Important VAT changes for technology and digital businesses

There are some very important VAT changes when making B2C sales of broadcasting, telecommunication and e-services such as apps, music, games, ebooks and similar services to private individuals based in other European Union member states.

Currently, UK VAT registered businesses making B2C sales to private individuals in another EU state will charge UK VAT at 20%.

BUT from 1 January 2015, all businesses will need to account for, and pay VAT to, the country where the customer is located. So, a UK business selling an app to a private individual based in Sweden will have to charge VAT at Sweden’s standard rate of 25%, while the same app sold to a customer based in Cyprus will be subject to Cypriot standard VAT rate of 19%.

Importantly, these changes will affect all UK businesses making B2C sales to customers in other EU states even if they are not registered for UK VAT.

There’s good news for businesses selling through Apple’s App Store, but, further complications arise for those selling through Android/Google Play and also in-app purchases. 

Selling on the Apple's App Store 

VAT Apple App StoreApple has structured its current agreement so that they act as your agent each time an e-service is downloaded. In effect, each download is effectively two sales; 1) UK business sell to Apple SARL in Luxembourg, and 2) Apple sell on to the EU customer.

The good news is that UK businesses only have one B2B customer, Apple SARL in Luxembourg, so for a vast majority of businesses selling on Apple’s App Store platform, these sales will be continue outside the scope of UK VAT and this change won’t affect them.

Selling on Android/Google Play or Direct to EU Customers

VAT Google Play

However, for UK businesses selling e-services on Android/Google Play, the agreement is currently structured in a way that the business sells directly to the EU customer. It will therefore be the businesses responsibility to account for, and collect, the correct amount of VAT based on each customer’s location and pay this over to the local tax authorities.

It is unclear at this stage whether Android/Google will implement a similar mechanism to Apple.

Update November 2014: Google has now updated their developer terms and conditions to that similar to Apple. ​Google will now be responsible for determining, charging, and remitting VAT for all Google Play Store digital content purchases for EU customers. No action is required on your part.

Businesses selling directly to EU customers, i.e. through their own website or in-app purchases, will also need to account for, and collect, the correct amount of VAT based on each customer’s location.

Actions

With 28 countries in the EU and 30 different rates of VAT the scope of confusion is obvious.

All affected businesses are required to update their checkout process to identify and store evidence of the customers physical location with verification checks. Pricing structure and profit margin must also be reviewed. 

Businesses will then be faced with a new and complex mechanism for filing EU VAT return. HMRC has announced the launch of a 'Mini One Stop Shop' (MOSS) for VAT registered businesses to prevent the need for multiple VAT returns however start-up and small businesses may not be able to benefit. Instead, they will be required to register and account for VAT in each EU state through a local VAT return.

FOR GENERAL INFORMATION ONLY. Please note that this article is not intended to give specific technical advice and it should not be construed as doing so. It is designed to alert clients to some of the issues. It is not intended to give exhaustive coverage of the topic. Whilst every care has been taken in the preparation of this article it may contain errors and/or omissions. Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein. Article last updated by DH July 2014.