Vat Guidelines On Digital Products, Extremely Confused!

[nellypope]

These new VAT guidelines which came into force recently have got me completely confused. So before I call the tax man for an explanation I'm coming here first.

In short: I'm a freelance Graphic Designer / Web designer.
Products are virtual, so artwork is supplied to client digitally (I don't necessarily handle the printing). Website wise I set up hosting accounts and charge the client (obviously with a markup) and I build and maintain websites for people.

I was under the impression that because my products are virtual I do not need to charge VAT.

Neither am I VAT registered.

Also, probably worth noting, I do not earn enough to pay income tax either (give me a chance I've only just started ;-)

Do these new rules affect me?

[ToraToraTora]

Digital services are liable to VAT but you only have to register for VAT if you are taking more than £81k. So based on your assertions above you need not charge VAT. So I'd say carry on as you are, you are unaffacted.

[buildersmate]

No TTT, that's just plain wrong. That's the whole point of this - the impact on those businesses who up to now haven't had to bother about VAT as they are under the annual turnover threshold.
New rules impact those providing digital services.

[ToraToraTora]

Sorry, BM you mean they all have to charge VAT regardless of turnover? You lost me.

[ToraToraTora]

here's a helpful flowchart: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/390300/VAT_MOSS_Flow_chart.pdf

[buildersmate]

Your helpful chart makes it clear the scenarios under which the trader requires to handle VAT under the new regime - the bottom right corner of the chart.

Depending on the nature of the trading, current non-VAT registered businesses may have to register for VAT (irrespective of T/O) in the UK in respect of this trade, or else register for VAT in the countries in which they trade.

Nelly - does Tora's flowchart answer the question for you?

[New Judge]

Not my area of expertise but I’m not so sure the changes do apply to nelly’s business, bm.

Question number one on the flowchart is this:

“Do you supply digital services broadcasting, telecommunications or e services, for example video on demand, downloaded apps, music downloads, gaming, e books, anti virus software or online auctions where the service is automated? (Merely communicating by email and sending attachments does not constitute Digital Services)”

I think the key phrase is “…where the service is automated”. If I’m reading her description correctly Nelly’s services are not automated. She provides bespoke solutions to individual clients and simply makes them available virtually (in much the same way as if she were to e-Mail the results of her work to the client). So I think her answer to that question would be “No” and the flowchart indicates that the changes do not apply.

I think these new rules were aimed at online traders, which Nelly clearly isn’t, though I’d be interested to hear an alternative view.

[buildersmate]

I think you are right, NJ, if the lady ever gets back to tell us.

What I was objecting to was the bland statement that businesses below £81k aren't impacted anyway. It simply isn't true.

[BlackadderV]

How times change. When VAT was first introduced the turnover threshold was £5k

[Ellipsis]

> I was under the impression that because my products are virtual I do not need to charge VAT.

That is completely wrong. But anyway ...

What's relevant here is:

* Where are your customers? Are they in the EU?
* What are your customers? Are they individuals or businesses?

If your customers are outside the EU, or if they are businesses, then these new changes make no difference. The changes are designed to target supply of electronic goods or services to individuals in the EU, by companies based anywhere in the world (including the EU).

[New Judge]

As I said earlier, Ellipsis, I think Nelly's answer to the very first question would be "no". If that is the case then the rest (including where she or her customers are based) is irrelevant.

[Ellipsis]

There's a bit more to it than that flowchart, New Judge.

For example in this document ...

https://www.gov.uk/government/publications/vat-supplying-digital-services-to-private-consumers/vat-businesses-supplying-digital-services-to-private-consumers

... you can find ...

---------------------------------------------------------------
The new rules for supplies of digital services to non-business consumers is a specific rule so you should approach the issue as follows:

1. Determine whether it is a digital service (because if it isn’t, the general place of supply of services rules will apply).
...
Defining digital services
[Other services defined, then ...]
Electronically supplied services

The rule change only applies to ‘e-services’ that are ‘electronically supplied’ and includes things like:

* supplies of images or text, such as photos, screensavers, e-books and other digitised documents eg, pdf files
...
* website supply or web hosting services
---------------------------------------------------------------

[New Judge]

This is interesting and as I said, not my area of expertise. But reading the guidance document (along with the very limited knowledge we have of Jenny’s business) I would suggest that it could be argued that the new rules may not apply. It seems the thrust of these new measures are directed towards automated selling businesses where little human intervention takes place. I do not think this describes Nelly’s business (but it would be nice to hear from her!). I’ve also had a look at the EU guidance document (92 pages!):

http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/how_vat_works/telecom/explanatory_notes_2015_en.pdf

To save you wading through it, In particular this says:

“Electronically supplied services” - shall include services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention,”

I think Nelly needs to have a chat with her local Vat-man !!!

[nellypope]

Sorry minor domestic emergency meant I couldn't back on here. I have spoekn to HMRC I was told that the threshold was £1,000!

I was also under the assumption that the threshold was £81k +.

[nellypope]

So basically I spoke to HMRC: They were vague to say the least. I described my business and last years turnover and my services, she said I do not need to be registered until I reach the threshold of £1,000.

I replied, "of course I will reach that", she responded with read the guidelines 700/1.

I really am none the wiser!

[New Judge]

As far as I can see (and I've only skimmed through it) guidelines 700/1 make no mention of a £1,000 threshold. Only the £81k is mentioned.

However, as has been mentioned, the threshold (be it £1k or £81k) is not the issue. If your business falls liable to VAT under the new regulations it will be liable regardless of your turnover (that's the crux of the new rules - they make businesses which were previously exempt because of their turnover liable now regardless of T/O).

The question that needs to be addressed is not one of turnover but of the nature of your business - does what you supply amount to "digital services"? I suggest that it does not because it seems that the only "digital" aspect is the fact that you deliver your solutions over the internet. But they are not like, say, music downloads, where they are sold almost without your intervention. That is the question that the VAT-man needs to answer for you, not to blandly refer you to some irrelevant guidelines.

[nellypope]

Thank you New Judge. I think another conversation with the VAT man needs to take place, but thankfully with all your input, I will have a better grasp of the questions that need asking. You're right there is no mention of this £1000 threshold. Thank you for your time, not sure what I'd do without Answerbank and it's contributors.