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VAT and the Digital Single Market

The European Commission's (Commission) Digital Single Market (DSM) strategy proposes further changes to the VAT treatment of cross-border business-to-consumer (B2C) supplies of goods and services, with the aim of allowing better access for consumers and businesses to digital goods and services across Europe.

June 2015

On 1 January 2015 fundamental changes to the VAT treatment of B2C supplies of "digital services" were introduced across the EU, shifting the place of supply of such services (i.e. where VAT is charged) from the location of the supplier to that of the consumer and introducing a "Mini One-Stop Shop" (MOSS) to enable businesses affected to register for VAT in a single EU jurisdiction.

The Commission now proposes further changes to the VAT regime as part of its DSM strategy to:

  • simplify the distance selling regime by bringing cross-border B2C supplies of goods (i.e. distance sales) within the scope of the MOSS;
  • allow 'home country' auditing of cross-border sales activity;
  • introduce a common VAT registration threshold for micro and small businesses – simplifying early-stage VAT compliance for startups; and
  • abolish "Low Value Consignment Relief" on the importation of goods from non-EU suppliers.

solutions key on keyboardThe proposals are intended to ease VAT compliance for businesses operating in more than one EU jurisdiction.  Currently, businesses making "distance sales" to consumers in other EU jurisdictions are required to register for VAT in each separate jurisdiction if their sales exceed the relevant registration threshold (of €35,000 in countries such as Belgium, Ireland and Spain, €100,000 in France, Germany and Luxembourg, and differing amounts in countries which have not adopted the Euro).  By extending the MOSS to cover distance sales, the aim is to remove this administrative burden, enabling distance sellers to submit returns and account for all their EU VAT with their 'home' tax authority.  The proposal for 'home country' auditing will take this a step further, allowing businesses to have a single point of contact for VAT compliance and audit across the EU.

While the simplification offered by the MOSS is to be welcomed, the current regime has not been without its critics.  Micro and small businesses selling digital services to consumers in other countries which, before 1 January 2015, operated below the VAT registration threshold in their home countries suddenly found themselves liable to register for VAT either in another EU Member State, or in their home country to allow them to use the MOSS.  After lobbying, HMRC relaxed the UK VAT rules so as to allow businesses operating below the UK VAT registration threshold to register for the MOSS without having to charge UK VAT to their UK customers. It is welcome news that the Commission has acknowledged this concern by proposing a new common VAT registration threshold for micro and small businesses – although, as with all proposals, it is not yet clear what this threshold will apply to or even whether this will be achievable.

As well as simplifying VAT compliance, the Commission has stated that it wishes to eliminate distortions which allow non-EU businesses to supply VAT-free goods – which the Commission believes costs EU business lost revenues of €4.5billion annually – by abolishing "Low Value Consignment Relief".  This relief was partly abolished by the UK in April 2012 to combat the perceived impact of VAT-free goods purchased on the internet from retailers established in the Channel Islands, and its abolition across the EU would coincide with the extension of the MOSS to enable non-EU businesses to easily account for the VAT they would then be required to charge.  The DSM strategy also suggests that market distortions in other areas – such as the differential in VAT treatment between that of e-books and publications and their paper counterparts – will be considered and hopefully addressed.

padlock key on keyboardIt is welcome that the Commission is addressing the impact that disparate and complicated VAT regimes across the EU can have on cross-border commerce.  There is, however, some irony in that a further aim of the strategy is to prevent "unjustified" geo-blocking (where retailers prevent consumers in other EU Member States purchasing goods or services) - given geo-blocking was, in some cases, a response to the difficulty in complying with complex cross-border VAT rules.

The Commission has imposed an ambitious schedule to implement these proposals, aiming to have legislative proposals for changes to the VAT rules published in 2016.  Only time will tell if this is achievable and, more fundamentally, whether changes to the VAT regime can facilitate a true digital single market.

Find more content and resources on our Digital Single Market hub.

If you have any questions on this article please contact us.

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Neil McKnight

Neil McKnight

Neil looks at the proposals for streamlined VAT rules.

"It is welcome that the Commission is addressing the impact that disparate and complicated VAT regimes across the EU can have on cross-border commerce."