The EU VAT system is set for a significant upheaval come January 2015, potentially causing suppliers of digital products a major headache.
The change aligns the rules for both EU and non-EU businesses in relation to the supply of “digital services”, so that VAT is charged on supplies to individual customers in the jurisdiction in which those customers are located. Internet businesses can therefore no longer save VAT by supplying digital services from EU jurisdictions with a low rate of VAT (such as Luxemburg).
“Digital services” for these purposes will include video and music downloads, online games, e-books and other forms of online content, as well as broadcasting and telecoms services. They do not include, however, the supply of physical goods (such as books) just because the sale takes place over the internet.
|Who is making the supply||The current VAT position||The position from 1 January|
|Supply by non-EU business||VAT charged where customer is located||VAT charged where customer is located|
|Supply by EU business||VAT charged where business is established||VAT charged where customer is located|
The change will create significant administrative difficulties for many internet businesses, and ironically, for a change targeted at perceived VAT avoidance by big business, it is going to be start-ups who are hit the hardest because, regardless of the level of supplies they make in each jurisdiction, they will still be required to apply the same rules as established internet companies.
For more information about the proposed changes, and the difficulties they present for internet start-ups, please click here.