I’m a software developer living in the UK and selling a digital service to consumers and businesses in the UK, EU and world-wide, part-time. If you sell goods instead of services then this article is probably not suited to you.
New rules came into effect on the 1st January 2021 due to Brexit which meant at the very minimum I must stop using the UK VAT MOSS (one stop shop) and swap to either registering in each EU country, or apply for a non-union VAT MOSS in one EU country.
Yes - that’s what I thought… more bureaucracy for no gain.
I had started correspondence with my accountant in December 2020 to validate my understanding of what changes I need to make.
My accountant isn’t used to her customers wanting to sell outside of the UK, which means any advice I receive I tend to double-check with research from the HMRC website, Avalara and other 3rd party-websites, including Reddit.
One of my questions was born out of confusion. I’d started to see people quoting online that when you sell a service from the UK to a consumer in Europe that from the 1st January you would have to charge the consumer 20% UK VAT.
Without prejudicing my accountant I asked what my responsibility would be for selling my service without pointing her at any facts I had at hand. She dutifly sent a screenshot from the HMRC website confirming that I should charge 20% UK VAT.
But something didn’t smell right.
As it turns out there are two rules, the ‘general rule’ which is what my accountant screenshot, plus the ‘special rule’ also known as Use & Enjoyment rule.
Because my tools is a digital service it falls under the special rule, this means that I must charge my B2C consumers the VAT rate within their European country; their place of residence.
During my discovery I also learned that there are three main regions to take into account
UK → UK
UK → EU
UK → Non EU and Non UK (everywhere else in the world)
The UK → UK scenario is by far the simplest, because I’m already registered for VAT then I must charge 20% VAT on all sales whether to a B2B sale (to business) or a B2C sale (to a consumer — a member of the public).
The UK → EU scenario splits again dependent on whether you’re selling to a business or consumer. This really hasn’t changed since pre-brexit, so I’m comfortable with this.
If you’re selling to a B2B business and they can provide evidence (such as a valid VAT registration number) then they are outside-of-scope of VAT and they will reverse-charge.
If they are a B2C consumer, or they’re a business where you have insufficient evidence that they really are a business then you must then treat them as a consumer.
As a consumer you must charge the VAT rate of the European country of their residence and file this in a VAT MOSS return, this is where it’s slightly different now because the UK have shutdown their VAT MOSS returns system (because the UK are no longer part of Europe).
Instead you need to register in each country, or register for non-union VAT MOSS in one EU country. I chose Ireland because they speak English and Ireland is geographically close to the UK — so their timezone is the most compatible if I need to contact them in the future.
The UK → Everywhere else scenario appears to be a case of raising the invoice as VAT exempt.
The following diagram summarises my research, but it’s evolving as I learn more.
Please note that the diagram is in context to selling a digital service from the UK and it’s not advice for your company — please verify your needs yourself.
I must give credit here to Avalara as I used a lot of their blogs and webinars to clarify certain aspects of VAT legislation. In addition information was available on the official HMRC website but sometimes ambiguous, or simply leaving me having more unanswered questions.
My unanswered questions have been submitted to my accountant and a representative at Avalara, if/when I get further information I will update this post, so please follow if you would like to hear more.
Q) I presume that when a product is a digital service then it falls into the Special Rule category? Therefore the VAT is charged based on the customers place of residence, therefore I do not charge the UK VAT rate, but theirs, e.g. Germany at 19% VAT?
Q) In the Avalara e-commerce PDF it states that the VAT can be reported in the UK VAT or EU MOSS return. Is this still the case? I was expecting it to clearly indicate that the non-union VAT MOSS would be used for reporting all EU VAT and that you can’t report this via the UK any more?
Q) If your company revenue is less than £500m then you are exempt from DST
Q) There’s mention that the EU companies use reverse-charging to file their VAT, however if I’m selling my service as outside-of-scope of VAT (Zero rated) then how/why would they reverse-charge something that’s 0%? Am I supposed to be specifying their VAT rate in my accounts software (on the invoice) but show it’s reversed out?
Q) I was under the impression that anything outside of the UK / EU (e.g. U.S / Russia) would also be outside-of-scope? The GST table shows many countries outside of the EU and I’m now worried that I’m supposed to be charging VAT based on that table, instead of treating all B2B as outside of the scope of VAT? How does GST relate to the VAT rules?
I sincerely hope my research can help other independent software developers trading from the UK. Please let me know via the comments if you have answers to any of these questions, I cannot however provide advice for your business as I am not qualified to do so.