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VAT simplification rules raise compliance issues

ON 1 JANUARY 2015, supplies of telecommunication, broadcast, media and content (‘e-services’) will become subject to VAT in the EU country of the private consumer.

EU providers of digital services to private customers are currently required to charge VAT on their services at a single rate depending on their country of establishment and irrespective of where their customers belong.

The result of this policy is consistency in pricing, relative simplicity in accounting systems and, fundamentally, no requirement to consider the additional administration involved in needing to establish the precise location of the customer.

From 1 January 2015, however, VAT should be charged at the rate applicable in the customer’s country of residence. This raises immediate issues in having to understand the VAT rates and compliance rules in each country where customers are located – and establishing the country of location may itself be a difficult task (see box).

Among the many challenges facing e-businesses in complying with the new VAT regulations will be the consideration of how best and most efficiently to collect and record data concerning their customers’ location, as well as the question of how to ensure that IT systems and business infrastructure can adequately capture, record and declare that information.

Capturing this information will be important as suppliers may need to register for VAT in the country of their customers, or register to use a so-called ‘mini one-stop shop’ (MOSS) and undertake all their overseas VAT reporting requirements through online submission in the UK.

The European Commission has announced the development of MOSS and has given early indications of registration requirements, reporting requirements and how to make payments of VAT liabilities of supplies made in relevant member states.
The online reporting form proposed by the European Commission will require up to 20 boxes of ‘administrative’ details, as well as up to an additional 19 boxes identifying the value of supplies (and applicable VAT rates) per country where the services are received.

A so-called simplification
The European Commission has also indicated that payment of overseas VAT liabilities should be made when the return is submitted, and on a pre-prescribed date – without any opportunity to agree any payment plans or delayed payment mechanism, or on the risk of taxpayers facing withdrawal from the scheme if all reporting and payment conditions are not met.

HMRC will, in due course, implement a MOSS facility in the UK in order to ‘simplify’ the multi-jurisdiction VAT accounting of digital services, with further details expected to be announced by HMRC in the autumn of 2013. Primary legislation is likely to be implemented by the Finance Bill 2014, with registrations for use of the MOSS for these specified services being made available from October 2014.

But will MOSS really result in a ‘simplification’?

As the proposal from the EU indicates that each supplier may have to complete up to 19 ‘boxes’ in an online reporting form, this, in addition to the EU’s proposal for a standardised VAT return containing 26 boxes, suggests that any simplification is on the part of the tax authorities, and not on the tax payer. Indeed, for the tax payer, it looks like red tape that has a distinct possibility of turning into red mist.

Where are you?

The question of how you go about establishing your customers’ location for the purposes of paying e-services VAT – while also understanding the many differences in each jurisdiction’s VAT rules – is by no means one that has a straightforward answer.

Take, for example, the situation in which e-services are received by consumers at a location such as a telephone box, a telephone kiosk, a Wi-Fi hot spot, an internet café, a restaurant or a hotel lobby.

In cases where the physical presence of the recipients of the service at that particular location is needed for the service to be rendered to them, the presumption is that the customers are established, have their permanent address or usually reside in that particular country, and the service is effectively used and enjoyed there.

If the customers happen to be on board, say, a ship, an aircraft or a train, the country in which you pinpoint the location for these purposes is presumed to be the country of departure.

However, if the customers are receiving e-services through a fixed land line, a mobile network or a so-called ‘decoder’, the presumption is that the customers are established, have their permanent address or usually reside in the country where the land line, SIM card, decoder or viewing card is registered and/or located.

David Wilson is a VAT associate director at Baker Tilly

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