Small businesses affected by VAT rule change
The way that VAT is applied on the sale of certain Business to Consumer digital services in the EU changed on 1 January 2015. The place of supply is now determined by the location of the customer who receives the service rather than the location of the supplier.
The new rules have been introduced mainly to stem the growing problems of large multi-nationals locating their businesses in low tax jurisdictions. For example, many large US electronic service providers were based in Luxembourg which historically had the lowest VAT rate in the EU. It is interesting that the main VAT rate in Luxembourg increased from 15% to 17% with effect from 1 January 2015 to try and counter some of these VAT advantages.
The changes are also proving to be a significant problem for micro digital businesses that are struggling to adapt to the complex changes in the EU VAT rules. Businesses supplying e-services with a turnover under the current UK VAT registration limit of £81,000 are now required to register and use the MOSS for sales to other EU customers. (See below). The campaigning website EUVATaction.org has recently reported that more than 200 UK businesses have closed because they cannot deal with the administrative burden of the new rules. There are also reports of many UK businesses turning away customers in other EU countries.
To remove the requirement for businesses affected by these changes to register for VAT in other Member States, a Mini One Stop Shop (MOSS) has been introduced. The MOSS scheme is an electronic system that will allow businesses to register in only one EU member state and submit a single VAT return and payment each quarter for all their cross border supplies of digital services.