European Union has brought much convenience to entrepreneurs trading within EU, nowadays it is much easier to identify correct VAT rates, find out applicable reliefs or apply for grants that one is eligible for. There are many schemes available that simplify the process of taxation and hence encourage intra-Community transactions. Implemented mechanisms influence not just that, but also other aspects, however for the purpose of this article let us focus on VAT.
One of introduced mechanisms was VAT MOSS scheme or VAT mini one stop shop, which concerned entrepreneurs who are involved in the field of supplying cross-border telecommunication, television and radio broadcasting or sell digital services to non-taxable persons. The purpose of this scheme was to simplify the VAT procedures and allow entrepreneurs to avoid having to be VAT registered in every EU member state in which they are providing services. As of 1st of July 2021, VAT MOSS scheme was replaced by expanded VAT OSS and VAT IOSS schemes. VAT OSS expanded upon what was available in VAT MOSS, which means that everything that was possible under previous scheme is still available, with more options added for further simplification of the process. Despite that, VAT MOSS can still be used to make corrections to registration information until 31st of December 2024.
MOSS scheme was applicable, when services provided are part of the following list:
- Distance teaching
- Downloading music or applications
- Access to databases
- Supply of software
- Website hosting
- Online gaming
Another role of this scheme was to allow entity to pay VAT in the EU country of identification instead of settling it with every EU country in which business activities take place. This brings another question – what precisely is country of identification?
Country of identification
In simple terms country of identification is an EU country in which entity registers for VAT MOSS, however the case is not as easy to understand as that – you cannot pick a country at random, there are certain rules to follow. VAT MOSS rules regarding registration or rather deciding country of identification are based on fixed or business establishments in EU. In other words entity without establishment in EU, engaged in supply of digital services would not be eligible to apply for European Union VAT MOSS scheme.
To put it in simple terms there are three possible cases:
- Entity has business establishment in EU – country of identification is country, where business establishment is located.
- Entity has business establishment outside EU, however it has fixed establishments within EU – country of identification is country, where business establishment is located.
- Entity has business establishment outside EU and no fixed establishments within EU – VAT MOSS not applicable, hence no country of identification.
VAT MOSS was available in two variants, with the first one being a standard version and the second one being a non-union VAT MOSS option. After 1st of July 2021, enlarged OSS scheme is available in three variants, with the new one being import scheme (IOSS).
The way this mechanism works is that entity registered for the scheme submits VAT return in country of identification and settles all the transactions across EU within threshold instead of having VAT charged in every country in which transaction took place individually.
In case of overpaid VAT, tax authorities of the countries where transactions took place would repay the overpaid amount, with part of the due being paid by the tax authorities in the country of identification. This occurred due to the fact that country of identification would withhold certain administrative costs before transferring balance to appropriate country, where the VAT is due. Procedure might differ slightly, if entity reclaiming VAT uses Union or non-Union schemes.
Due to VAT MOSS being effectively replaced by expanded VAT OSS and IOSS systems, old VAT MOSS returns are outdated and no longer viable.
UK – issues
United Kingdom was once part of the EU, which allowed UK businesses to benefit from various mechanisms, schemes and reliefs. Brexit did make a lot of things more complicated, especially when it comes to UK VAT and sales. A particularly disputable topic is whether Brexit has benefited or harmed the UK, after all this decision was influenced by many aspects. However as far as UE or UK business owners are concerned, their tax responsibilities have definitely became a bit more troublesome.
As far as procedures VAT MOSS and VAT OSS are concerned, UK is now recognized as a non-Union country, hence any transactions between EU member countries and UK cannot be settled using aforementioned mechanisms. Due to above any EU entrepreneur interested in trading in UK must familiarize himself with the rules concerning UK VAT returns and UK VAT in general.
On the other hand for those interested in starting business in UK and providing digital services to the EU member states, there are two options – register for the non-Union variant of the VAT OSS scheme or to register for VAT in each of EU member states in which supply of digital services takes place. Please do not forget about registration for VAT, as in order to register for the EU scheme a valid VAT number is required, which means that regardless of whether UK VAT threshold was reached, registration must be done – on voluntary basis.