On 1 January 2015, new EU VAT rules in relation to supplies of electronic services to final consumers will enter into force. Under the new rules, the place of supply of electronic services will be the place where the consumer resides (destination principle). Currently, such services are deemed to be provided at the place where the supplier is established (origin principle).
To simplify compliance obligations and to avoid the situation where a supplier with customers residing in 28 Member States has to be registered in all those Member States, a special scheme known as the Mini One Stop Shop (MOSS) will be introduced. Under the MOSS, entrepreneurs will be allowed to be registered only in the Member State of establishment, submit VAT returns and pay the relevant VAT through the web portal of that Member State. However, VAT must be charged at the rate of the country where the final consumer resides.
The MOSS is a simplification measure designed to relieve entrepreneurs from the obligation to register and submit returns in several Member States. While it indeed simplifies compliance in many situations, some entrepreneurs will be worse off under the new rules. The following example illustrates this.
An UK supplier provides electronic services to final consumers resident both in the United Kingdom and in other Member States. His total turnover is GBP 70,000, where GBP 60,000 comes from transactions with UK customers and GBP 10,000 from the cross-border provision of services to final customers in other Member States. Until 31 December 2014, all supplies are deemed to be made in the United Kingdom. The UK registration threshold is GBP 81,000 and this means that as long as an entrepreneur’s turnover from taxable transactions remains below that threshold (and is not likely to exceed it in the future), the entrepreneur is not obliged to be registered for VAT purposes and to charge VAT to his customers. In our example, the turnover is GBP 70,000, so the UK supplier does not have any VAT compliance obligations.
However, as of 1 January 2015, the UK entrepreneur will have to register for VAT since the GBP 10,000 services will be deemed to be supplied in other Member States. The new rules do not provide for any de-minimis thresholds. Even if the turnover from the provision of electronic services in another Member State is very low, the supplier must be registered and charge VAT at the local rate.
To sum up, the new VAT rules and the One Stop Shop will increase the compliance burden on small enterprises. While, until 31 December 2014, entrepreneurs providing cross-border electronic services with a turnover below the registration threshold do not have to charge VAT, as of 1 January 2015, they will face extensive VAT compliance obligations.