24 Aug The EU Reverse Charge Scheme: How does it work?
From 1 January 2015, the EU reverse charge scheme has caused great controversy and opposition, especially among micro-businesses that are now seriously reconsidering trading in Europe. According to the new legislation, VAT is charged in the country that products are purchased, rather than the country that sells them. The scheme applies only to digital products, such as downloads, e-books, and online courses. In practice, this means that entrepreneurs that export digital services and/or products to Europe do no longer exempt from paying VAT for under £81,000 worth of products annually. For example, if a UK-based organisation makes a sale in another member of the European Union, they are obliged to pay VAT there.
There are only two ways you can comply: either (1) register for HMRC’s VAT MOSS (Mini One Stop Shop Scheme) or (2) register for VAT with the country you are buying from. Based on information posted on the HMRC website, you need to submit a VAT payment and Single Calendar Quarterly Return to HMRC, for the VAT MOSS scheme. HMRC will then send the information required to the tax authority of the member state you are having business with and send payment.
It should be noted that the £81,000 threshold is not cancelled. Micro-businesses selling digital products and services can still trade VAT free, provided they are selling in the UK and stay below the threshold. Only sales made to another EU member are subjected to the local VAT. In this cases, there is no minimum threshold. Considering that there are more than 80 different VAT rates in the 28 countries, the new legislation is believed to come with a tremendous administrative burden alongside a significant financial impact on SME owners selling digital products/services.
Businesses, such as app developers or developers of digital downloads usually trade through a third party marketplace (i.e. app store), which means that the marketplace operator is held responsible for accounting for the VAT. In this case, micro-businesses aren’t affected much – provided they do a meticulous cost-benefit analysis to see whether it is financially worthwhile to continue trading in certain countries- but 34,000 SMEs in the UK are. However, not all third party marketplaces or platforms are willing to comply with this legislation, at least not just yet. Also payment providers (i.e. PayPal) are NOT regarded as third-party platforms, hence are NOT responsible for accounting for VAT. Unfortunately, you may struggle to get all the information you need to comply, from them. Here is a list of the compliant and non-compliant platforms that you can use as a general guide.
In a nutshell:
- The new scheme applies to any electronically supplied service (e-services*, telecommunications, broadcasting).
- Even if you are NOT in the EU, you are still required to pay VAT at your EU buyer’s country VAT rate.
- The law applies to everybody providing automated digital services, regardless of where the seller is located (inside the EU or not), without minimum threshold whatsoever.
- MOSS is a system that collects the VAT and distributes it on your behalf. It is set up in every member state of the EU, and you don’t need to VAT-register in every country you do business with. (Non-EU-residents can sign up with VOES, the equivalent of MOSS).
- To comply with the new legislation, you have to: (1) charge every buyer in the European Union VAT at their local rate, (2) sign up for VAT MOSS, as long as you are residing in a member state of the EU, and (3) collect two pieces of information that prove your buyer’s location (these pieces should be non-contradictory).
- Online magazines
- Films, music, games, on-demand programmes
- Text or images (i.e. screensavers, photos, e-books, PDF files)
- Web hosting or website supply services
- Remote maintenance of equipment and programmes
- Software updates and supplies
- Advertising space on websites
Unfortunately, guidelines are prone to be interpreted differently by the 28 countries, given that the term “automated digital service” is not yet clearly defined, causing more confusion and stress to micro-business owners.