New UK VAT rules on digital services

(This blog has been updated on 4th December 2014)

For those of you in the UK who sell ebooks, music, online training courses, etc (known as digital services) directly to your customer you likely already know that you will have to make some major changes next year especially if you are not VAT registered.

From 1st January 2015, HMRC are introducing new VAT rules on all digital services. There are loads of people who have written about it, including HMRC, and it is challenging to know what the facts are but the summary from what I can see is that:

• If your customers live (and the service is deemed to be) in the UK and/ or outside the EU you need to do nothing if your sales are under the VAT threshold (currently £81k).
• However if you sell digital services outside the UK to other EU countries you must either:
  • Register for VAT in all the EU countries that you sell to, OR
  • Register for HMRC’s VAT MOSS which collates it all for you. Originally it was thought that you would have to register for UK VAT when you do this, but you can opt out of domestic VAT and only apply for cross border VAT.
  • Alternatively stop selling directly and go through a larger seller who deals with the admin headache for you.
• If you go ahead and register for VAT MOSS your accounting systems must identify what your sales are more clearly. You need to know which sales are deemed as digital services and non digital services, and if they have been sold to a business or a private individual, and where does that customer reside (UK, another EU country or outside the EU) and then charge the applicable rate of VAT, or take the hit on the profit if your systems cannot change what your charge outside the UK.
• When you register, every 3 months you must complete a VAT Return online via VAT MOSS, where you will have to declare the sales you have made to other EU countries, those to businesses and those to individuals and the system will collate all the VAT that is due to other EU countries.
• If you are already registered for VAT and only sell to business you can continue to use the reverse charges method and complete the EC Sales List.

There is some info on HMRC’s website but to be truthful its hard going! However I found a really good blog here http://rachelandrew.co.uk/archives/2014/11/25/how-small-companies-and-freelancers-can-deal-with-the-vatmoss-eu-vat-changes/ with some interesting comments!