New VAT regulations come into effect in January 2015. Fast becoming known as the “Digital VAT”, for small to medium enterprise (SME) businesses, the VAT regulations mean changes to the pricing aspects of products you sell through the internet.
Sale of Telecoms, Broadcasting and Electronic Services
Giant consulting firm KMPG reveals 62% of small businesses in the UK are not aware of the changes due to come in. From 1 January, 2015, VAT will be charged on telecoms, broadcasting and E-services by the country where the customer is based, and no longer levied from the geographical location of the supplier of the service. Small businesses providing these services, with turnovers of less than 10 million, are largely unaware of the changes, while larger companies are “very much aware”, according to KPMG.
How will the Regulations Affect SME’s?
The VAT change applies to the European VAT rules. In Europe, VAT rates vary from 15 percent to 27 percent (average is 21.54 percent). Once businesses move from charging one rate reflecting the location from which they are making the supply, they will have charge different VAT rates according to where their customers are based. Small businesses need to ensure they put in place systems for complying with the new laws. This will be challenging for many.
Small Business E-Service Suppliers Hit Hard
Early indications are many businesses predict price increases will be needed to cover increased VAT bills. For example, if you think of the E-book marketplace, many are sold through companies based in Luxemborg, where the rate of VAT is charged at 3%. A UK author who sells on a major E-book site, via the self-publishing method, will need to apply a 20% VAT rate from 1 January,2015. Since most E-book publishers are small businesses, this is a direct hit to their profits. This means there has to be price increases from the origin price they set for the E-book platform they use to sell their work, or a price increase set by the platform business service provider.
Customers Will Experience Price Increases
The most notable increase in prices due to VAT compliance procedures is bound to be applied to download products. The E-platform providers, such as Amazon, HMV, ITunes, Google Play, Spotify, etc, are going to have to apply the correct VAT amount to the sale price of each product, instead of basing the whole business in Luxemborg (for example). They are bound to pass on the cost to the consumers, or the suppliers of the E-products.
The news is not all bad. According to KPMG forecasts, the UK Treasury is going to receive £300 million more in revenue from increased VAT receipts. When you consider electronically supplied services include electronic books, apps, video downloads, sat-nav maps, games, software and cloud storage services, the application of VAT on consumption in the UK of paid-for services delivered to consumers over the internet or through other electronic media may actually prove to be a leveller. After all, anyone who sells a product in the UK retail environment, has to apply 20% VAT rate on eligible products.