HMRC Clarifies Impact of MOSS on Businesses Below U.K. VAT Threshold

The U.K. tax authority, HM Revenue & Customs (HMRC), has clarified the impact on small businesses of the new value-added tax (VAT) rules on the supply of digital services to consumers within the European Union (EU). The new regime, which comes into effect across the EU on January 1, 2015, makes VAT on such services chargeable in the member state of the consumer rather than the state where the supplier is established. Designed primarily to prevent internet giants from gaining an unfair competitive advantage by basing themselves in EU jurisdictions with low VAT rates, it will also have the effect of drawing many U.K. small businesses into the VAT net for the first time.

Unpalatable Options

The issue has arisen because of the high turnover threshold for compulsory VAT registration in the U.K. At GBP 81,000, the threshold is much higher than in most other EU member states - often by as much as GBP 20,000. As a result, many U.K. small businesses do not have to register for VAT.

Under the new rules, a business supplying digital services (e.g. e-books, PDF downloads, software, music, games and pre-recorded online courses) to a consumer in an EU member state must account for VAT in that state, under its VAT regime. To ease the compliance burden on affected U.K. businesses, HMRC has established, as permitted by the new EU regime, a VAT Mini One Stop Shop (MOSS) – a service that enables U.K. businesses to account for VAT throughout the EU, thereby dispensing with the need for them to register in all EU member states where they do business.

A pre-condition of registering for HMRC’s VAT MOSS service is registration for VAT in the U.K. So to take advantage of MOSS, U.K. digital services suppliers will have to register for VAT in the U.K. even if their turnover falls beneath the U.K. VAT threshold. This appeared to leave small-scale U.K. suppliers of digital services with three unpalatable options – retain the benefit of their U.K. VAT exemption but suffer the burden of having to account for VAT separately in each EU member state where they do business; avoid that burden by signing up for VAT MOSS, but at the cost of losing the benefit of the GBP 81,000 threshold in the U.K.; or not supply digital services to EU member states at all.

Shock and Worry

Not surprisingly, this has caused consternation among many small businesses. “We’d planned to expand into downloadable products from December”, the owner of a subscription stationery business, Carla Watkins, told The Telegraph, a U.K. national newspaper, on November 26. “I had planned to launch an e-course in January. Though I’ve worked on it for months, it now falls under these rules . . . We are now being held to the same corporate compliance procedures as giants like Amazon. In one fell swoop, they’re stifling innovation and cross border trade, and forcing people to close their businesses – all for lack of consultation, clarity and communication.”

She was not a lone voice. “Although these changes are an important part of the battle to make large companies pay their fair share of tax, they are proving a shock for some small firms who are trying to build exporting digital businesses”, the National Chairman of the Federation of Small Businesses, John Allan, told The Telegraph. “We are already hearing from members who are very worried and want to know what to do about it.”

By December 7, an online petition, organised by a group calling itself the “EU VAT Action Team”, and requesting the government to “Uphold the VAT Exemption Threshold for businesses supplying digital products”, had gained some 10,000 supporters. “Why should small digital businesses be treated differently to other categories of small business in the U.K.?” asked the petition. “This new legislation will cripple, and potentially force into closure, thousands of micro-businesses across the U.K. – just as [the U.K.] government claims to be trying to make things easier for small business in the U.K.”

New HMRC Guidance

Following a meeting with concerned parties in the first week of December, HMRC responded to the furore by issuing additional guidance on VAT MOSS on December 10. This makes it clear that businesses below the U.K. VAT threshold will be able to use MOSS to account for VAT in other EU member states without having to account for, and pay, VAT on sales to U.K. customers.  “Although it is a condition of registering for the MOSS that you must have a U.K. VAT registration number to identify the business,” the new guidance explains, “you will not lose your U.K. VAT registration threshold."

MOSS users below the U.K. VAT threshold will still be required to complete a U.K. VAT quarterly return, even if they not charging VAT on U.K. sales, as well as declaring any supplies of digital services to EU customers on a quarterly VAT MOSS return. Those not charging U.K. VAT will be able to reclaim input VAT only on business expenses and purchases that are wholly attributable to cross-border digital services supplies accounted for through MOSS, or on the proportion attributable to those sales.

The guidance also reminds businesses of MOSS record-keeping requirements. To establish that the correct VAT has been charged, MOSS-registered businesses will be required to retain two pieces of evidence of where each customer normally lives. Acknowledging that this requirement “can sometimes present a challenge for small businesses”, the guidance suggests the following two-step approach:

  • when the customer places their order, they should be asked to confirm either the EU member state they usually live in or their billing address; and
  • when the customer pays for the product using the payment service provider, businesses should arrange for the provider to supply them with the customer’s billing address and the country code of his bank or registered credit card.

As the customer records will have to be kept electronically, MOSS users will also need to register as data controllers with U.K. Information Commissioner’s Office.

Ramping Up the Campaign

None of this has impressed the EU VAT Action Team. “Unfortunately . . . this does not solve the issue for us at all”, the group said in a statement issued after the release of the guidance. “There is still a significant gap in understanding of our situation on the part of HMRC and no meaningful progress has been made . . . [HMRC] have still singularly failed to grasp that, far from not wanting to comply with the legislation, we simply CANNOT, due to the requirements for the proof [of] place of supply.”

Promising “to ramp up the campaign to a new level”, the EU VAT Action Team has now launched another online petition, this time calling on the EU Commission “to unilaterally suspend the introduction of the new EU VAT laws for micro businesses and sole-traders”. The new petition claims that the “costs in paperwork, bureaucracy, and amendments to websites and payment processing will simply mean that many businesses are no longer viable.”

As of December 15, the petition had gained 3,248 supporters.

Dr Craig Rose, Technical Editor, Global Tax Guide

Access even more in-depth analysis and expertise with a free trial to the Premier International Tax Library.