Key Facts About The January 2015 EU Digital VAT Rules


The smallest businesses will be the hardest hit. Most micro businesses and sole traders (and even their accountants) are not up-to-speed with the new legislation. One of the difficulties in compiling these key facts is that we are getting reports that different countries are interpreting and applying the rules differently.  We have given the best information we can, but you will need to check with your local tax authority as to their specific implementation.

To copy the link to a specific answer, right-click the LINK HERE next to that question and copy the link address.

DISCLAIMER: The information in this page is for general guidance only and does not constitute legal or accounting advice.  Please contact an accountant or your local tax authority for more information.

I’m new to EU VAT: what are the key facts? | I’m digging deeper: FAQs| The rules apply to me: What now? | Show me the evidence base!

I’m new to EU VAT: what are the key facts? Link here

What are the new EU regulations/VAT MOSS? Link here

In a nutshell:

  • The new rules apply to “automated digital services” – that’s anything downloadable or used online, unless it’s custom-made.
  • From 1 Jan 2015, as a seller, you have to pay VAT in any EU buyer’s country, at that country’s VAT rate, even if you aren’t in the EU.
  • There is no threshold: even if you sell one item for 99c, the law still applies.
  • To prove where the buyer is, you need two non-contradictory pieces of information, which you need to store for 10 years.
  • MOSS (Mini-One-Stop-Shop) is a system set up in each EU country, to collect the VAT and distribute it for you, so you don’t have to VAT-register in each country. Overseas users can sign up with VOES, the equivalent for non-EU-residents.

Which services/products does this apply to? Link here

The law applies to “broadcasting, telecommunications, and e-services that are electronically supplied”. The e-services definition applies to a surprising number of things, including…

  • images or text, such as photos, screensavers, e-books and other digitised documents e.g. PDF files
  • music, films and games, including games of chance and gambling games, and of programmes on demand
  • online magazines
  • website supply or web hosting services
  • distance maintenance of programmes and equipment
  • supplies of software and software updates
  • advertising space on a website

More details on defining “automated digital services”

Why is this being introduced? Link here

The law was originally designed in 2008 to stop to billions of euros of consumer tax being lost due to multi-nationals setting up in low-tax jurisdictions – an aim which few would argue with.

The European Commission argues that this will create a level playing field, because it means that sellers can’t undercut their competitors unfairly by using a lower VAT rate. However, because there’s no threshold, it actually disadvantages the smallest companies and individual traders. It creates a divide between the multinational companies who have the systems to comply and those sole traders and microbusinesses that simply can’t.

The services/products I supply don’t appear to be covered – I can breathe a sigh of relief, right? Link here

These rules are just the first wave of legislation – sell anything online? YOU are next in the EU’s sights. Similar rules are planned to extend to all goods and services as early as 2016. At the moment, people selling goods across national boundaries have a distance-selling threshold of either €35,000 or €100,000 (depending on the country they sell into) before having to register for VAT in that country. This threshold will go too.

I sell through a third-party platform, so I don’t need to worry about this right? Link here

If a third-party platform handles the payment and supply and also sets the standard Terms and Conditions, they are responsible for VAT. Unfortunately, not all third party platforms are ready to comply with this legislation and many have only found out about this recently. So please do check with your third party platform.

Payment providers such as PayPal are not third-party platforms (they just provide a payment mechanism) so they are not responsible for accounting for VAT. At present, many of them will not even supply you with the relevant data you require to comply.

The EU VAT Action Campaign Facebook group has a growing list of compliant and non-compliant platforms which you can use as a guide.

I’m outside the EU, so I don’t need to worry about this right? Link here

The rules apply to all sellers providing digital services to customers within the EU, no matter where in the world the seller is located.

Quite how this will be enforced is unclear, but we are hearing noise that other countries will follow suit if this is successful – so unless we stop this now, expect selling outside your own borders to get even more complicated in years to come!

I think this applies to me – what do I do now? Link here

In a nutshell: To comply with the new law, you need to…

  • collect two non-contradictory pieces of information to prove each buyer’s location
  • charge each EU buyer VAT at their local rate
  • sign up for VAT MOSS – if you’re in the EU, in your own country; outside the EU, you can choose which country
  • submit quarterly VAT MOSS returns so you can hand over the VAT for MOSS to distribute

Unfortunately, all that sounds easier than it is in practice.

Find out more about what to do.

What’s the problem? Link here

For microbusinesses and sole traders, especially those who sell independently, the rules are almost and sometimes actually impossible to comply with:

  • Payment providers don’t give the 2 pieces of non-contradictory information on the buyer’s location that we need
  • Even if we can get that data, we aren’t equipped to store sensitive data safely
  • There are 81 VAT rates across the 28 EU countries, which vary according to region and product, and there’s no central up-to-date source for these rates
  • “Automated digital service” isn’t clearly defined and the 28 countries can all interpret the guidelines differently, for what counts

This is just the tip of the iceberg of problems that small sellers start to confront.

Continue down to read more about whether your products or services are affected and what to do if they are.

I’m digging deeper: Frequently Asked Questions Link here

What counts as an “automated digital service”? Link here

In a nutshell, it’s anything downloadable or used online, which is either automated or uses “minimal human intervention”. Formally, the law applies to “broadcasting, telecommunications, and e-services that are electronically supplied”. The e-services definition applies to a surprising number of things, including…

  • images or text, such as photos, screensavers, e-books and other digitised documents e.g. PDF files
  • music, films and games, including games of chance and gambling games, and of programmes on demand
  • online magazines
  • website supply or web hosting services
  • distance maintenance of programmes and equipment
  • supplies of software and software updates
  • advertising space on a website

Defining “minimal human intervention” is the biggest problem: 28 countries are interpreting these EU guidelines, and some of the interpretations are contradictory – for example, whether or not manually emailing a file counts as “minimal intervention”.

Keep reading or jump to your specific question:

I make things for individual customers, which they download. Does this apply to me? Link here

No. If the product is different for each customer (eg bespoke logos, customised templates, PDF documents written especially for them), then that counts as more than minimal intervention, and the rules don’t apply to your work. The EU guidelines specify “services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology” (Article 7, paragraph 1; page 85). Bespoke work is not essentially automated and involves more than minimal human intervention.

Are licences for digital products included? Link here

Yes. The EU guidelines make it clear that these are included, in their examples on pg 85 onwards:
“(a) the supply of digitised products generally, including software and changes to or upgrades of software;
(b) services providing or supporting a business or personal presence on an electronic network such as a website or a webpage;
(c) services automatically generated from a computer via the Internet or an electronic network, in response to specific data input by the recipient”
Nothing here indicates that the new rules only apply when ownership is transferred. Licensing is still a service.

What if I send files by email? Link here

This is a grey area. The EU guidelines specify “minimal or no human intevention” and it’s debatable whether manual emailing is minimal intervention. The UK tax office, HMRC, originally gave conflicting advice on this. Their most recent guidelines (29 Dec 2014) say a PDF document manually emailed by the supplier is not covered by the new rules, while an automated email is (even if you manually click send). Estonia has said the same. Austria has said that manual emailing is not exempt. The Netherlands tax office has given conflicting advice on this to different individuals. (This information is based on advice given to individuals, so we don’t have an official source to link to.) The other 24 countries’ positions aren’t yet known.

Manual emailing also creates practical issues. File-size limit means some files can’t be emailed and the inevitable delay (especially across time zones) has led to unhappy or angry customers for some suppliers.

What if I have a Facebook group / webinar / etc? Link here

If your sales include live interaction, they may not count as “automated digital services”. However, adding “live interaction” to prevent the new rules applying to your sales may bring you into the realm of tax avoidance.

For UK businesses, HMRC advises you to write in individually to explain your business model and clarify your business’s status.

For businesses outside the UK, we would urge you to seek clarification from your own tax office and / or government. Please let us know any official replies you’re able to share.

Can I block EU sales to avoid all this? Link here

For UK businesses, HMRC has told Syed Kamall MEP that they can block sales to the rest of the EU if they can show it would impose a disproportionately high administrative burden on the business. However, EU anti-discrimination law may not fall under HMRC’s authority.

For EU businesses, refusing to sell to other EU customers may be a breach of EU anti-discrimination law: “Because of a protected characteristic, you and anyone working for you must not refuse to serve someone or refuse to take them on as a client” (page 12). Race, which includes nationality, is a protected characteristic, so you can’t discriminate on grounds of nationality. You can refuse service for an “objective justification” (legal term), but it’s not clear whether the compliance burden of the new rules constitutes an objective justification (although HMRC clearly feel it can do). An objective justification “is a shorthand way of referring to the legal test of objective justification, ie that the service provider’s treatment of the service user must be a proportionate means of achieving a legitimate aim” (page 102).

For non-EU businesses, your own country’s anti-discrimination law applies, and it may be legal for you to block EU sales. However, geoblocking has a very bad effect on businesses, customers, and collaboration. Moreover, geoblocking relies on IP addresses, which aren’t always accurate and which can be changed with VPNs (Virtual Private Networks), so if you do use geoblocking, you may still be selling to EU customers. You would then have to comply with EU VAT, even if someone else’s app got the location wrong. The EU guidelines Article 9.5.9. say, “In many circumstances, taxpayers rely entirely on verifications undertaken by third party trading partners, such as payment service providers and other intermediaries. It is necessary to stress that the correct determination of the place of supply remains with the supplier.” (Page 73)

Do I have to prove customers are non-EU? Link here

In practice, yes.

It isn’t possible to prove whether or not your customer is in the EU without collecting the data you need about EU customers. According to the EU guidelines, “Two items of evidence are needed in all the cases where none of the specific presumptions for telecommunications, broadcasting and electronic services (included in Articles 24a and 24b(a)-(c)19) can be applied.” (Article 9.5.5, page 71)

To prove your buyer’s location, you need two pieces of non-contradictory information, such as…

  • the billing address of the customer
  • the Internet Protocol (IP) address of the device used by the customer
  • customer’s bank details
  • the country code of SIM card used by the customer
  • the location of the customer’s fixed land line through which the service is supplied
  • other commercially relevant information (for example, product coding information which electronically links the sale to a particular jurisdiction)

(List from HMRC guidelines)

Will my government protect me if I follow their guidelines? Link here

For UK businesses, HMRC has confirmed that any objection from an EU Member State would go through them, and not direct to you. It would be HMRC’s decision on whether to pursue a complaint. If you are compliant with the UK interpretation, then you have shown willingness to comply.

For businesses outside the UK, we would urge you to seek clarification from your own tax office and / or government. Please let us know any official replies you’re able to share.

The rules apply to me: what now? Link here

I don’t have to comply for 6 months, right? Link here

This is NOT true. Some headlines have been misleading. The UK tax office, HMRC, made a concession on 29 Dec 2014 to help UK microbusinesses stay open. Under this concession, you can use the data your payment provider supplies as proof of your buyer’s location, but…

  • this only refers to using customer-location data from a payment provider
  • this only applies to UK businesses under the VAT threshold of £81,000
  • this only applies until 30 June 2015
  • you still have to register for VATMOSS on the 10th of the month following your first EU sale

What data do I need to prove where my customer is located? Link here

To prove your buyer’s location, you need two pieces of non-contradictory information, such as…

  • the billing address of the customer
  • the Internet Protocol (IP) address of the device used by the customer
  • the customer’s bank details
  • the country code of SIM card used by the customer
  • the location of the customer’s fixed land line through which the service is supplied
  • other commercially relevant information (for example, product coding information which electronically links the sale to a particular jurisdiction)

(List from HMRC guidelines)

What does “where they’re located” mean? Link here

The buyer’s location usually means their home country or where they’re usually resident, but not necessarily. The law actually applies to where the customer “uses and enjoys” the product.

If it’s something they can download or use anywhere, use their place of residence. This is what the EU guidelines call “over the top” services.

If it’s something they can only download or use in one place, use that place. For example, wifi in a café can only be used in that place. And if that place is a boat, a train, or a ship, then use the place of departure.

(For more details, see EU Guidelines, 7.4)

This would be very simple if people stopped moving about so much. For example, a UK resident is on holiday in Spain. She pays for wifi in a café and downloads a Spanish-phrases app. She can only use the wifi at that place, so that’s charged with Spanish VAT. She can use the app anywhere, so that’s charged at UK VAT. No problem for the holidaymaker – so far. However, for the app-seller, the customers’ IP address and her billing address conflict, so the app-seller needs more information (bank details, landline, etc) and must either block the sale or chase the customer for personal information. Another example: a UK citizen usually resident in Sweden but currently working in Singapore goes on holiday to Italy and downloads an ebook using his British credit card. His bank details are British, his billing address is Swedish, his SIM card is from Singapore, and the IP address is Italian. Either our unfortunate globetrotter can’t buy anything digital or everyone who sells to him is breaking the law.

How do I get that data? Link here

That’s the big question. Most payment providers (including PayPal) refuse to supply that information to the seller. UK businesses under the threshold can just use what information they do supply, but only until 30 June 2015. (This was HMRC’s concession on 29 Dec 2014.)

New systems and plug-ins are being developed:

Some new third-party platforms will take over all the VAT for you – charging commission, of course – which means you’re no longer selling independently and either your profits shrink or your prices rise. Because VAT is now based on their VAT liability, this also means they will charge VAT to buyers in your country, even if you are under the VAT threshold.

Some new plugins and systems promise to collect the information and calculate the VAT for you, then supply you with the data (also at a cost). Not all of these are following the letter of the law and one of them said in a forum that they’ll only be using one piece of data, the IP address. (They’ve since deleted that post, unsurprisingly.)

If the plug-in gets it wrong, who’s liable? Link here

You are. The EU guidelines Article 9.5.9. say, “In many circumstances, taxpayers rely entirely on verifications undertaken by third party trading partners, such as payment service providers and other intermediaries. It is necessary to stress that the correct determination of the place of supply remains with the supplier.” (Page 73)

How do I store the customer’s data? Link here

Presuming you do manage to capture the two pieces of non-contradictory data required to calculate the correct VAT rate, you need to store this information securely for 10 years.

This is personal, sensitive information, so it falls under Data Protection rules. For UK businesses, HMRC has said you need to register with ICO (Information Commissioner’s Office) as a data controller. However, ICO has said you don’t have to.

Doesn’t MOSS just sort out all the VAT for me? Link here

No. MOSS will register you with the other tax authorities and distribute any VAT you owe for you. However, you still need to collect the 2 pieces of information and you still need to know the applicable VAT rate for each sale. HMRC’s guidance on using MOSS says,

Select a country from the drop down menu, enter the total value of supplies (excluding VAT) and the appropriate VAT rate (eg, standard VAT rate or reduced VAT rate). The VAT amount will be calculated automatically for you. If, due to rounding issues, it is different from the figure you have calculated, you can overwrite the VAT amount due. … Add a line for each member state in which you make supplies, with a separate line for standard and reduced VAT rates. [My emphasis]

Although it says the VAT amount will be calculated automatically for you, this is only after you have entered the appropriate VAT rate. For example, £2 x 22% (figures I supply) = £0.44 (MOSS’s answer).

Is there a single, reliable, official source of EU VAT rates? Link here

No. We hope one will be created, but this doesn’t exist yet.

The EU’s official page on VAT rates links to the EU PDF of VAT rates, which was not updated between 1 July 2014 and 9 January 2015 while VAT rates did change, and includes the disclaimer that the information hasn’t been verified by all member states and the “European Commission cannot be held responsibile for its accuracy or completeness”. (Note that although the document is dated 1 January 2015, it was not uploaded until 9 January 2015 at the earliest.)

VATLive collects info on VAT rates, but it’s not fully accurate. For example, it gives the UK VAT rate for “books” as 0%, but doesn’t clarify that this only refers to physical books, not ebooks. Similarly, its info on Italy says “ebooks” have a 4% rate, but that’s only if they have an ISBN number. (Information checked on 8 Jan 2015, following their update on 5 Jan 2015.)

Sellers cannot rely on these sources to pay the appropriate VAT rate.

Must EU prices be shown VAT-inclusive? Link here

This is a grey area.

Yes: The UK government guidelines on pricing practices dated Nov 2012 say you should include VAT in the price (see 2.2.9), so leaving the final VAT-inclusive price until the final page of the checkout process (after you have their address) is not acceptable.

No: However, this guide is not legally binding. The legislation on which it’s based (2008) says you should show either the price including taxes or “where the nature of the product is such that the price cannot reasonably be calculated in advance, the manner in which the price is calculated” (page 5).

Yes: However, EU consumer guidance (3 Jan 2014) contradicts this, stating that “Before buying products or services in a shop, you have the right to receive clear, correct and understandable key information from the trader. This information should include… the total price inclusive of taxes and all charges“. (Original emphasis)

We are waiting for legal clarification.

Can I reclaim VAT on just EU purchases or on purchases in my own country too? Link here

For UK Businesses: If you are under the VAT threshold, you can claim VAT that relates specifically to your EU expenses; you can also claim a percentage of other VAT expenses according to your percentage of EU sales.

HMRC’s guidance updated 29 Dec 2014 says, “You can charge and account for VAT in respect of your EU cross-border B2C supplies but won’t have to charge and account for VAT on your UK domestic supplies. In addition, you will also be able to reclaim any VAT charged on business expenses directly related to your cross-border digital service supplies.” HMRC’s Brief 46 clarifies the kind of breakdown you can use: “For example, you might purchase a computer which you use to make all of your sales. If 60% of your sales are UK sales, and 40% of your sales are to customers in other EU member states, you would be able to recover 40% of the VAT charged on the purchase of the computer.”

For other EU countries: You will need to clarify your VAT situation with your own tax office. Please let us know any official replies that you’re able to share.

Show me the evidence base! Link here

Official guidance & documents Link here

All the FAQs above link to specific guidance, legislation, or responses from official bodies, so if you’re looking for information on particular topics, that’s a good place to start. These are the key documents:

EU documents Link here

UK documents: HMRC Link here

Facts & figures Link here

HMRC only considered the effect on 0.04% of “small” businesses.

  • HMRC estimated 34,000 businesses would be affected, of which 5000 were not registered for VAT. The ongoing costs for the 29,000 VAT-registered businesses was estimated at £40 each per annum and for the 5000 unregistered businesses, £220 each per annum. The one-off costs were considered negligble. (View document and House of Commons deliberation)
  • In contrast, the Business Population Estimates 2013 estimated there were 3,685,000 businesses with no employees. No effort was made to contact, inform, or assess the impact on sole traders: tax-registered sole traders received no information from HMRC. The same Business Population figures estimate a further 987,000 microbusinesses. These businesses were also not contacted, informed, or impact-assessed. The only businesses that were consulted, informed, and assessed for impact were SMEs (Small to Medium Enterprises), a total of 218,000 businesses.
  • In other words, of a total 4,890,000 “small” businesses, HMRC only considered the affect on 0.04% of them.

The number of digital businesses and their economic importance

  • Over 700,000 small businesses and 11% of jobs in the UK alone: The National Institute of Economic and Social Research’s 2013 report found that 14.4% of UK businesses were digital as of August 2012 and these accout for 11% of jobs. Even if small businesses didn’t have a bigger number of digital (unlikely, see below), even if this sector didn’t grow in the last 2 years (unlikely), this would give 704,160 affected small businesses. This represents 670,000 more businesses affected than HMRC estimated, at the most conservative possible estimates.
  • Digital businesses are more likely to be small and more likely to outperform other businesses when they grow: “digital economy companies have lower average revenues than the rest of the economy, but the median digital company has higher revenues than the median company elsewhere in the economy. Revenue growth rates are also higher for digital companies. However, these results come from a sub-sample of older, likely stronger-performing companies, so there is some positive selection at work.” (Same source)
  • 21% of GDP, 7 times the growth of overall GDP: The European Parliamentary Research Service publication (Nov 2013) found that “digital technologies accounted for more than 21% of gross domestic product (GDP) growth in the world’s most advanced economies in the past five years and Europe’s digital economy is expected to grow seven times faster than overall EU GDP in the years to come.”

The EU VAT Action Survey

The EU VAT Action Team has been conducting a EU-wide quantitative research survey to assess the financial and human impact of the new legislation on micro businesses and sole traders. By 12 December 2014, thousands of small business owners had already responded. These are the shocking initial results, from 12 December:

  • Only 4% expected to be able to comply with the legislation in time.
  • 60% of affected businesses sell direct to their customers, rather than through third party platforms such as Amazon or the App Store.
  • 45% were going to have to make major changes to their business before January– either removing all EU VAT-liable digital products from sale or excluding EU customers altogether. (We have since heard from hundreds of businesses who have done this.)
  • 50% believe they won’t be able to comply, at any stage.
  • 20% will be putting up their prices to consumers, to cover the additional VAT and the administration / new software costs. Consumers will be hit by price rises and a reduction in choice, as many sellers will restrict the countries they sell to and stop their digital downloads.
  • 10% planned to close their business completely before January.