London’s tech sector is under threat from EU VAT reforms
cityam.com"There are 28 countries in the EU with 75 different VAT rates, and businesses are expected to apply the correct one."
This also changes expectations from ecommerce software. It is not feasible to expect the administrator to research & create 75 VAT rates, then update them as they change (sometimes yearly). Plus, the actual logic of determining which rate to apply.
We've been redesigning our ecommerce package (Drupal Commerce) to account for this. We've extracted our solution into a PHP library that anyone can use: https://github.com/commerceguys/tax It's been verified and approved by our VAT experts. Even if you're not using PHP, clone our approach and make your users happy :)
I've also gone through these problems from a developer perspective, in case anyone is interested: https://drupalcommerce.org/blog/31036/commerce-2x-stories-ta...
This is a very poorly thought out piece of legislation and it could quickly turn into a huge pain in the ass:
- People are now incentivised to game the system by trying to seem like they are coming from low VAT jurisdictions, so they get lower prices. It's the business that is liable if customers get away with this.
- The "two pieces of evidence" rule means IP address and ... ? Realistically, it seems the only other thing that'd work is credit card billing address, do people even have any other way to prove their location over the internet? Wire transfer details? So for anything that isn't very expensive, forget about selling with anything OTHER than a credit card. Great, businesses selling digital goods just got nailed onto the cross of a 1970s era payment technology that barely evolves at all; how backwards. Not to mention that many people in the EU don't even have credit cards and make payments in other ways, which may or may not give geographic info.
- More rules that are so absurd they can't be reliably enforced, like the travelling rule, so they are just setting traps for the politically unfavoured.
All this to try and undo the effects of the single market the EU worked so hard to create, by preventing countries competing with each other on tax rates? Should have thought of that beforehand!
I can see this creating new businesses. I would love to issues credit cards within EU where there is low VAT and then invoice electronically so there's no phyisical address required. As well as if IP is used, cheap shop proxy which comes as bonus when you start using credit cards which I'm issuing. Even physical "delivery proxy" could be arranged for items. Many businesses are doing trickery like this all the time.
I can see this creating new businesses. I would love to issues credit cards within EU where there is low VAT and then invoice electronically so there's no phyisical address required.
I'm pretty sure what you call a "new business" could quite easily be given the alternative name of "tax evasion."
This isn't a field I'd recommend startups to look at entering.
HMRC is not going to know if someone travelling from France to the UK was charged the wrong VAT rate, and if they did, they wouldn't start issuing fines. They are very kind to our sector, as the government wants to encourage our sector to grow in the UK.
Also, you can do like Digital Ocean, have premises in the EU, and customers in the EU, but claim to be only an American company and ignore the VAT question completely. Still, I'm not sure how long they will get away with that.
The title is rather link-baity as other than a bit of an accounting headache, this isn't really going to affect anything. B2B can and will still be able to reclaim or not pay VAT, and B2C prices will most likely be inflated to account for the changes (if VAT is included in the list price). When selling to EU customers you are already required to provide HMRC a breakdown per country, so you should already be doing the hard bit of figuring out where customers are based.
The main issue with this legislation is that it isn't clear, and what has been said is contradictory. As an example, this is from the EC guidance notes [0]:
> Where telecommunications, broadcasting or electronic services are supplied to a private individual, VAT, as a rule, will be due at the place where the private individual has his permanent address or usually resides (as from 2015).
This completely contradicts what HMRC said as mentioned in the article :D I haven't heard any complaints from other countries, so is it just HMRC in the UK who are messing this up?
[0] http://ec.europa.eu/taxation_customs/resources/documents/tax...
The title is rather link-baity as other than a bit of an accounting headache, this isn't really going to affect anything
The headaches are quite large, to be fair:
- The VAT rate charged is now the customer's local rate, rather than the seller's.
- Verifying the customer's country via IP address or credit card location in addition to the address provided. No match, no sale.
I haven't heard any complaints from other countries
Funnily enough, I'm having various arguments with annoyed accountants right this very second (I'm based in Poland).
I guess it depends on the local language being spoken.
Everybody I talked to in Germany was complaining about the new regulations -- it's a PITA for every single online retailer and shop system vendor.
New rules will be in effect on Jan 1st and even accountants are still fuzzy on the details (fiscal authorities are still dragging their feet on providing implementation guidelines).
It's quite a challenge, and the administrative overhead is significant, particularly for SMBs (which fuels the existing notion that EU legislation tends to favor big companies).
I hardly see this as a threat to just the London tech sector - it's a PITA in general for everyone but it will first be a problem for business with digital products. A good piece of accountancy like Xero can go a long way making this easier and having a decent accountant to help is a must.
From what I understand this affects everyone EU-wide. And by "affects" I mean that everything will cost a little more. The following is the notice I received from Microsoft on the 24th (first notice came in October):
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SECOND NOTICE – European Union VAT Changes Coming 1/1/2015
Tax laws in the European Union (EU), which govern the Value Added Tax (VAT) rate applied to business-to-consumer digital goods, are changing on 1/1/2015. This affects the VAT rate on content offered in the Windows and Windows Phone Stores. You may want to start thinking about how this change could impact your EU pricing decisions.
Beginning on 1/1/2015, the applicable VAT rate for paid business-to-consumer transactions for digital goods will change from 15% to the country-specific VAT rate.
All EU countries are Microsoft tax remit, which means the price you select in Dev Center for your app and/or in-app purchase is the final sale price to the customer and already includes applicable taxes. Microsoft then subtracts the taxes from the price prior to payout, and remits them on your behalf.
--
They then give the VAT rates for each affected EU country. Most go up to just above or below 20% VAT. Hungary goes as high as 27%, and Luxembourg, the lowest, goes up by 2% to 17%.
"Currently, if a UK VAT-registered business sells anything overseas but within the EU, it must charge VAT at the UK rate of 20 per cent under the 'place of supply' rules. "
This is simply not true. In fact, the exact opposite is true. A UK VAT-registered business must NOT charge VAT when selling to customers within the EU.
Which leads me to believe that the author doesn't know what he's talking about.
A UK VAT-registered business must NOT charge VAT when selling to customers within the EU.
You've applied the rule too generally.
The rules are:
The new rules affect the above thus:1. Customer is an EU and VAT-registered business: no VAT *if* proof of business provided in the form of a VAT number. 2. Customer is an EU business: no VAT number: charge VAT at your local VAT rate. 3. Customer is an EU consumer: charge VAT at *your* local rate. 4. Customer is based outside the EU: no VAT.
The new rules also place a significant burden on proving the customer's location: you must verify their address using at least two methods, one of which may be the address the customer provides; and the other may be their credit card address, or geoip lookup via their IP address.1. No change. 2. Charge VAT at *customer's* local rate. 3. Charge VAT at *customer's* local rate. 4. No change.Whichever proofs you rely on must be recorded with the purchase, and kept for 10 years.
Has UK been enjoying special treatment here? Generally in EU you charge consumers their home state VAT, unless your sales there falls below some treshold ("insignificant" sales to that location).
https://en.wikipedia.org/wiki/European_Union_value_added_tax...
Generally in EU you charge consumers their home state VAT
No. That's what's changing in 2015.
> 1. Customer is an EU and VAT-registered business: no VAT if proof of business provided in the form of a VAT number.
I wish it worked that way in practice BTW. When asking about it at Apple Store in London (I have a business registered in Poland), the clerks replied that unfortunately they don't know what I'm talking about and thus they'll have to charge VAT.
I wish it worked that way in practice BTW
I wish it did as well! (I'm also based in Poland and make the odd purchase in London).
FWIW you can still claim back the VAT, so at least it's "just" a cashflow issue.
Yes, this is correct. Thank you for the clarification.
What you said is only true for B2B services. Normally, you would have to charge UK VAT for B2C services supplied to EU consumers: https://www.gov.uk/government/publications/vat-notice-741a-p...
Ok, agreed. Got confused.
I wonder if this is why Google Cloud as of recently doesn't allow non-business users in the EU to sign up for their services (and changed the status of current users from personal to business). Seems like a poor response to this new law IMO.
https://support.google.com/cloudbilling/answer/6090602?hl=en
Please correct me, if I have misunderstood the new rules.
The new rules are very bad for non-VAT registered UK companies which create and sell digital goods. If my company continues selling (http://www.virtsync.com) to EU countries, it would have to register for VAT in each EU country.
For £2k in sales, I would have to do VAT returns for 27 countries, in several foreign languages! It is clearly not worth it.
(VAT-registered companies can use HMRC's MOSS: https://www.gov.uk/government/publications/vat-supplying-dig...)
Thanks for bringing this up. From what I understand the company I work for will not have too many issues with collection (we are legally structured as an agent and don't sell digital goods) but it does mean that paying for Google Ads will involve paying an extra 20% up front which isn't great for cash flow management (though it will be reimbursed later).
I mean, for B2B services the place of supply was already the place where the customer belongs so your employer already reverse charges the VAT which means that VAT is reclaimed at the same time it's charged, effectively cancelling itself out. If I understand it correctly, this change will only affect B2C services.
The new EU VAT law makes VAT mandatory even for companies outside EU that sell digital goods to european citizens, also VAT is taxed at customer's residence country rate instead of company's like in the past, Luxembourg will no longer be a VAT heaven inside EU.