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12.1. General

VAT is charged on goods and certain services imported from countries outside the European Union or  brought into the UK from other EU countries.  The standard rate of 20% applies to most goods and services and a reduced rate of 5% applies to domestic fuel, power and certain other reduced rate supplies.  There are also goods and services which are zero-rated, exempt from VAT or outside the UK VAT system altogether.    

Effective 1 April 2017, government announced a flat VAT rate of 16.5% VAT on turnover of small businesses in any sector if the cost of goods inclusive of VAT is less than either:

  • 2% of the turnover; or
  • GBP 1,000 per year (if costs exceed 2% of the turnover)

Generally, for administering and discharge of VAT levies, the location of the supplier or the service provider is considered as the place of supply of goods or services, respectively. However, effective 1 January 2015, new place of supply rules for electronically supplied services (digital services), telecommunications and broadcasting services to consumers located in the EU Member States will be applicable. As per this rule, electronically supplied services, telecommunications and broadcasting services will, in general, be taxable at the customer’s location irrespective whether the customer is a taxable person (B2B) or a consumer (B2C). Simultaneously, taxpayers will have the possibility to opt for the use of the Mini One Stop Shop (MOSS) for these supplies of services in order to minimize their tax compliance burden.

Registration Threshold

Supply of goods by taxable persons made in the UK is generally chargeable to VAT, where the taxable turnover exceeds the registration threshold (which applies where the turnover of taxable goods and services supplies within the UK for the previous 12 months exceeds GBP82,000, or is expected to exceed GBP82,000 in the next 30 days).  Taxable persons include individuals, partnerships, companies, clubs, associations, charities, organisations or group of people acting together under a particular name, a trust or a local authority. Effective 20 October, 2014, UK notified the VAT MOSS, an optional online service, for supply for certain specified services to customers in EU Member States. The scheme allows the taxpayer to obtain a single registration in any one Member State, as against the requirement to have registration in every Member State where the services are supplied. The MOSS scheme is discussed in detail below.

Mini One Stop Shop (MOSS) Scheme

MOSS is an optional online service provided to taxpayers who provide electronically supplied, telecommunication and broadcasting services to consumers in EU Member States. Under the scheme, opportunity is given to the taxpayer to register in one EU Member State (referred to as the Member State of Identification) and declare all supplies covered by the special scheme and pay the VAT due on these supplies. If a taxpayer exercises the option for MOSS, there is no obligation to register, file tax returns and issue VAT payments in each Member States where electronically supplied services, telecommunications and broadcasting services are carried out.

VAT due for supplies covered by the MOSS is paid via the Member State of identification. Payments have to be made to a special account designated for the MOSS supplies. Payments are linked to the underlying VAT returns, and has to be made when submitting the return, or at the latest by the 20th day of the month following the return period.

Note that, input taxes cannot be deducted by using MOSS. Input deduction has to be effected through the VAT refund mechanism.      

A taxpayer using the MOSS can opt out of the scheme, regardless of whether it continues to supply services which are eligible for the special scheme, by providing a prior notice of at least 15 days before the end of the calendar quarter, to the Member State of Identification. Once opted out, the taxpayer will be excluded from using the MOSS in any Member State for two calendar quarters (quarantine period).

Simplication measures introduced by UK

The UK has introduced additional measures to reduce the impact of the changes for smaller businesses.  These measures are:

  • HMRC allows UK businesses that are below the UK VAT registration threshold and registered for VAT MOSS to base their customer location decisions based solely on the information provided to them by their payment service provider. This simplification measure was introduced in response to feedback from small businesses that said that they found it difficult to obtain 2 pieces of evidence. HMRC recognises that some small businesses have still found this difficult, so the requirements have been simplified further to allow small businesses to make a judgement on customer location based on a single piece of information.
  • There is no registration threshold on cross border supplies of services and businesses of all sizes fall within the scope of the changes. However, this only applies where supplies are made in the course or furtherance of a business. If activity is carried out as a hobby (i.e. only on a minimal and occasional basis), HMRC does not normally see this as a business activity for VAT purposes.
  • Businesses that fall under the current VAT registration threshold of £82,000 may register to use VAT MOSS for their cross border sales. These businesses can still benefit from the UK’s domestic VAT registration threshold and do not have to account for VAT on supplies to UK consumers.