By Steven Sandford, Director at Davis Grant
Since 1 January 2021, the UK tech sector has faced new challenges with regards to digital sales to much of Europe, due to the new trade arrangements with the EU that affect the way VAT is recorded and paid.
Following the end of the Brexit transition period, UK sellers of digital service now need new EU VAT registrations to avoid being fined by the tax authorities in the EU.
This requirement covers cross-border sales to UK and EU consumers of:
• downloadable or streaming media;
• apps and online software;
• online journals; and
• dating or similar membership websites.
The requirement to register for VAT in each country is the result of the UK’s withdrawal from the VAT Mini-One-Stop shop (MOSS).
This scheme previously allowed sellers to produce a single VAT return, filed with HM Revenue & Customs (HMRC), which allowed them to report sales to EU consumers and pay EU VAT.
Instead, UK sellers must now apply in any EU member state for a MOSS registration number. This single registration will allow UK sellers to be able to use the non-Union MOSS scheme to report quarterly sales to all EU27 states.
Similarly, EU sellers of digital services to UK customers should apply now for a regular UK VAT number to report sales on a quarterly basis to HMRC.
Unlike UK businesses, who must meet an annual turnover threshold of £85,000 for VAT registration, this new rule applies to all EU businesses, regardless of turnover, which means all UK sales must be reported and makes VAT registration a requirement for trading digital services with UK customers.
Businesses affected by this change must make changes to their reporting procedures and register via the necessary authorities so that they can accurately report VAT on sales.
Failure to correctly report supplies of digital services to the relevant tax authorities could result in penalties and fines being issued alongside any tax that is due.
These latest changes do not affect the rates of VAT paid on digital sales at this time, but this may be subject to change in future, so businesses need to carefully monitor this situation.