The beginning of 2015 was notable for many European businesses providing digital services. It was from this date that we had to comply with the new European VAT regulations, charging VAT at the place of supply when selling our software Perch. In this post I’ll explain what VAT MOSS is, how we’re complying, and some of the problems we’ve encountered.
What is VAT MOSS?
On 1 January 2015, the new regulation came into place that meant VAT on digital products sold in the European Union will be chargeable in the place of purchase, rather than the place of supply. VAT MOSS was introduced to stop large corporations such as Amazon diverting sales through low-VAT countries. But small businesses and sole traders like mine are also now faced with the burden of having to pay extra.
Selling software in a post MOSS world
Much of December 2014 was spent on reimplementing our sales process to cope with collecting the proof of customer location. We’d already been aware of needing to charge VAT at the rate of our customer from January 2015, however the demands of collecting proof of location were harder to meet.
We found the rules confused customers, in particular those who don’t pay VAT such as those from the USA. To try and help this I created a page to explain tax to our customers. But it’s clear that these complex rules make us less attractive to deal with as a business when compared to competitors who are simply ignoring the legislation. For every person who contacts us to query tax, how many walk away, put off purchasing by what they see as over-complicated purchase requirements?
Location data and rate changes
In terms of collecting data our system has worked well. Any purchase missing the required two pieces of location evidence is flagged and we contact the customer to check they’ve paid the correct VAT. We found someone who bought a license while visiting the UK for their business registered in China, but using a card registered to a French bank! But we’ve had only three such instances in the last nine months. Most of the time we’re able to collect two pieces of evidence.
We built into our systems a method of adding VAT rate changes in advance of such changes coming into effect. I watch the VAT Live site for rate changes and add them to our system so we won’t be caught out.
Creating VAT invoices and submitting our returns
All sales of Perch licenses are created in Xero via our integration with the API. We were able to create invoices with the correct VAT applied, following the advice in the documentation. This meant that actually submitting our MOSS returns has been relatively straightforward. I create the report in Xero and then enter the data online for each country we owe VAT to.
Owing the Czech Republic 53 pence
In addition to our software I have a couple of self-published books originally sold under my own name. But these have been moved into the company to avoid me also needing to register for VAT. I sell these via SendOwl, which deals with charging the correct VAT. At the beginning of the year an error meant a purchase went through using the wrong rate of VAT, so I under-reported and underpaid my VAT MOSS bill. This was picked up and I received an email from HMRC, demanding I correct the error and pay the outstanding amount of 53 pence.
This correction involved several emails with a friendly representative of HMRC. It does raise the question of how much is being spent in collecting these tiny sums of money from small businesses. Given the low registration for MOSS I can’t see how it can be worthwhile.
Owing Ireland ten thousand Euros
While I did owe the Czech Republic 53 pence, I did not owe Ireland €10,009.88 as demanded in a letter from the Irish Revenue. It appears that most MOSS registered businesses got these spurious demands, demonstrating that our personal details are being shared with other tax authorities.
The cost of compliance
As web developers, with a custom back-end system and ability to integrate with the Xero API, complying with VAT MOSS has for us been possible. But it’s come at a cost of weeks of development time that could have been put into our product. Then there is the ongoing cost of contacting customers to collect missing VAT evidence, filing the return and keeping an eye on rate changes.
There have been wider implications. The legislation put our plans for a marketplace for third-party add-ons on hold, not wanting to cause developers to become liable for the VAT. It means our Perch Shop add-on has to deal with complex tax scenarios and it makes us appear less competitively priced when compared with our American competitors who don’t charge taxes.
I still believe, despite the fact we have done all the work to comply, that a threshold should be put in place for smaller businesses. We need to prevent this legislation from further damaging the competitiveness of European businesses in a global market.