In this insight, Naomi Quant and Michael Samuel-Bryan highlight upcoming changes to the place of supply for certain B2C virtual services to the EU will change from 1 January 2025, affecting where UK suppliers pay VAT.
The Changes Coming into Place
From 1 January 2025 the EU will introduce 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.
Currently, UK providers selling these services are 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 will change the place of supply from where the supplier belongs to where the consumer resides. B2B supplies of the same nature will be unaffected by these changes.
For example, a UK business is providing live online webinars to individuals in France for a fee. Prior to 1 January 2025, UK VAT will be charged and accounted for on these services. However, from 1 January 2025, the UK business will be 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 is creating uncertainty around the impact on UK and EU suppliers. If the UK does not follow suit and apply the change in Place of Supply rules there is a risk of double taxation. Say a UK supplier is providing live virtual events to individual consumers in the EU then if HMRC don’t change the UK treatment, the supply will be deemed to have been made in the UK. However, following these changes the EU would deem the supply as being made in the EU. In this instance both the UK and EU would require VAT to be accounted for by the UK supplier. As double taxation agreements do not exist for VAT, this would double the VAT burden on the UK supplier.
For EU supplies the reverse would take place. Say a French supplier is providing live virtual events to individual UK consumers. Under the new rules, the EU would deem the place of supply to be where the consumer is based (UK), but the UK would continue to deem the place of supply to be where the supplier is based (France). 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.
Until HMRC publish their stance on the upcoming changes, the impact on UK suppliers remains uncertain.
Consequences for UK Businesses
The EU has a nil threshold for non-established traders. This means that UK businesses supplying these kinds of services will be 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 faced with 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 making forward planning essential. Otherwise, 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 will 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 begin preparations and plan the right course ahead for your business, allowing for a smooth and compliant transition come 1 January 2025.
