Alastair’s Place

Software development, Cocoa, Objective-C, life. Stuff like that.

1st January 2015 VAT Changes

On the 1st of January 2015, some changes to European Union law come into force that significantly affect the way that VAT works for “electronic services” delivered to consumers. The laws in question were actually changed back in 2008, but because of obstruction from some member states that benefit from the status quo, the date at which they came into effect was pushed back by six years.

If you are a software developer selling software in the European Union, these changes matter to you. There has been very little publicity thus far about these changes (that will change as we get closer to the end of the year), but given that you may need to make changes to your website, it seems like a good idea to tell you about them now.

So, what’s changing? Currently, if you are established in the European Union and you sell downloadable software to a customer who is also in the European Union, you always charge VAT in your country, following the rules in your country, and you pay it to the tax authority in your country. This is simple, because there is only one set of rules to follow, and it’s the one for your country.

As of the 1st of January, the VAT will instead be due in the customer’s country. If there were no other changes to the rules, you would therefore be obliged to register for VAT in other member states, according to their rules, and submit multiple returns every quarter (or at whatever period they specify). That means you might have to register with up to 28 member states, apply 28 different rates, 28 different sets of rules, make 28 times as many VAT returns and 28 separate payments in difference currencies (with currency conversions and rounding following different rules in different jurisdictions). For a small software company or an independent developer, this is clearly not going to work.

There are two other changes that are also coming in at the same time that mitigate this problem. The first is that app stores will be responsible for charging and remitting consumer VAT. Apple already does this, but some other app stores may not. Under the new rules, they will have to, so you will only have to deal with VAT as it applies to transactions between you and the app store provider.

If you sell direct to consumers, that doesn’t really help, though. What will help is that EU member states are going to operate a system known as the Mini One Stop Shop (or MOSS for short). This is similar to the scheme that has been operating for businesses outside of the EU selling to EU customers, whereby you can register with a single tax authority, submit a single return to that tax authority, and pay all of the tax due to that one place. You are still required to charge VAT at the rate applicable in the customer’s country, and in various respects the rules in that country will still apply — with some simplifications. Registration for this new scheme starts in October, and, unless you plan on only selling via an app store, you will probably want to register for it.

The other slight complication is that after 1st of January, you will need to keep two non-conflicting pieces of evidence to identify the location of your customer. HMRC has indicated, at least in the case of the U.K., that they will be fairly relaxed about this evidence — so, for instance, they realise that IP geolocation may not be 100% accurate, and that some customers may lie and give you false details. It also does not matter if you have more data that conflicts with your two non-conflicting pieces of evidence; all you need is those two. However, this affects all of your sales, not just those to customers in the EU, since it applies equally to your decision not to charge VAT to customers because they are not in any EU member state.

Why am I telling you about this? Because I’m a member of H.M. Revenue and Customs’ MOSS Joint SME Business/HMRC Working Group. Those of you who are in the UK, if you have queries about the scheme, or issues you would like to raise with HMRC, please do get in touch and I’ll try to help out. (If you are a member of TIGA, they have a couple of representatives on the working group also, so you can talk to them too.)

Finally, I will add that the law changes are already made — back in 2008 — so the scope for changing the rules at this stage is very limited. What we can influence to some extent is how they’re enforced and whether HMRC is aware of problems the new rules may cause us.

I’ll be posting some more on this topic over the coming weeks and months.