashtag.
Although the EU legislation was done for the right reasons (to stop big cross-border businesses like Amazon diverting all their sales through low-VAT countries like Luxembourg), politicians and bureaucrats clearly underestimated, or simply didn’t consider, the potential impact of the change on micro business owners. This is because many of them don’t have any experience of working for one and they don’t have an effective method of communicating to or consulting with them.
It also highlights the problem of lumping micro businesses (0-9 employees) in with much bigger ones under the catch-all banner of SMEs (Small and Medium Sized Businesses) which can have up to 250 employees. A 250 employee business has very different needs and ability to cope with major legislation changes than a 1 employee business which is why we helped Tony Robinson OBE and Tina Boden (Enterprise Rockers) host the first annual #MicroBizMattersDay to help raise awareness of micro businesses and discuss issues like ‘VAT MOSS’ during the live Google+ Hangout interviews.
What to do about it
The EU VAT legislation is a fast-moving topic with new updates and information being shared on an almost daily basis via the #VATMOSS hashtag on Twitter. Unfortunately this makes it difficult for anyone to keep up and to know whose advice they should listen to.
In my opinion, when it comes to legislation it’s always best to listen to the professionals like your accountant (if you have one) and organisations like Sage whose business it is to ensure that all our customers (over 830,000 of them in the UK) are provided with all the support that they need.
Indeed, although we don’t believe many Sage One customers are affected by the legislation, and at the time of writing have only had 5 calls from businesses concerned about what they need to do, we’ve written a short blog titled ‘#VATMOSS advice for small & micro businesses in the UK’ which clearly explains how they can manage the changes using our Sage One Accounts Extra software.
I also recommend businesses (and their accountants or bookkeepers) keep an eye on the GOV.UK website which is regularly updated with all the latest EU VAT guidance including how to Register for and use the VAT Mini One Stop Shop (MOSS).
And if you do want to read more on the subject and how different types of businesses might be affected, I recommend the following resources: