Tax doesn’t have to be taxing (part 1 aka the #VATMESS)

December 12th, 2014 by

We were planning to announce upgrades to our Virtual Servers today, but unfortunately we’ve had to spend time dealing with the #VATMESS

One of these coins is worth something. The other carries an obligation for a decade of document storage, 80 tax returns and tax rates for nearly 30 different countries. Guess which one we prefer?

At the moment, VAT on “e-services” sold within the EU is paid based on where the supplier is, so if you’re a small UK company selling, say, hosting services, you pay UK VAT to HMRC, irrespective of where the customer is.

If you’re a large company selling lots of such services then you’ll be paying enough VAT that it’s worth your while to move your operations to the member state with the lowest VAT rate, which is Luxembourg.

Of course, big companies avoiding tax is Evil, Bad and Wrong, so the EU has taken action.

The very short summary is, if you’re a non-VAT-registered customer in an EU state other than the UK, then we’re going to have to start charging you VAT at your local rate, rather than the UK rate. Good news if you’re in Luxembourg, bad news if you’re in Hungary.

The rather longer rant summary is that we’ve been forced to waste a significant amount of time understanding and complying with new regulations for VAT on electronic services which come into force on 1st January 2015.

Whilst cutting down on large companies undertaking VAT rate tourism might seem like a nice idea, charging VAT based on where the customer of an online service is creates a whole bunch of new problems:

1. How do we establish where a customer is based?

The guidance tells us that we need two non-contradictory pieces of evidence to establish the customer’s location, the most readily available being the billing address and the customer’s IP address. Setting aside the unreliability of geolocating IP addresses, what happens when a customer is enjoying their right to roam the EU freely and places an order whilst in another country?

Well, the guidance tells us we can use:

  • location of the bank (we don’t collect this information)
  • the country code of SIM card used by the customer (not applicable)
  • the location of the customer’s fixed land line through which the service is supplied to him (not applicable)
  • other commercially relevant information (suggestions on a postcard)

In the event that we succeed in obtaining the necessary evidence, we’re legally required to hang onto it for 10 years.

2. How do we find the correct VAT rate for a state?

Presumably, recognising that a huge proportion of companies in the EU now need to regularly lookup current VAT rates for different states, the EU will have created a convenient web service providing this information in a computer-readable format?

Well, the guidance sends you to this site which allows you to select “all states” and has an “Export selection” button. Looks promising until you try it and discover that it buries the data in a generated PDF.

Fortunately, some helpful soul has created what we actually want: a simple JSON feed.

Unfortunately, that site makes the amateur mistake of thinking that ISO 2 digit country codes will be enough to cope with all the VAT rates in the EU, forgetting that the Portuguese Azores and Portuguese Madeira have their own VAT rates, but not their own country codes. As it happens, the EU site listed above also denies knowledge of the VAT rates applicable in these regions.

3. How do we report and pay our VAT?

HMRC are proud to tell us that they’re saving us the burden of registering for VAT in each member state in which we do business by letting us use MOSS, their “One Stop Shop”, but we still now have to complete two separate quarterly VAT returns and, of course, the quarters don’t even align.

Bulk upload of our VAT data is supported using that well known open data-interchange standard: a spreadsheet. A particular highlight is that: “When completing HMRC’s spreadsheet you can’t use country codes (for example GB, UK, NL or DE) or country descriptions (for example Great Britain, the UK or The Netherlands). You must only use the following EU country names:”. That’s right, HMRC have eschewed ISO country codes for its preferred list of country names and spellings, and not even for the obvious reason that some states have multiple rates: Portugal is only listed once.

Tax doesn’t have to be taxing … but it is

The net result of these new rules is that it’s now much harder for us to sell to consumers in other EU states than it is for us to sell to consumers outside of the EU – surely the exact opposite of what the single market is supposed to achieve?

The amount of our business that is affected by these new rules is tiny, as most of the EU business we do have is to VAT-registered entities to whom an entirely different set of rules apply. The amount of profit we make in a year from the affected services is almost certainly less than the upfront compliance cost, if not the ongoing cost, so we have seriously considered simply refusing to sell to consumers in other EU states, although it has been suggested that this could be illegal under EU law!

It could be worse

These VAT changes are a nuisance for us, but we’re already well above the UK VAT threshold so already have processes in place to deal with the burden of UK VAT reporting. For very small companies, as we were not so long ago, these changes are absolutely horrific as there is no VAT threshold for inter-state VAT. The government accepts that requiring all businesses to operate UK VAT would be an unreasonable and stifling burden on small businesses, which is why we have a VAT threshold (currently £81k). But there is no such threshold for inter-state VAT, despite it being significantly more complicated to administer.

There is a growing storm of angry micro-businesses who, through virtue of not being VAT-registered, weren’t notified of the upcoming changes. Indeed, it seems that HMRC’s assessment of the impact of these changes not only vastly underestimated the cost of implementing them, but also completely forgot about several hundred thousand micro businesses that would get shafted by these changes.

(HMRC’s original impact assessment stated that “businesses currently unregistered in the UK who choose to register for MOSS in the UK will also have to obtain a UK VAT registration and their UK supplies will therefore also become liable to VAT”, meaning that if you sold a single e-service to an EU consumer you were pretty much obliged to start operating UK VAT too. HMRC have back-tracked on this by publicly endorsing the practice of splitting EU from UK revenue – despite revenue splitting normally being considered an illegal VAT-evasion practice)