The new place of supply rules for (b2c) electronic services have generated  a certain amount of interest in the media and on Twitter. The new rules require EU based providers of electronic services to private individuals to account for VAT in whatever member state of the EU they sell to. Electronic services cover the automated dispatch such things as e books, photos, music and electronic knitting patterns.

One of the reasons for the new rules was the Kindle problem. Prior to 1 Jan 2015 sales of electronic services made to private individuals were treated as supplied where the supplier was based. Amazon were treated as based in Luxembourg and therefore charged Luxembourg VAT regardless of where their customer lived. Since Luxembourg had rather low rates for e books this meant low VAT on Kindle purchases.

The new rules aim to stop this by ensuring that electronic services are taxed where the customer is based. Suppliers now have an obligation to account for VAT in the different members states.

So as to avoid suppliers having to complete 27 different VAT returns and understand 27 different VAT systems (sounds fun to me mind), they can register with HMRC for VAT MOSS – The Mini One Stop Shop. Under this they complete one return, declaring their turnover for each member state they sell to and MOSS then calculates the VAT due.

Now the main complaint from UK based electronic service suppliers has been that there is no de minimis. Whatever your turnover you must account for VAT if you make supplies elsewhere in the EU. This is rather different from the UK system where there is a high registration threshold of £81,000. Suddenly lots of small turnover UK businesses are having to charge VAT for the first time and they understandably don’t like it.

There are a few things its worth remembering when discussing the de minimis threshold question. The first is that to get one you need unanimity from all the member states and thats not easy to get. The UK Government may like the idea and I believe did push for a threshold, but if someone objects it won’t happen.

The second point is that if you have a threshold where below it the old rules apply and the supply  is treated as made in the country of the supplier then this is fine for UK businesses but not so good for those in other member states. For example assume there was a de minimis similar to the goods distance selling limit – about £70,000. This means a small UK business with a turnover of £50,000, that is not obliged to be UK VAT registered, will sell to both its UK and German customers with no VAT charged. In contrast, a similar German business, which must be VAT registered in Germany, will have to charge German VAT of 19% to its UK and German customers.  You can see why the German business might not think this ‘simplification’ such a great idea.

The obvious retort here would be that this distortion is Germanys fault for not having a higher VAT registration threshold. Thats true but in terms of VAT thresholds it’s the UK that’s way out on a limb. The danger of a high de minimis being introduced for electronic services might be that questions get asked about whether a standard VAT registration limit across the EU wouldn’t also be a good idea.  Its possible 26 other member states will agree to increase their limits, reducing the tax take with it  …or then again perhaps they won’t..

Now I accept that this distortion could be said to already apply with goods where there are quite high intra EU distance selling thresholds. But in practice it’s less of an issue. Businesses that sell goods using distance selling to consumers elsewhere in the EU are normally of a sufficient size to make UK VAT registration  essential. If they are not VAT registered then since they will generally incur VAT when obtaining the goods they will take a higher hit by not being able to recover this VAT than an electronic service provider.

In my view a low threshold would be a good idea for electronic services but I am not sure it will be agreed. An attempt at obtaining a higher threshold might raise registration limit or VAT rate harmonisation questions  we really don’t want. Regardless, the evidence rules should be greatly simplified, the current 2 pieces of evidence rules are ridiculous for a small business. But as for UK electronic service provider businesses being allowed not  to charge any VAT on intra EU sales as before I can’t see that happening. Most EU small businesses have to account for VAT and UK electronic businesses are now being treated the same way.

BUT in my view theres been a lot of exaggeration as to the impact of the new rules. Having looked at Twitter it appears that one of the most vocal groups are knitters who sell the occasional knitting pattern. The sale of a occasional knitting pattern online by a hobby knitter or the occasional photograph by an amateur photographer is not a business activity for UK VAT purposes. This is published HMRC policy. So if you were VAT registered as a say a tax consultant and happened to make a few pounds on the side by selling the odd knitting pattern then you should not need to account for VAT on this hobby income.

Now there is some debate as to when such a small scale activity becomes a business or economic activity and in the context of the electronic services changes it is of course the view of the member state you sell into rather than the UK HMRC view that matters. But I can’t see that selling a few knitting patterns is any more a business elsewhere in the EU.  If some guidance could be given on this then I am sure it would put a lot of minds at rest. I am currently acting for a national hobby membership organisation and HMRC have confirmed their view that hobby sales are not caught, but I am seeking further clarification.

A third point I would make is that is not just an EU issue and it won’t go away if we left the EU. The move to VAT systems treating services as taxable in the country of consumption has OECD support and is happening in non EU countries too.

What is completely clear is that there has been a communication failure over the changes. The number of UK MOSS registrations has been predicted to be 60,000, 90,000 or even 200,000. Now even if tens of thousands of those are knitting pattern authors that should not need to worry, thats still a lot of  VAT MOSS registrations  – rather more than the approximately 1,500 applications I am led to believe HMRC had received by last week. This is such a low figure it surely has the potential to become a news story. As of now, based on UK government predications, thousands of UK businesses are breaking EU VAT law.