2015 and the "mini one-stop shop"

The mini one-stop shop is coming. Last week’s release by the EU Council of amendments to Implementing Regulations 282/2011 is a timely reminder that 1 January 2015 is getting closer. What are the changes? From 2015 all B2C telecoms, broadcasting and electronics services are to be taxed in the EU member state where the customer is based (changing from supplier location). The implications for businesses in this sector, and indeed their customers, are wide ranging. As a quick example, from 2015 your kindle eBook will become subject to 20% UK VAT and no longer the 3% Luxembourg rate as you’ll currently find is the case.

Reasons for this change are fairly clear. Member states were not happy with the “VAT rate shopping” that had become relatively prevalent and straightforward in sectors where technology has increasingly permitted remote service delivery. This, on the surface, simple change in the place of supply from supplier to customer location effectively and quickly removes the competitive advantage gained by those businesses locating in low VAT rate jurisdictions. But the impact affects all businesses in the sector. And it presents a number of challenges...

Where is my customer?

Potentially the biggest challenge for all for businesses applying the 2015 place of supply rules is putting a process in place which can effectively and correctly identify the customer location. The new implementing regulations suggest that businesses will need to be able to identify where “the customer is established or has his permanent address or usual residence”. How individual member states interpret this requirement is yet to be seen, but it can be expected that different tax authorities will require a different burden of proof. Where credit card details with matching address may suffice in one member state, a cross checked national ID number may be required in another. Setting up a system that can handle such multiple requirements will be no easy task.

Whose VAT rules do I apply?

Whilst the place of supply change is superficially simple, the interaction with VAT “use and enjoyment” rules (that may apply to telecoms and broadcasting) makes the new position increasingly complex than the status quo. The starting point for applying EU use and enjoyment is that you should look first to the basic rule, and subsequently override that basic rule in specific situations. Pre-2015 you therefore look first to the basic rule of where the supplier is based, and would defer from that position based on the application of the use & enjoyment rules within the member state of that supplier. Post-2015 you look first to the basic rule of where the customer is based, and would defer based on the use & enjoyment rules within the member state of that customer. In order words, whereas currently each supplier operates one set of use & enjoyment rules (those in the member state where they are established) going forward they may need to operate twenty-seven different sets of rules. And none of them are especially simple.

Where should I register?

Finally, despite the name, the one-stop shop may ultimately involve a number of stops for businesses. Whilst MOSS will permit businesses to submit a single VAT return for all twenty seven member states, it may not be used in any member state in which that business has an establishment. As a consequence it is likely that a number of EU based business will end up in a hybrid situation where they operate separate VAT registrations in certain member states and a MOSS registration for the remainder, and will need to continuously monitor this position. The location of the business’s MOSS registration will be optional (to an extent) and the UK may well be a popular choice due to both the language advantage and a relatively accommodating tax authority.

Plenty to think about.

EU vs eBooks

This week saw the European Commission announce that it has launched infringement proceedings against France and Luxembourg for the VAT rates applied to sales of eBooks (7% and 3% respectively).  Link to EU Press Release.  This follows a decision by the two countries (presumably under some lobbying pressure) to change the VAT charged on eBooks at the start of 2012.

Those who have followed this story will know that there has been much campaigning by the publishing industry, politicians, and people who love reading, to extend the UK 0% VAT rate that applies to traditional books to also cover eBooks.  And the campaign no doubt intensified after France and Luxembourg reduced their own rates, not least because (somewhat unsurprisingly) most of the big eBook sellers are now located in one of these two countries.

But the pushback in the UK has always been that extending our 0% rate would not be compatible with EU law.  Indeed this was confirmed by a ministerial response to Tom Blenkinsop MP’s question at the end of last year see Tom's Question.  This makes the current infringement proceedings especially interesting, as they will provide a good indication as to where the UK can go next.

And there is a crucial difference between the French and Luxembourg cases...

France’s 7% reduce rate stems from EU VAT Law which permits the application of a reduced rate of VAT to the supply of “books on all physical means of support”, whilst also specifically stating that “the reduced rates shall not apply to electronically supplied services”.  France’s case will therefore focus around a broad interpretation of this EU law, and will need to counter the traditional view that an eBook falls within the EU definition of an electronically supplied service for VAT purposes.  This argument will be a challenging one.

Where Luxembourg differs (and the UK would be similar to Luxembourg in this regard) is that it’s 3% reduced rate is not actually an EU reduced rate (indeed the maximum permitted reduced rate under EU VAT Law is 5%).  The 3% Luxembourg rate pre-dates EU VAT harmonisation, and EU member states which had their own reduced VAT rates before 1991 (which differed from the new EU one) were allowed to keep those rates.  In this regard the Luxembourg 3% is very similar to the UK 0% rate.  And what this means is that Luxembourg’s 3% rate is not subject to the restriction as for France above i.e. that it “shall not apply to electronically supplied services”.

Luxembourg will therefore need to successfully argue its pre-1991 VAT law, which has always permitted a 3% reduced rate for books, is worded such that it, as a point of fact, it also includes eBooks.  In other words, Luxembourg can’t actually change its pre-1991 law, but needs to be able to justify that what is already written includes books in both electronic and physical form.  Now I don’t know exactly what that wording is, but there is a subtle difference to the French situation, and Luxembourg’s position is very similar to the one that the UK would need to apply our own 0% VAT rate to eBooks.

Watch this space, it will be an interesting one to follow.

Tax and Morality – what’s the solution?

Having miraculously returned from a great week in Ukraine not in a coffin, I swiftly discovered that this week’s media sensation is tax avoidance.  And a tax avoidance scheme aptly named after a mountain with a 25% death rate seems to have quickly killed off the career of Jimmy Carr.  But although the K2 offshore scheme is fairly easy to deride, there are surely areas of tax avoidance that are less easy to pin-point on a moral compass. 

Tax advisors like to use the term “tax planning” to essentially mean taking steps to minimise your tax bill, but in a less aggressive manner than the more ugly term “tax avoidance”.  It is certainly clear to me that trying not to pay too much tax is not morally wrong per se.  Here are a few examples, and maybe different people will draw the line in different places:

·         Putting your savings in an ISA so that the interest you earn is tax free;

·         Keeping track of the charity donations that you make and claiming the reduction in income tax allowed under the gift aid rules;

·         Giving money to your children every year in order to use the £3,000 annual exemption from inheritance tax;

·         Setting up a company to provide your services as a contractor, and deducting your work expenses from your tax bill;

·         Setting up your eBook business in Luxembourg so that you charge your customers only 3% VAT;

·         Flying your private jet out of the country at 23.45 and back in at 00.15 the next day, so that you’re not technically in the UK overnight for residence purposes;

·         Using the K2 tax avoidance scheme to only pay 1% income tax.

All of the above are / were technically legal (although some are challengeable), but obviously not all of them sit as comfortably with us as the others.  To simplify this in my mind I define tax planning as minimising your tax by doing something intended by the law (e.g. using an ISA which was intended to incentivise saving), whereas tax avoidance is minimising your tax by doing something not intended by the law (e.g. clearly income tax law was not written with the intention what some people would only pay 1%).  By defining and understanding this “purpose” we set a much clearer benchmark than a pure moral judgement which can change with the wind, a politician’s latest grab for headlines, or the media’s latest hunt for a sensation.

This is not new.  In Sweden, tax legislation is accompanied by interpreting provisions which define both the purpose of the law and guidance on how it should therefore be interpreted.  These interpretations are considered persuasive in the Swedish courts.

So maybe there is a simple answer to the complex question of defining a tax system which prevents abuse of rules.  New tax law should include a description of purpose, and this should be persuasive in court.  There are obviously a few hurdles in the way, but in an economic environment where every penny counts, knowing what you’re trying to achieve is surely a good starting point.

Lebara Made Simple

You may have noticed a few tweets over the last week about the Lebara case and changes to UK VAT rules on vouchers.  This is one of the most complex areas of VAT; and so in an attempt to maintain my reputation for making the complex simple, here’s a quick and easy take on Lebara and vouchers...

The way things were

The UK has in general taxed vouchers on redemption.  So as an example if you went to HMV and bought a gift voucher for a friend, they wouldn’t account for VAT at the time you paid the cash, but would do so when your friend came back to the store and used the voucher to buy stuff.  This gave retailers one big VAT advantage, if your friend lost the voucher and never used it, HMV would get its £10 VAT free – this concept is called “breakage”.

But difficulties arose when a voucher was sold through a distributor (which is fairly common practice).  UK rules say that the sale of a voucher by a middle-man is subject to VAT (unlike a sale by the retailer itself) in order to ensure that any margin made is appropriately taxed.  As a result in a three party chain the distributor accounts for VAT on its sale, the retailer accounts for VAT when the voucher is used, and the poor customer ends up paying VAT twice on the same thing!

And so HMRC came up with an odd work around to stop this happening.  This allowed the distributor in such a chain to recover VAT on its purchase of a voucher from a retailer, even though VAT would not actually be accounted for by the retailer on the sale (as we know from the HMV example above).  This “pseudo-VAT” was therefore netted against the VAT charged by the distributor, and ultimately the customer only paid VAT once (accounted for by the retailer when the voucher was ultimately used).  Right overall result but all a bit of a mess.

The new way

In its recent ECJ case Lebara challenged the UK rules.  VAT is a harmonised tax across the EU, and so while the UK has its own VAT legislation that legislation must fall within the parameters set by the EU VAT Directive.   I won’t go into the details of the case, but essentially Lebara had ended up in the position outlined above of being taxed twice; this was because its distributor was not based in the UK and therefore could not make use of HMRC’s special work around to recover “pseudo VAT”.

And last week Lebara won, and the UK has had to change its rules.  The result is that the sale of a voucher should now be treated as a sale of the actual goods or services which that voucher can be used to buy.  So back to the HMV example:  HMV should now account for VAT when you pay for its gift voucher, any distributor should do the same, and no VAT should be accounted for when your friend ultimately uses the voucher.

I’ll put in a small caveat here.  Lebara only considered vouchers with a single purpose i.e. ones that can only be used to buy one type of thing and at one VAT rate.  It’s obviously hard to tax a voucher based on what it can be used to buy if you don’t know what those things will be.  So the changes only apply to single purpose vouchers.

What are the implications?

Well the obvious big one is no more “breakage”, vouchers will be taxed even if they’re not used.  Judging by some of the messenging coming from the Treasury they feel that this is an anti-avoidance measure and will be a big winner for the Exchequer.  I think this may be a little premature.  Firstly it’s not obvious to me that breakage was tax avoidance in any event, after all, if a customer doesn’t actually buy anything why should VAT be charged?  Secondly, as the rules for multi-purpose vouchers haven’t changed there’s an obvious solution to keep breakage, make sure your voucher can be used to buy more than one type of thing...

Another interesting impact here is how and where a voucher will be taxed.  As the new rules apply VAT based on the underlying good or service, different vouchers will have different VAT treatments depending on what that good or service is.  And a sure consequence of numerous different treatments is numerous types of VAT planning around them.  Factor in cross border sales, special rules for different types of services, and the EU proposals for further changes to the voucher rules in 2015, and this becomes a complex and challenging area for businesses to get right!