HMRC applauded for approach to digital firms' VAT

Monday 22 December 2014

Changes to VAT rules for digital firms by HM Revenue and Customs (HMRC) have been welcomed by tax advisors.

The Chartered Institute of Taxation (CIOT) says that HMRC's decision will save thousands of small businesses who need to register for European VAT on digital services from having to charge their customers VAT rates in the UK, that is as long as their turnover stays below the £81,000 threshold. This will include many limited companies and sole traders.

CIOT proposed that the VAT Mini One Stop Shop (MOSS) scheme be amended so that businesses who operate below the VAT threshold will be able to separate their sales to UK customers from sales to other countries in the EU.

MOSS was introduced for suppliers of digital services in the UK who sell to different countries within the EU. It was intended that these suppliers would be able to sign up for MOSS but not have to register for VAT across each country in which they operate. It was predicted that 34,000 businesses would be affected by this change.

However, it also meant that a trader had to be registered in the UK if they wanted to use MOSS. This meant that the whole turnover of a trader would be subject to VAT in the UK, even if they were below the UK VAT threshold of £81,000.

With the change now in place, businesses whose turnover is below the VAT registration threshold will be able to register with MOSS in the UK and will not see their turnover being subject to UK VAT.

The change to MOSS was announced in HMRC Brief 46, where it was explained: "Although it is a condition of registering for MOSS that you must have a UK VAT registration number to identify the business, you will not lose your UK VAT registration threshold."

CIOT described this change as a "common sense approach", however it questioned whether or not this can be properly achieved without explicit provision being put in place in legislation.

Tax policy director at CIOT Patrick Stevens explained that the initial proposals for MOSS were rejected by smaller businesses as the removal of the UK VAT exemption meant that they would likely have paid more on domestic turnover than the cost of the services they would provide elsewhere in the EU. Mr Stevens explained that in the majority of these cases, the traders would have chosen not to apply for MOSS but would instead have registered for VAT in each of the states in which their services are provided.

He explained that CIOT was happy to see that HMRC had changed their approach for these small traders, but added: "Our concerns have not been entirely allayed. The current wording of the legislation means it is open to interpretation and will likely result in a situation whereby the separation of UK and EU sales will arise through HMRC concession rather than through proper legislative provision."

By Victoria McDonnell

Get in touch

Please select your type of enquiry:

Brookson on Twitter