From 1 January 2015, selling digital services to consumers outside Ireland is going to get a lot more complicated for domestic businesses. Anyone in the business of selling services within three defined categories – telecommunications, broadcasting and e-services – is going to have to make some changes to the way they do business with consumers to other EU states. Channel partners with a business to business focus, by contrast, will be completely unaffected.
New EU rules governing VAT, which take effect at the beginning of next year, will significantly change the way VAT is applied, shifting it from the country where the supplier is based to the place where the customer lives. The purpose of the VAT changes is to level the playing field for suppliers by making it more difficult for companies in low VAT countries (Luxembourg for example) to charge lower prices than those based in countries like Ireland where VAT is significantly higher.
But while the aim is laudable for Irish companies, it does generate a lot more complexity. Previously, if an Irish company supplied a digital service to a customer in the UK, for example, it would apply the Irish VAT rate to the overall price. From 1 January 2015, the supplier will need to apply the VAT rate from the customer’s country instead. As you can appreciate, this could create a lot more admin for the supplier, especially if it is providing services across a number of EU countries.
The term ‘digital services’ is quite wide-ranging. While broadcasting is unlikely to be a concern for many channel partners, there may be some issues with telecommunications which includes VoIP. The e-services category, which covers selling content online, may have even broader consequences.
Revenue defines an e-service as “a service that is delivered over the Internet (or an electronic network which is reliant on the Internet or similar network for its provision) and is heavily dependent on information technology for its supply – i.e. the service is essentially automated, involves minimal human intervention and in the absence of information technology does not have viability”.
These include the supply of digitised products (such as software and upgrades to software), providing website hosting and webpage hosting, automated, online and distance maintenance of programmes, remote systems administration, online supply of on-demand disc space, apps, music downloads to computers and mobile phones, book downloads, film downloads and game downloads.
Preparation
So just how prepared are businesses for the change? If the results of a KPMG report in the UK entitled 2015 VAT Changes – Are You Ready? are anything to go by, many smaller businesses could have problems being ready in time for the new VAT regime. The report found 62% of small businesses were unaware of the changes and 31% of businesses with turnover between £50 million and £100 million did not believe they would be ready to comply by 1 January 2015. It also found the changes could lead a significant number of businesses (61% of those in the £50 million to £100 million bracket) to scale back their sales activities by reducing the number of EU countries where they sold the affected products.
The report revealed that over 70% of businesses were contemplating increasing their prices from 1 January by at least 2-3% as a result of the changes, even though nearly two-thirds were concerned customers would reduce their spending if new regime led to price increases. According to KPMG’s calculations, if businesses sought to pass on the additional compliance costs to customers, prices could increase by up to 11% for territories with the highest VAT rates, so those considering minor price changes were likely to end up absorbing the bulk of the price change themselves.
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