We have previously blogged and written about the upcoming (and significant) changes to VAT occurring from 1st January 2015, where VAT on Business to Consumer (B2C) supplies of telecoms, broadcasting and electronic supplies will be taxed where the customer belongs. This will require all businesses, even those operating below the £81,000 threshold, to pay tax and keep up to date with all the VAT rate changes in 28 member states. As if that wasn’t enough of a headache, HMRC announced yesterday at an online seminar for affected businesses and advisors that it is looking to move “very quickly” to tax supplies of goods to EU consumers in the same way.
What “very quickly” means is not clear, but we presume within a year or so. The impact of this change is likely to be hugely more significant in terms of affected taxpayers simply because there are lots more taxpayers selling goods than electronic services. The impact can best be described with a couple of examples.
Bob has a small business trading under the UK threshold selling T shirts. Bob has built up quite a following in a number of EU countries as well as the UK and he sells via eBay and directly through his website. At present he does not charge any VAT. Under the likely changes to the rules, Bob will have to apply VAT on the sales to EU customers. To deal with the administration more simply, he would have to elect to pay VAT on his UK sales too.
A retailer, Holt Limited has a growing e-commerce site and sells luxury food items to a number of EU consumers. At present UK VAT applies unless the food item qualifies for the UK zero rate, such as sales of cheeses. Under the new rules, Holt Limited would no longer be able to exempt cheese sales and would have to know what the VAT rate was on cheese in all the 28 member states.
HMRC have confirmed that the new rules are intended to ‘level the playing field’. Whilst it is clear that, at present, it is unfair that large e-commerce suppliers are able to charge significantly less VAT by locating in, say, Luxembourg, it is less clear how imposing massive obligations on very small businesses is proportionate. Behind the new rules is what appears to be an EU led ambition (which the UK seemingly supports) to significantly extend the reach of taxation on consumer sales. In an ideal world, the EU would prefer all countries to apply the same tax rate and apply it to as many transactions as possible. The UK’s retention of both a high threshold and zero-rating of food, children’s clothes etc is a definite barrier to achieving this tax-nirvana and it is my opinion that, within quite a short period, these reliefs will disappear or be significantly diluted, because the UK will not be able to both support the move towards the optimum (for the tax authorities) position and defend the UK not charging VAT on a significant list of products..
If you make sales to EU consumers, you need to start considering these changes now.