HMRC temporarily relaxes VAT rules for micro digital businesses

In December, we blogged about the new VAT rules and implications for small business owners. Now, any UK business selling digital services to end consumers (as opposed to businesses) within the EU must register and account for VAT in the EC member state of their customer or sign up for VAT MOSS. This requires them to identify three things: 1) whether their business is actually providing digital services; 2) exactly where the customer is located; and 3) whether the customer is a business or an end consumer. The new online service, VAT MOSS, has been established with the aim of easing the increased administrative burden the new rules create, but the legislation remains highly controversial.

The new VAT rules have attracted widespread criticism with many saying that the excessive administrative complexity involved will result in some of the smallest businesses having to shut up shop. It is feared they simply would not be able to sustain operations given the level of red tape they are required to overcome. Some business advisors are suggesting that an obvious way to get around this problem is to consider the feasibility of adding a human element to their business operations, to ensure it no longer satisfies the definition of digital services. In doing this, they may no longer be solely digitally based, and no longer required to comply with the new VAT rules.

This is not something we would recommend and thankfully, many businesses will be able to benefit from the recently announced relaxation to the government’s new rules. These are as follows:

Businesses with UK sales of less than £81,000 can still use VAT MOSS

1) Originally the VAT MOSS service was intended for businesses that were already registered for VAT. This would have meant that the smallest UK businesses selling across the EU which were not required to register and charge their UK customers VAT, would either have had to file separate returns in every country they sold products to, or register and charge VAT on UK supplies to be able to use VAT Moss. HMRC has now clarified that micro businesses which do not have a high enough turnover to require UK VAT registration but are required to comply with the new regulations, can use the VAT MOSS facility for administration purposes only, without also having to charge their UK customers VAT. They will however still have to register with HMRC for VAT simply to use VAT MOSS.

To verify this, HMRC has said, “Businesses below the current VAT registration threshold that can separate their sales to UK customers from sales to EU customers can voluntarily register the cross border element of their business, and then use that registration number to register for MOSS. This means that their domestic sales will remain VAT free.”

Temporary relaxation to forms of location evidence required

2) Although most businesses need two forms of evidence proving their customer’s location for tax purposes, micro businesses only are able to use the evidence of location provided by their payment service provider. This is a temporary relaxation to the full compliance rules, which will be valid until July 1^st 2015. After this date, micro businesses will also have to supply two separate pieces of evidence as per the standard rules.

Importantly, these changes now mean that the smallest businesses are no longer forced into a position whereby they have to charge VAT to their UK customers, which in essence would have meant an immediate price increase. They may have benefited from being non-VAT registered to keep their prices lower and some could have ceased trading as a result of the change. However, in spite of these concessions, there is still widespread criticism that it is still not enough to properly ease the administrative burden for the smallest businesses affected.

If you would like independent VAT advice about complying with these new requirements or using VAT MOSS, please contact Simon Paterson by emailing sp@rjp.co.uk.