EU Commission Publish VAT Proposals
On April 7th the Commission published their VAT plans. See Commission Plans.
The aim is to continue the move towards VAT being accounted for in the country a supply is made to and used – the destination principle. The 2015 changes in the place of supply of electronic services were an example of this. They required that businesses providing services to private consumers elsewhere in the EU must account for VAT in the member state of their customer. To prevent them needing to register for VAT in every member state of the EU a special simplified EU wide VAT registration was created – The Mini One Stop Shop or MOSS . See HMRC on MOSS
The Commission propose extending this regime to all e commerce, meaning that goods will be included. Currently a UK seller of goods online will only need to register for VAT in another EU state if it supplies goods to non business customers in that country that exceed the distance selling limits for that state. Thus for example if you sell goods to Spain you must register for Spanish VAT only if your sales exceed the Spanish distance selling limit of 35,000 Euro. If you are below this then you charge UK VAT. Since in many cases UK VAT will be lower than Spanish VAT this might be good news. Larger e commerce retailers clearly have to register throughout the EU, but smaller ones do not.
If the electronic service regime is extended to goods then things will change and if you sell goods to a customer in Spain then Spanish VAT will need to be accounted for. This will be either under a Spanish VAT registration or through MOSS. Fortunately the Commission support the introduction of a threshold below which E commerce traders will not need to worry. They state that they have always favoured this but they couldn’t get unanimity from all the member states, which is why the rule change for electronic services came in without any threshold. The Commission states that the new rules led to lots of complaints from businesses in one state only. We can guess which one that was. The reason is of course because in the UK we are used to high registration thresholds meaning smaller businesses do not need to account for VAT.
Fortunately the proposed threshold is described as being over and above the domestic registration limit. This means that it won’t hopefully cause the UK VAT registration limit to fall. Unfortunately it is still not clear if agreement can be reached for anything other than a very low threshold – 10,000 euros has been muted. Lets hope a higher limit is possible. A low limit like that might help hobby businesses, amateur knitting pattern writers were extraordinarily vocal over MOSS, but it wouldn’t help smaller non hobby businesses much.
But a threshold is a good idea for another reason ,which is that it supports what one might call the UK approach to tax. The fact is that even according the Commissions figures, although the electronic service rules may have been implemented by almost all large providers of such services and therefore the vast majority of the tax has been collected – tens if not hundreds of thousands of very small businesses are ignoring them. I don’t get the impression this is really seen as much of an issue – possibly because its clearly daft that a single sale of a photo or knitting pattern by a very small business should require a special VAT registration to account for the VAT. But I rather prefer common sense tax law to common sense enforcement of daft law and hence support a threshold that legalises what is in practice already happening.
Another advantage of a VAT system where VAT is accounted for in the state of the customer, is that it becomes less important to be prescriptive over VAT rates. Countries can set their own as there will not be massive cross border distortion. This change will presumably be very welcome to the current UK government who have already legislated on women sanitary products assuming this will happen. It will also mean that VAT can move on from the 70’s where its rates are effectively stuck and consider new rates for electronic books and other new products that have come into being since the heyday of ABBA.
Overall the Commission plans are rather exciting, although they will clearly result in greater VAT compliance costs if they are implemented. All businesses engaged in e commerce will need to be able to identify where their customers are and have sites that can cope with a range of different VAT rates and thus VAT inclusive prices. If you think it might impact on your business and want to talk about what sort of things its worth doing now then get in touch. I would certainly think its worth businesses that are now developing new e commerce platforms to try and ensure they can cope.