Last week, we witnessed how big and clear the discontent is regarding the new VAT rules that will go into force on January 1.
If you have just joined the party, the EU has decided to change how you charge VAT on your digital products and services to European consumers. Whereas VAT was previously charged in the country of the supplier, the new rules state that it will now be payable in the country where services are supplied.
Let’s say you’re a French business that sells an online tool. Until now, all your sales were subject to a 20% VAT (France’s VAT), but from now on, the VAT will change depending on where your clients are located. If it’s a Spaniard, the VAT will be 21% VAT; if it’s a German, the VAT will be 19%, and so on.
Sounds kind of messy and tricky, right? The first question is…
What is a digital service/product?
Not all Internet businesses are affected by these new rules.
The new legislation affects only sales of broadcast, telecommunications, and digital services/products within the EU A digital service/product is defined by the following criteria:
- It’s a service, not a physical good.
- It’s essentially based on information technology.
- It’s provided via the Internet or an electronic network.
- The supply is fully automated or involves minimal human intervention.
Some examples of digital services are as follows:
- Downloaded and online games.
- E-books, images, movies, and videos.
- Downloaded and streaming music.
- Cloud computing and software as a service (SaaS).
- Websites, hosting, VoIP, and ISP.
If you’re not selling a digital product/service, you can breathe a sigh of relief. Otherwise, the second question is…
Who is a consumer?
For a product like Quaderno, we could say that we only sell our service to businesses, so the new rules don’t affect us. But it’s not so easy. We have to show that our customers are real businesses and not private individuals. How? By asking them for their VAT numbers.
As the U.K. tax authorities say…
“If you supply digital services and your customer doesn’t provide you with a VAT registration number (VRN) then you should treat the supply as B2C. You, as the supplier, may choose to accept alternative evidence of business status although this may not be acceptable for all member states. If a member state does not accept alternative evidence then you will be responsible for VAT in that country if a VRN has not been provided.
It’s your decision to accept alternative evidence. Your customer can’t require you to treat a supply as B2B if they have not provided a valid VRN.”
In our case, this means that we have to ask the user for his VAT number before billing him. One more field in our signup form.
Where is the consumer?
This is one of the biggest issues. You have to determine the real place of supply. You can ask your customers for a billing address, but it’s not enough. They could cheat you to pay less in taxes.
So you have to collect at least two non-contradictory pieces of evidence as to the location of your customer. These can include the following:
- Billing address of the customer.
- IP address.
- Location of the bank from which the payment was made.
- Country code of the SIM card.
- The location of the customer’s landline.
- Other commercially relevant information.
And you must keep the evidence you’re using for a period of 10 years from 31 December of the year during which the transaction was carried out.
At Quaderno, we’ve decided to collect the billing address, the IP address, and the location of the credit card.
We can get the customer’s location based on his IP. Then we check it against his billing address, and if they match… voilà! But what happens if the customer is using a proxy server?
We can use the credit card BIN to determine the country of the issuing bank. But what if the billing address says London, but the customer is now in Paris, and he’s paying with a U.S. card? In that case, the only thing we can do is cancel the transaction because we cannot prove the customer’s location. Not a great user experience! And a sale lost!!
What’s all that buzz about VAT OSS?
VAT One-Stop Shop (OSS) is an optional scheme that is being introduced to help suppliers of digital services comply with their obligations to pay VAT in many different member states.
Once you register your business in the VAT OSS entity of your country, you avoid having to manage the VAT return for every EU country where you have sold your digital services.
In the example we provided before, if you run a French business and you have customers from Spain, Germany, and the U.K., the homolog French VAT OSS institution will handle the VAT return in each of these countries for you.
Businesses outside the EU can choose to register in any country. Some tax authorities will allow you to submit tax filings under OSS in English, such as Spain and obviously Ireland and the United Kingdom.
Can I get my business ready for the new EU VAT rules?
Sure! We launched Quaderno to make it much easier for businesses to handle VAT in their invoices. After we learned about these new VAT rules, we prepared our solution to be adaptable to the new needs.
If not, take a look at our REST API, which allows you to calculate taxes and save the evidence of the customers’ locations.
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.