In January, the VAT accounting rules for EU sales of electronic services to consumers, including mobile apps, music, books, and games, are to change.
They are currently subject to VAT in the country where the seller is based. UK vendors charge UK VAT to all EU consumers. Next year, VAT will be based on where the customer resides. This change will affect a range of digital services providers.
It is a significant change, and sellers of electronic services could have to account for EU VAT in all 28 member states.
They have two choices; they can either choose to register for VAT in each country or take advantage of HMRC's Mini One-Stop Shop (MOSS) accounting scheme.
Deloitte asked about 100 tax professionals last year how their business intended to account for VAT in EU member states where VAT is not established.
About 20 said they would register for the HMRC MOSS scheme, and five indicated they would register for VAT in each relevant country. Thirty-four had not yet considered what to do.
Companies need to ensure they have and retain sufficient information on where their customer is located, to account for the correct amount of VAT.
In addition, they will need to develop their systems to ensure the correct rate of VAT can be accounted for. The changes could have a material impact on pricing and margins, as standard VAT rates can vary by as much as 12 per cent across the EU.
When asked how they would deal with this VAT rate change, about 26 said they had not considered the impact, and about 12 indicated they would pass the variable VAT rates on to customers. About half did not know what they would do.
If they decide to adopt a single pricing policy, VAT rate variation could have a notable impact on profit margins. If a decision is taken to pass the increased VAT cost on to the customer, it will lead to price rises, to maintain a consistent margin.
In the face of substantial competition, coupled with the need to have transparent online pricing across the EU, it is expected that most retailers will opt for a single pricing policy.
It is important that companies ensure they get their pricing strategy right from the outset. All companies that sell digital products to consumers need to prepare for these changes.
Kendra Hann is indirect tax leader for the UK at Deloitte
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