VAT and E-Commerce
By Sonal Shah, Lawrence Grant Chartered Accountants
UK businesses are selling an increasing proportion of their goods and services online. Cross-border trade has also increased as customers have been able to identify suppliers, anywhere in the world, offering a greater choice of merchandise and competitive prices. The ease of setting up businesses online and the greater choice for retail businesses in where they locate, with no need to have a physical presence on the high street, could make it more difficult to trace suppliers and collect VAT.
Where goods or services are supplied by a UK business to a customer whether the business is obliged to account for VAT in the UK, elsewhere, or at all, will depend upon whether the supply is of goods or services, where the supply is treated as made and whether the customer is in an EU member state. The implication of VAT and e-commerce can be examined in a context of three types of transactions:
- Supplies of physical goods to businesses or private consumers
- Supplies of services to businesses
- Supplies of services to customers
The VAT treatment for the supply of goods to a customer in the EU will depend on whether the customer in that member state is VAT registered or not. If the UK supplier delivers goods to a VAT registered customer in another member state, the goods can be zero rated by the UK supplier provided the UK supplier has the customer's VAT registration number.
Where a UK business supplies goods to a private customer in another member state, the sale would be subject to VAT and the UK business will have to charge VAT in the normal way just as they would if they were to supply a UK customer. However, if the level of sales has exceed the distance selling threshold of that state, the UK business will be obliged to register for VAT and account for VAT on their sales there.
Supplying goods online to customers in a variety of EU countries imposes a significant burden on UK businesses. Another area of difficulty in internet sales is verifying customer VAT registration.
Supplies of electronic services to business customers
Examples of electronically supplied services:
- Website supply or web hosting services.
- Supplies of digitised products
- Distance maintenance of programmes and equipment.
- Supplies of software and updating thereof.
- Supplies of images, text and information and making available of databases.
- Supply of music, films and games, including games of chance and gambling games and of political, cultural, artistic, sporting, scientific, educational or entertainment broadcasts of events.
- Supply of distance teaching
If according to the general rule the supply is treated as being supplied in the UK, but the supply is effectively used and enjoyed in a country outside the EU, the supply is treated to that extent as made in that country (so that no VAT is charged on the supply)
If according to the general rule the supply is treated as being supplied outside the EU, but the supply is effectively used and enjoyed in the UK, the supply is treated to that extent as being made in the UK and as such UK VAT is charged on the supply of the service.
Supply of electronic services to private customers
The general rule for supplies of services to private customers is that the place of supply is where the supplier belongs
However, electronically supplied services to a private customer based in the EU by a supplier outside the EU will be treated as being made where the customer belongs. Supplies to customers in the UK will therefore be subject to subject to UK VAT regardless of whether the supplier is in the UK or outside the EU.
Please note that the use and enjoyment override as mentioned above, does not apply to supplies made to private customers.
As mentioned above, non EU suppliers supplying services to private customers in the EU will need to account for VAT in that member state. Non EU businesses supplying electronic services can now register for VAT in a member state of their choice instead of having to register in each member state in which they supply a service. They will account for VAT at the rate applicable in each member state on an electronic return and VAT will be distributed appropriately to the relevant member state in which the supply is made.
From 1 January 2015 the rules will change regarding where the place of supply will be to where the customer belongs. The electronic system mentioned above will extend to UK suppliers who can account for VAT in the UK in respect of supplies made in other member states and will operate the same way as mentioned above.
Her Majesty's Revenue & Customs launched a campaign aimed at businesses that might be trading over the VAT registration threshold of £77,000 and are yet to register for VAT and pay over the applicable taxes. There is a so called tax amnesty for e marketplace traders who have not previously disclosed their profits and their VAT on sales. Under the new initiative, taxpayers are able to come forward any time between 14 March 2012 and 14 June 2012 to register their desire to take part.
They will then have until 14 September 2012 to provide details of the taxes they owe and to make full payment including interest and penalties.
In some cases a full and timely disclosure will result in no penalty, while most participants will be expected to pay no more than 10% of the total debt owed.
After that date, HMRC has warned that it will use information pulled together from many different data sources to investigate those who have failed to respond. The department has recruited additional investigators and will pursue those who have failed to declare their earnings and pay up. Penalties of up to 100% of the tax owed or even a criminal investigation could follow.
By Sonal Shah
Lawrence Grant Chartered Accountants, London, United Kingdom