Come on, keep up!
Technology and telecom services are moving faster than HMRC, which is struggling to keep up with the pace of change.
For many technology services, especially those in the B2C arena, the VAT legislation was not designed for the ever-changing tech world and is struggling to keep up. The ideas which lie at the heart of the classic VAT model, such as place of supply or time of supply, can be difficult to apply and so the VAT rules can be less than adequate for dealing with new technology solutions. For example, the financial services exemption still refers to “dealing with money” and “current, deposit and savings accounts”, but makes no mention of e-finance or electronic payment solutions.
Tech businesses are facing a number of challenging VAT issues to ensure that they fully comply with the regulations, while taking advantage of all available opportunities. Here are our three top tips:
1. When and where to charge VAT
“Technology” covers a wide range of products and services that are purchased by both businesses and private consumers, located anywhere in the world. It is essential to know where the liability to account for VAT arises. For now, it is possible that, if customers are private individuals located in other EU countries, the tech business would need to be registered for VAT in each EU country where sales are made. To address this, there is a facilitation measure called “The Mini One Stop Shop” (MOSS) which allows for the VAT due on these sales to be paid in the UK on one VAT return, and only involve one VAT registration.
2. Will HMRC tax everything?
Sales made to business customers in other EU countries are more straightforward (for now), as no VAT needs to be charged on these sales as long as the customer can provide details of their “business” status. A VAT number is the usual evidence of this. However, certain services, e.g. telecommunication services, are subject to an additional “use and enjoyment” test which needs to be applied if it would give a different result when the normal rules are applied. However, HMRC has recently said that it is looking at treating all telecommunication sales to private consumers as subject to UK VAT, regardless where the services are used and enjoyed.
3. Reclaiming VAT
Early stage high-growth tech businesses can also be involved in corporate finance arrangements, e.g. fundraising, acquisitions, joint ventures etc. This can involve significant VAT being incurred before any sales are made or income is generated. There is a risk that HMRC could challenge the recovery of this VAT on the grounds that no income is, or is intended, to be generated. To address this risk, it is essential that tech businesses set up their arrangements as robustly as possible from the outset to demonstrate that there is a serious intention to launch a business that will be making supplies and generating income that will be “taxable” for VAT purposes.
If you may be affected by any of the above and would like to discuss this further, please contact a member of our team.