VAT: 2016 EU reforms mean new rules and rates

EU reforms slated for 2016 could mean thousands of small UK businesses face a new onslaught of stifling red tape.

Since the start of 2015, UK companies that sell digital services to customers in Europe have been forced to pay VAT according to the laws set by the country in which their buyers live. Even to businesses below the current UK VAT turnover threshold of £82,000 (approximately €115,000) are affected.

But campaigners warn that policymakers in Brussels are planning to extend the new system to cross-border retailers of all types of goods and services as early as 2016, threatening to add another layer of bureaucracy to the VAT system.

Which firms are affected by the new EU VAT rules?

Since January 2015, companies which sell goods and services such as smartphone apps, e-books, music downloads or online training services to consumers in the EU, have been obliged to pay VAT at each customer’s local rate. Companies must collect data about where customers live to ensure they are paying tax at the correct rate.

“The new VAT rules mean affected companies face an increased compliance burden and billing becomes more difficult to manage,” says Amanda Tickel, tax partner at accountant KPMG. “In the first instance, businesses need to ensure their systems can capture the right sort of information to evidence where each customer lives and apply the correct VAT rate.”

 What if my business has no VAT registration?

Companies that turn over less than the current threshold of £82,000 a year in the UK will need to start paying VAT on their overseas sales within the EU but not on sales to UK-based customers.

The VAT mini one-stop shop (MOSS) service allows firms to make a single quarterly VAT payment rather than having to deal with tax officials in several countries.

Sally Beggs, deputy director of indirect tax at HM Revenue & Customs, explains: “The VAT MOSS system means that digital services suppliers will not have to register for VAT and provide a quarterly return and payment in every member state where they do business, reducing the administrative burden of implementing these changes. Businesses that have their main operation or headquarters in the UK will register with HMRC to use the service.”

Until 30 June 2015, smaller firms are allowed to use the information from their payment providers to decide where each customer is based.

But after this date, all companies will have to ensure that location details are recorded with each transaction – adding yet another layer of bureaucracy to the system.

 What if I sell other goods or services?

The reform of the VAT system is aimed at preventing companies setting up in low-VAT countries such as Luxembourg and then being able to sell throughout the EU at lower tax rates. As such it is widely expected that the rules will soon be extended from digital-service retailers to sales of other products.

A spokeswoman for campaign group EU VAT Action says: “These rules are just the first wave of legislation. If you sell anything online, then you are next in the EU’s sights: similar rules are planned to extend to all goods and services as early as 2016.”

The spokeswoman adds that there is currently a turnover threshold of either €35,000 or €100,000 (depending on the country they sell into) for people distance-selling goods across national boundaries before having to register for VAT in that country. “But,” she warns, “this threshold will go too.”

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