In this insight, Naomi Quant and Michael Samuel-Bryan highlight changes to the place of supply for certain B2C virtual services to the EU, affecting where UK suppliers pay VAT on supplies made from 1 January 2025.
The Changes Coming into Place
With effect from 1 January 2025 the EU introduced changes to the place of supply rules for business-to-consumer (B2C) services which are streamed or otherwise made available virtually. Key examples are live virtual events (online conferences/webinars) and distance learning courses that include live elements.
Prior to these changes, UK providers selling these services were subject to the general place of supply rules for B2C services, meaning the supply is taxable where the provider belongs. However, the changes from 1 January 2025 change the place of supply from where the supplier belongs to where the consumer resides. B2B supplies of the same nature remain unaffected.
For example, a UK business is providing live online webinars to individuals in France for a fee. Prior to 1 January 2025, UK VAT was charged and accounted for on these services. However, following the changes, the UK business is required to charge VAT at the applicable rate in France and account for VAT to the French tax authorities.
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HMRC’s (lack of) response
Despite Council Directive (EU) 2022/542 having been implemented back in April 2022, HMRC have not yet responded to the changes formally. This leaves uncertainty around the impact on UK and EU suppliers. Currently, as the UK has not followed suit, UK suppliers will be affected by double taxation. For example, say a UK supplier is providing live virtual events to individual consumers in the EU. As HMRC have not changed their rules in line with the EU directive, the supply is deemed to have been made in the UK. However, following these changes the EU now deems the supply to be made in the EU. In this instance both the UK and EU tax authorities require VAT to be accounted for by the UK supplier. As double taxation agreements do not exist for VAT, this will double the VAT burden on the UK supplier.
For EU suppliers the reverse situation will occur. For example, a French supplier provides live virtual events to individual UK consumers. Under the new rules, the EU deem the place of supply to be where the consumer is based (UK), but the UK still continue to deem the place of supply to be where the supplier is based (France). From 1 January 2025, neither tax authority requires VAT to be accounted for on the supply, leaving the EU supplier in an unfairly beneficial position having escaped VAT on the supply altogether.
Until HMRC publish their stance on the changes the EU have implemented, the impact on UK suppliers will be significant.
Consequences for UK Businesses
The EU has a nil threshold for non-EU established traders. This means that UK businesses supplying these kinds of services are required to account for VAT from the point of their first sale from 1 January 2025 at the rate applicable in the member state of consumption.
From 1 January 2025, neither tax authority would require VAT to be accounted for on the supply, leaving the EU supplier in an unfairly beneficial position having escaped VAT on the supply altogether.
Taking Action
Businesses affected by these changes should consider the most appropriate options available to them. VAT registration will be required in each member state of consumption from the date of the first supply following 1 January 2025.
Alternatively, businesses can opt to use the One Stop Shop (OSS) simplification. OSS allows for a single EU wide registration in which businesses can account for VAT on all taxable sales in the EU under a single OSS return. This is a system that has already been rolled out and proved helpful in dealing with electronically supplies services where the place of supply for B2C services is where the consumer belongs.
There are two caveats to OSS. Firstly, it cannot be applied retrospectively. Where sales have already been made to the EU under these new rules, VAT registration would be required to account for sales made from 1 January 2025 up to the date an OSS registration is arranged. Secondly, input tax deduction is not currently permitted, meaning that costs incurred in the EU will not be recoverable. However, for most UK suppliers providing virtual services, costs will likely be incurred in the UK and input tax will be recoverable via a UK VAT return as the supply would have been taxable if made in the UK. This makes OSS an attractive solution for UK suppliers of virtual services.
Businesses also need to implement systems to identify the location of the customer to ensure VAT is being accounted for in the correct member state. Information such as IP addresses and other indicators may need to be obtained.
Now is the time to ensure your business is compliant to deal with the impact of the changes that came into effect from 1 January 2025.
