Digital service VAT

[business123456]

Hi, I have provided my answers to a few scenarios below regarding the sale of a "digital service". I would appreciate if someone who has knowledge in this area could please check if they are correct and answer the question in the last paragraph.

1) UK supplier – UK business customer (B2B) = UK supplier responsible to charge and account for vat if he is vat registered. Place of supply is location of the customer.

2) UK supplier – UK consumer (B2C) = UK supplier responsible to charge and account for vat if he is UK vat registered. Place of supply is location of consumer.

3) UK supplier – Consumer outside the EU (B2C) = exempt from vat.

4) EU supplier – business customer from UK (B2B) = business customer from UK is responsible to charge and account for vat if he is vat registered by using reverse charge. If business customer from UK is not vat registered then no vat is charged but total value of purchase will be taking into consideration along with his UK sales to determine if he has exceeded the VAT threshold.

5) Supplier outside EU – business customer from UK (B2B) = same as scenario 4.

I plan on becoming a sole trader in the UK, selling a “digital service” to customers only in the UK (maybe customers outside the EU too) and have suppliers from around the world in order to avoid having to register for UK VAT and VAT MOSS as long as my sales (including purchases from other eu and not eu countries) do not exceed the UK vat threshold. Will this work?

 

[AbsoluteVAT]

Agree in the most part but be very wary on point 3. Many non-EU countries have now implemented legislation which means that where digital services are sold to non-business customers in the country, there is potentially an obligation for the non-established supplier to register and charge VAT, GST etc.

This is very much an increasing trend and indeed already applies in Japan, Russia, South Africa, NZ, Australia, Norway, Switzerland.......the list goes on.

Also be aware that the classification of digital services may differ in those countries from the EU definition.

Thanks

Rich

 

[TheCyclingProgrammer]

Rich makes a good point but otherwise OP your interpretation looks correct.

Another thing to watch out for with 4. is some EU businesses will not accept that it is a B2B transaction unless you supply them with a VAT number and will want to charge you their own country’s VAT. You only have to search on this forum to see other people who have had this problem.

 

[Sparetoolparts]

@AbsoluteVAT when talking about point 3, does your reply refer to only digital services? or physical exported goods too?

 

[TheCyclingProgrammer]

@AbsoluteVAT when talking about point 3, does your reply refer to only digital services? or physical exported goods too?

There are different rules for services and goods but in this case the end result is the same - no VAT is charged on goods exported outside the EU as long as you have evidence of export.

https://www.gov.uk/guidance/vat-exports-dispatches-and-supplying-goods-abroad

Only difference I can say is that goods are zero-rated in this case, where as supplies of services are outside the scope of UK and EU VAT altogether. This might matter if, say, you're on the flat-rate VAT scheme.

 

[business123456]

Rich makes a good point but otherwise OP your interpretation looks correct.

Another thing to watch out for with 4. is some EU businesses will not accept that it is a B2B transaction unless you supply them with a VAT number and will want to charge you their own country’s VAT. You only have to search on this forum to see other people who have had this problem.

Yes, I think I read about this in one of the explanatory notes from hmrc website. Even if the eu supplier wanted to treat me as a b2b if he does not accept other evidence other than VAT number, he cannot charge based on his local rate but has to charge me UK VAT. Thank you for your help, much appreciated!

 

[TheCyclingProgrammer]

Even if the eu supplier wanted to treat me as a b2b if he does not accept other evidence other than VAT number, he cannot charge based on his local rate but has to charge me UK VAT.

That depends on what they are supplying to you. If they are supplying digital goods or services, then yes they'd have to charge you UK VAT under the VATMOSS rules. Otherwise, the general rule would mean they'd charge you their local VAT, which you would not be able to easily reclaim.

 

[business123456]

That depends on what they are supplying to you. If they are supplying digital goods or services, then yes they'd have to charge you UK VAT under the VATMOSS rules. Otherwise, the general rule would mean they'd charge you their local VAT, which you would not be able to easily reclaim.

For expenses such as paypal fees, ebay fees, domain name fees etc, If i am not already charged VAT on such expenses and the company is based outside the UK, would I treat this in the same way as if i was sold a digital service from outside the EU (scenario 4). So the value of these expenses would be taken into consideration if i need to register for UK VAT?

 

[TheCyclingProgrammer]

For expenses such as paypal fees, ebay fees, domain name fees etc, If i am not already charged VAT on such expenses and the company is based outside the UK, would I treat this in the same way as if i was sold a digital service from outside the EU (scenario 4). So the value of these expenses would be taken into consideration if i need to register for UK VAT?

I'd expect PayPal and eBay fees to be treated as a B2B transaction. If the PayPal or eBay entity that bills you for fees is not based in the UK then yes, it would be treated as a reverse charge service which in your case not being VAT registered, would fall under scenario 4 or 5 in your original post.

Domain names...not certain about this, they might count as a digital service. If the supplier treats it as a B2B, then its as above, otherwise yes I'd expect they'd charge you UK VAT under the VATMOSS rules if it is indeed deemed a digital service.

 

[AbsoluteVAT]

@AbsoluteVAT when talking about point 3, does your reply refer to only digital services? or physical exported goods too?

Yes, the new rules in many non-EU countries means that a UK based supplier of B2C digital services must register locally and charge local VAT/GST etc. If goods are exported there are generally no obligations unless of course the UK business is the importer of record into the non-EU country.