This On The Subject explains how the Mini One Stop Shop (MOSS) system for VAT works and what affected businesses need to do to prepare for Brexit-related changes after the transition period ends.
In summary, unless a suitable trade deal is agreed between now and 31 December 2020, worldwide businesses engaged in cross-border sales of business-to-consumer (B2C) digital services to EU-based consumers on or after 1 January 2021 will no longer be able to register in the UK for administration of EU-wide VAT under the UK’s MOSS system. Such businesses would either need to register for EU-wide VAT in an EU member state under that country’s own equivalent MOSS system, or make separate registrations for local country VAT in the EU countries where their consumers are based.
What is MOSS and how does it work?
MOSS is an EU-wide system that allows eligible suppliers of cross-border B2C digital services to register in just one EU country (including, for now, the UK) to enable the relevant tax authority to collect and administer local VAT due in the EU countries where their consumers are based (such VAT being referred to throughout this note as MOSS VAT). Businesses registered for MOSS VAT are required to include on their MOSS VAT returns the gross sales made to, and applicable VAT rates chargeable in, each of the EU countries in which the B2C digital services are consumed. The relevant tax authority then collects and administers the MOSS VAT on behalf of the tax authorities to whom the MOSS VAT is due and remits the appropriate MOSS VAT amounts to these authorities.
Ordinarily, under UK and EU rules, B2C digital services are treated for VAT purposes as supplied in the country where the non-business customer belongs, unless a de minimis exception applies. EU business consumers of digital services are typically VAT-registered in their home country and are thus able to reverse-charge the applicable VAT. EU non-business consumers, on the other hand, cannot register for VAT in their home country. This means that, absent the MOSS system, a supplier of B2C digital services would have to register for VAT in each and every country in which its non-business consumers are based, which could potentially include all 27 Member States plus the UK. MOSS simplifies this by allowing eligible businesses to register for MOSS VAT in just one of those countries, thus making life significantly easier for those businesses by removing the administrative burden of multiple local VAT registrations.
The UK MOSS system is based on these principles. Like its EU counterparts, the UK operates two MOSS schemes, namely the non-Union Scheme and the Union Scheme. Although the UK legislation implementing both schemes has now been repealed by the Taxation (Cross-Border Trade) Act 2018 due to Brexit, the schemes will continue to operate in the UK for the remainder of the Brexit transition period. Given that the Brexit transition period is almost over, it does not make practical sense at this late stage for businesses to register in the UK for MOSS VAT, since they will no longer be able to do so after that date.
What are B2C digital services?
Under UK rules, ‘B2C digital services’ for these purposes include electronically supplied services, radio and television broadcasting services, and telecommunications services. EU Member states may vary somewhat in their interpretation of these concepts, but all are derived from EU Directive 2006/112/EEC (as are the UK rules), so one would expect the definition of B2C digital services to be broadly consistent and similar in scope across the EU.
‘Electronically supplied services’ for these purposes are defined under UK rules as:
- Website supply, web hosting and distance maintenance of programmes and equipment
- The supply of software and the updating of software
- The supply of images, text and information, and the making available of databases
- The supply of music, films and games (including games of chance and gambling games)
- The supply of political, cultural, artistic, sporting, scientific, educational or entertainment broadcasts (including broadcasts of events)
- The supply of distance teaching
According to HMRC guidance, electronically supplied services broadly covers e-services that are automatically delivered over the internet, or an electronic network, where there is minimal or no human intervention. This is typically where the sale of the digital content is entirely automatic, such as where a consumer clicks the ‘Buy Now’ button on a website and either the content downloads onto the consumer’s device or the consumer gets an auto-generated email containing the content. Electronically supplied services may also include online courses consisting of pre-recorded videos, but do not include live webinars. Merely selling goods or services online or by email does not count as an electronically supplied service for these purposes.
How does the UK MOSS non-Union Scheme work?
Non-UK businesses that sell B2C digital services cross-border to UK- or EU-based consumers may register in the UK for MOSS VAT under the non-Union Scheme until 31 December 2020.
Electronic MOSS VAT returns must be submitted quarterly, within 20 days of the end of the relevant quarter, to HMRC (e.g., by 20 April for the quarter ended 31 March). VAT is due at the rate applicable in each customer’s member state. Once it has collected the applicable VAT, HMRC must then remit the appropriate amount of VAT to the EU member state of the relevant customer (including, for now, the UK). As such, MOSS-registered non-UK businesses may be required to account for up to 28 different amounts of output VAT on the same MOSS VAT return. Equivalent MOSS schemes in EU countries work in a broadly similar way.
The non-Union Scheme does not permit recovery of input tax under the normal UK rules, which allow input VAT to be offset against output VAT on the same UK VAT return. Input tax may be recovered by the submission of a claim in accordance with Directive 86/560/EEC with respect to UK VAT incurred on the cost of goods or services supplied intra-UK to that business, or on the cost of goods imported into the UK, insofar as such goods or services are used by that business to provide B2C digital services. Because the UK will be a ‘third country’ from 1 January 2021, it will no longer be in a position to grant VAT refunds to non-EU businesses under Directive 86/560/EEC, although UK businesses will continue to be able to claim VAT refunds from EU member states under that Directive after that date.
How does the UK MOSS Union Scheme work?
UK businesses that sell B2C digital services cross-border to EU-based consumers may register in the UK for MOSS VAT under the Union Scheme until 31 December 2020.
As with the UK MOSS non-Union scheme, electronic MOSS VAT returns must be submitted quarterly, within 20 days of the end of the relevant quarter, to HMRC. VAT is chargeable at the rate applicable in the customer’s member state, which VAT HMRC then collects and remits to the EU member states of the relevant consumers. As such, MOSS-registered UK businesses may be required to account for up to 27 different amounts of output VAT on the same VAT return. Equivalent MOSS schemes in EU countries work in a broadly similar way.
Again, there is no right to input tax recovery under the normal UK rules. A separate claim for refunds of VAT incurred on related input costs would need to be made under Directive 2008/9/EC. Any refunds of such input tax must be claimed by no later than 31 March 2021 (per Article 51(3) of the Withdrawal Agreement).
What will happen to the UK MOSS system after the end of the Brexit transitional period, and what action should affected businesses take?
Unless a trade deal is agreed between the UK and the EU before the end of the transition period to preserve the UK’s participation in the MOSS system (which at the time of writing seems unlikely), UK businesses currently registered under the UK MOSS system will no longer be able to use the system to submit MOSS VAT returns to HMRC after 1 January 2021, except for sales made during the period ending 31 December 2020, which must be reported to HMRC on a MOSS VAT return by 20 January 2021. Any amendments to such VAT returns must be filed with HMRC by 31 December 2021, and the UK MOSS system will remain open for this purpose. Similarly, businesses with an EU MOSS VAT registration supplying B2C digital services to UK-based non-business consumers must file any amendments to their EU MOSS VAT returns with the appropriate tax authority by that date.
From 1 January 2021 onwards, all eligible businesses, wherever established, will either need to register for MOSS VAT in an EU member state or register for local VAT in each EU member state where its consumers are located. Businesses currently registered under the UK MOSS system should therefore consider de-registering from the UK MOSS system now and re-registering with an EU equivalent. Should they wish to continue using the MOSS system, they will need to register for the appropriate MOSS scheme in an EU member state by the 10th day of the month following the month in which the first (post-1 January 2021) cross-border sale of B2C digital services to an EU customer takes place. For example, if the first sale occurs on 12 January 2021, the business must register in that EU member state by 10 February 2021.