Global Tax Insights Q3-Q4 2018 – UK
VAT implications of a ‘no deal’ Brexit for businesses selling digital services in the European Union
With the UK’s exit from the EU fast approaching on 29 March 2019, uncertainty remains about the impact of Brexit on trade with the rest of the EU. One of the most significant areas to face changes will be tax, especially VAT. Although the UK will continue to operate a VAT system identical to the current EU VAT system, what remains to be seen is how supplies between the UK and the EU will be affected.
In what appears to be an attempt to allay some of these fears, HM Revenue & Customs (HMRC) has recently issued guidance on how UK VAT will be impacted if the UK leaves the EU without agreement (i.e., a ‘no deal’ scenario). The Mini One Stop Shop (MOSS) is one of several sectors that could be fundamentally impacted in such a scenario.
MOSS rules and how they apply to non-EU businesses
The MOSS regime was introduced on 1 January 2015 as a simplification mechanism for suppliers of ‘e-services’ to private individuals or organisations with no business activities (known as on a ‘B2C’ basis). The rules governing B2C e-services mandate that VAT must be accounted for in the EU Member State to which the customer belongs. Without MOSS, businesses could potentially have to register for VAT in all 28 Member States; clearly, this would be extremely cumbersome.
The B2C e-service rules apply to all businesses throughout the world, not just those established in the EU. As the requirements for MOSS registration differ slightly for non-EU established businesses (EU established business must be VAT registered in a Member State to use MOSS, whereas non-EU established businesses are not required to be VAT registered in the EU already), there are two regimes: Union MOSS (for EU established businesses) and Non-Union MOSS (for non-EU established businesses).
It’s worth noting that the MOSS regime was prompted by a change in the rules governing B2C e-services. Before 1 January 2015, the place of supply of B2C e-services for EU established businesses was where the supplier belonged. Historically, this allowed B2C e-service providers to establish themselves in Member States with lower rates of VAT (e.g. Luxembourg and Malta), thereby making their prices more competitive. The change in rules therefore prevented this distortion and levelled the playing field.
Importantly, the rules for non- EU established B2C e-service providers did not change on 1 January 2015; indeed, since their introduction on 1 July 2003, they have always imposed tax based on where the customer belongs. Until the introduction of MOSS, non-EU businesses used the VAT on e-Services (VOES) system, which is ostensibly the same as MOSS.
Non-EU businesses that are required to use the MOSS regime (i.e. the Non-Union MOSS regime) currently have the freedom to choose the Member State in which they register for MOSS. EU businesses do not have that luxury and are required to register for MOSS in a Member State in which they are established. There are many factors to consider for non-EU businesses when deciding where to register; in particular, language preference. Therefore, many businesses in English-speaking countries (e.g. Australia and the United States) choose to register in the UK. Unfortunately for these businesses, the impact of a ‘no deal’ Brexit could be significant in respect of MOSS.
An obligation to register in the UK
HMRC’s recent guidance outlines that, in the event of a ‘no deal’ Brexit, the MOSS system will effectively cease for businesses that use the portal in the UK. Non- EU MOSS users that provide B2C e-services to the rest of the EU will effectively have to re-register for MOSS in a Member State of their choosing, or can opt to register for VAT in each Member State individually. Again, language may be a decisive factor, in which case Ireland may be the best option for English-speakers. The effect on UK established businesses is similar: they too will require MOSS registration in an EU Member State.
Either way, as we edge closer to Brexit, our advice would be that affected businesses should start considering their options.
A key aspect of MOSS is that there is no registration threshold; therefore, even a single sale covered by the B2C e-services rule will precipitate a MOSS/VAT registration requirement. This is a point that is often overlooked by affected businesses. Indeed, in our experience, many non-EU businesses are completely oblivious to the fact that their supplies might be subject to EU VAT. While it is extremely difficult for EU Member States to enforce these rules on non-EU businesses, we are aware that HMRC is taking certain steps towards this. Although HMRC is unlikely to be able to collect any perceived VAT owed, it does have the power to make life difficult, as discussed in the following case study.
A US business (ABC LLC) provides various services in relation to websites, such as customisation to small-to-medium sized businesses, and can also offer generic package and support to private individuals. Altogether, 90% of ABC LLC’s customers are based in North America; but, as there is no equivalent business currently operating in the EU, the remaining 10% of customers are UK-based (both businesses and private individuals).
The business is unaware of the rules governing B2C e-services and, in fact, has no idea what VAT is. HMRC undertakes a project to catch non-EU businesses that should be accounting for VAT in the UK under the B2C e-services rules and finds ABC LLC’s website. The website contains a free forum and many of the members appear to be based in the UK.
As the rules for non-EU businesses came into effect on 1 July 2003, HMRC decides that ABC LLC must be liable for VAT in the UK and it registers ABC LLC for VAT from this date. It then raises VAT assessments covering the years 2003–17 inclusive.
HMRC writes to ABC LLC numerous times, but does not receive a response. HMRC is unable to collect the debt as there is no formal agreement between the USA and the UK.
At some point in 2018, ABC LLC decides to sell the business to a third party. As part of the process, due diligence is undertaken and ABC LLC’s debt with HMRC is discovered. The buyer then pulls out of the deal as it is concerned about ABC LLC’s non-compliance and the possibility that it may have VAT obligations in other Member States, not just the UK.