VAT rule change for micro businesses wanting to use the MOSS for their digital supplies

Revenue and Customs Brief 46/14 has introduced a welcome VAT relief to the VAT accounting and payment requirements for micro businesses affected by the place of supply rules in relation to digital supplies.

New place of supply rules require businesses from 1 January 2015 to account for VAT on their supplies of digital downloads in their private customers’ member states. This is a deviation from the current rules which, until 31 December 2014, require digital supplies to be accounted for in the member state of belonging of the supplier.

There are no VAT thresholds when selling to private individuals in other member states, so the supply of a single download for £1 or 1 Euro will be subject to VAT in the customers’ member states.

UK suppliers have two choices from 1 January 2015 as to how to account for VAT:

  1. Register for VAT in each member state where the customers download the supplies dealing with all the VAT ramifications locally; or
  1. Register for the MOSS in the UK and handle all EC affairs centrally (the UK).

It is unlikely that a micro business will be able to handle the administrative burdens of registering and accounting for VAT in different locations, but use of the MOSS requires businesses to be taxable persons and  VAT registered in the UK.

While VAT registration was open to any micro business, its effect is to result in all taxable supplies in the UK being subject to VAT in the UK, effectively making supplies by micro businesses uncompetitive.

The rule change announced on 10 December in essence allows micro businesses selling digital services to VAT register, split their business between UK supplies and other EC supplies and only account for VAT on their other EC supplies. Naturally this will only apply to digital suppliers while other businesses that have split their businesses and not accounted for VAT will still be subject to the disaggregation rules!

HMRC confirm:

If you make taxable supplies of digital services to customers in other EU member states, and your UK taxable turnover is below the UK VAT registration threshold, you may use the VAT MOSS to account for the VAT due in other EU member states but you do not need to account for and pay VAT on sales to your UK customers.

Businesses should make sure they obtain the required customer location information and account for the VAT rate applicable in the customer’s member state.

Input tax claims should also be considered accordingly.

For further information regarding the VAT rules on MOSS or electronic services, please contact the TaxDesk on 0845 4900 509 and ask for Vaughn Chown.