The core of the VAT regime applying to services is the concept of the place of supply.
Place of supply
In simple terms, a place of supply is the place where the supplier or the customer (business or non-business) belongs.
Businesses ‘belong’ where they have an established location, place of operation, and permanent human and technical resources used in providing the service.
Consumers ‘belong’ where they have their permanent home.
Though in reality where the business or the customer belong may cause debate, for the purposes of this article we only outline the principle in brief and simple terms, as our focus is elsewhere.
Services supplied to businesses
If you supply services across the border to another business, the place of that supply is where a customer belongs. To account for VAT, it is the customer, not the seller, who accounts for VAT using the reverse charge VAT rules.
Services supplied to non-business consumers
If you supply services to a non-business consumer, the place of supply is where you as a supplier belong. If the supplier is in the UK, UK VAT is charged on the transactions.
Special rule for digital services for non-business consumers
Digital services supplied electronically to a non-business consumer are treated differently – they are supplied where the consumer belongs.
This treatment, in force from April 2015, followed the EU consensus that it is the destination at which the service is consumed which should determine the tax treatment. This meant that the location of the supplier would no longer affect the VAT treatment or distort business competition.
The same rule applies to digital sales to non-EU countries.
What is a digital service covered by the special rule
To be covered by the special rule, digital services must have the following characteristics:
The service product is purchased and supplied electronically in an automated fashion
The product itself is does not involve the delivery of physical goods or the physical presence of the supplier and often requires no or very little human intervention.
Some examples of digital services covered are: provision of downloaded files, music, films, books, magazines, online games streamed or downloaded electronically, supply of website design, hosting, remote maintenance of IT systems and software updates, provision of digital advertising.
Services provided electronically but not covered by the rules are those which require a simultaneous physical presence and involvement of the provider of the service and are not automated. Examples would include: supply of physical goods following an online order, supply of consultancy and accounting services via email or video, real time live webinars, distance learning using remote tutors.
HMRC provides a useful illustration of the above in the below examples:
Electroni- cally supplied
Covered by the rules
PDF document manually emailed by seller
PDF document automatically emailed by seller’s system
PDF document automatically downloaded from site
Stock photographs available for automatic download
Online course consisting of pre-recorded videos and downloadable PDFs
Online course consisting of pre-recorded videos and downloadable PDFs plus support from a live tutor
Individually commissioned content sent in digital form, for example, photographs, reports, medical results
Link to online content or download sent by manual email
In real life it is often difficult to establish with certainty the location of the customer.
To implement the VAT rules, presumed customer presence is often sufficient and accepted by the VAT authorities. The following circumstances will give rise to a presumption of customer location:
Presumption of location based on the physical location where the digital product is accessed (other than a mobile device), for example a phone box, wi-fi hot spot, internet cafe, computer in a hotel lobby, satellite dish) when the digital product is received. If a Spanish businessman makes a call from a hotel telephone in France, the service is treated as being supplied in France.
Presumptions of location when service is received by a consumer on board transport - VAT arises due in the member state of departure.
Presumption of location when service is received by a consumer on a mobile device – VAT is due in the country of which the consumer is a resident, not the country in which they received the digital product on their mobile device. If a French resident streams digital content on a mobile device in Germany, VAT will be due in France.
In circumstances other than the above as well as when a payment provider is used by the supplier, suppliers of e-services must obtain one of the following pieces of information to confirm the location of the customer:
the billing address of the customer
the Internet Protocol (IP) address
bank details such as the location of the bank account used for payment or the billing address of the customer held by that bank
the Mobile Country Code (MCC) of the International Mobile Subscriber Identity (IMSI) stored on the Subscriber Identity Module (SIM) card used by the customer
telephone number with the state code of the customer’s fixed land line
notification advice from the payment provider containing the 2-digit country code of the customer's member state of residence as listed in the payment provider’s records.
Two options are available to account for VAT in respective countries:
Register for VAT in each country and submit VAT returns (except when services are exempt in that country). There is no registration threshold.
Register for UK MOSS (see below).
It can be easily seen how either of the above may be equally challenging to a digital service provider.
What is MOSS and how it works
VAT MOSS (Mini One Stop Shop) enables digital service suppliers to avoid VAT registration in the country of each consumer. Instead one quarterly VAT MOSS return is submitted in one EU country. If you register for MOSS in the UK, the return is submitted to HMRC. HMRC ensures relevant parts of the MOSS return data are sent to individual countries where sales were generated.
To register for MOSS, a business needs to be VAT registered first.
Two separate VAT MOSS schemes operate for businesses based in the EU and those based outside of EU.
Businesses must register for VAT MOSS by the 10th day of the month after your first digital service sale. It is possible to deregister from MOSS as long as HMRC are notified 15 days before the end of the last quarter.
Only output VAT is declared on VAT MOSS return. Input VAT in connection with digital services provided needs to be reclaimed on the standard VAT return.
Guidance on how to complete a VAT MOSS return can be found on the HMRC website