Major VAT changes are being introduced by the EU on 1 July 2021, just six months after the end of the UK’s transitional deal. The UK is classed as a ‘third country’ as far as the EU is concerned with effect from 1 January 2021. Neil Warren provides guidance on the key changes that will take place.
The changes being introduced on 1 July 2021 do not amend any of the place of supply rules. For example, if a service provided by a non-EU business is subject to VAT in a particular member state under existing place of supply rules, that will continue to be the case from this date. The changes only affect the way that VAT can be declared and paid to the tax authorities.
The changes means that goods arriving in an EU country from GB are always classed as imports rather than arrivals and a lot of the July 2021 changes relate to imports (such as the import one stop shop (IOSS) scheme). However, the changes also affect non-EU suppliers of business-to-consumer (B2C) services, in situations where VAT is payable in a member state. The mini one stop shop (MOSS) scheme is extended to become the one stop shop (OSS) scheme.
EU member states – are the countries within the EU where these VAT rules apply. These are Belgium, Bulgaria, Czechia, Denmark, Germany, Estonia, Ireland, Greece, Spain, France, Croatia, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Hungary, Malta, Netherlands, Austria, Poland, Portugal, Romania, Slovenia, Slovakia, Finland and Sweden.
This TAXguide has been written by Neil Warren and edited by Philippa Vishnyakov.
As the UK is mainly a service-based economy, it is important that advisers and clients are clear about the changes taking place for services from 1 July 2021 – the changes should produce simpler VAT reporting procedures. The main benefit is that only one quarterly VAT return will need to be submitted to cover all B2C supplies made in the EU, rather than a separate VAT registration and return being needed in many different countries.
This will be achieved by extending the principles of the Mini One Stop Shop (MOSS) reporting system from only broadcasting, telecommunication and electronic services (BTE) services to all B2C services taking place in member states where the supplier is not established.
The VAT return submitted for services will be known as an OSS return and for non-EU businesses, the scheme will be the OSS non-Union scheme.
The OSS system only applies to B2C sales – the procedures for declaring and paying VAT on business-to-business (B2B) supplies are unchanged.
If your clients make any of the following supplies of B2C services in an EU country, they will be affected by the new procedures (note – the list is not exhaustive):
- accommodation services carried out by non-established taxable persons (eg, Airbnb income for a property in a member state);
- admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events, such as fairs and exhibitions;
- transport services;
- services of valuation and work on movable tangible property;
- ancillary transport services such as loading, unloading, handling or similar activities;
- services connected to immovable property (eg, building or plumbing work) or professional services relevant to the construction industry (eg, surveyors, architects, estate agents);
- hiring of means of transport;
- supply of restaurant and catering services for consumption on board ships, aircraft or trains etc
The general B2C rule for most services is that they are taxed in the supplier’s country. The above services are not subject to this general B2C rule – the place of supply instead being where they actually take place. A good reference point for what is known in UK VAT law as ‘performance services’ is VAT Notice 741A, section 9 . Land services are considered in VAT Notice 741A, section 7 .
Jane is a UK based opera singer who will perform at three birthday parties of private individuals in France, Ireland and Germany. All concerts take place in August 2021.
The place of supply for Jane’s B2C services is where she is singing – her services are classed as ‘entertainment’ in the list above. She will therefore have to charge the birthday hosts French, Irish and German VAT on her fees and pay this tax to the authorities in each country. Until 30 June 2021, she can only do this by having separate VAT registrations in each country but from 1 July 2021, she can register for the OSS non-Union scheme in an EU country of her choice, and submit quarterly returns online to the tax authorities in that country to declare the VAT charged on her services.
From 1 July 2021, businesses not established in the EU that supply services to non-taxable persons (consumers) in the EU, will not need to register for VAT in each member state in which they supply services. The VAT can instead be paid in one member state (described as the member state of identification) via the OSS non-Union scheme. This is a big saving of time and administration. It also means that a UK business can choose an EU country for the OSS registration that uses English as a primary language (eg, Ireland, Malta, Netherlands). Overall, the OSS scheme is a simplified procedure to declare and pay VAT.
Steve is based in the UK and he owns separate holiday apartments in France, Germany and Italy, which are rented out for short term holiday lettings (ie, the income is subject to local VAT under the place of supply rules). He is registered for VAT in each country, submitting monthly or quarterly VAT returns to each tax authority. However, he can deregister in each country on 30 June 2021, and instead register for the OSS non-Union scheme. He does not need to choose one of these three countries for his OSS registration – it makes sense to register with a member state where English is commonly used (eg, Ireland, Malta, Netherlands).
Note: don’t forget that a UK business cannot use any local VAT registration threshold that might apply in another EU country. A zero-registration threshold applies to supplies made in that country. In other words, a UK business benefits from the £85,000 registration threshold in the UK but not the threshold in any other member state.
Mike is based in the UK and registered for VAT. He has agreed to travel to Ireland and give a tax update course for a firm of accountants. He will invoice the firm that is based in Ireland. The OSS non-Union scheme is irrelevant here because this a B2B supply of services. The Irish VAT will be dealt with by the accountancy firm doing the reverse charge on its Irish VAT return, based on the Irish rate of VAT. In other words, there is no need for Mike to register for VAT in Ireland.
If Mike pays Irish VAT on any expenses he incurs, this will be claimed by making a 13th Directive claim directly to the Irish tax authorities from 1 January 2021.
As the examples show, the OSS non-Union scheme simplifies the VAT obligations for non-EU businesses selling services in the EU. The OSS allows them:
- To register for VAT electronically in a single member state of their choice for all of the eligible services they provide to B2C customers located in all member states;
- To declare in a single quarterly electronic OSS return the VAT collected on all sales in a particular period;
- To make a single payment of the VAT to the same member state where the return is submitted;
- To only have to liaise with one member state, the one in which they are registered for the OSS and, most importantly, in one language.
The practical issues of the OSS non-Union scheme, such as registration and deregistration, VAT returns, corrections, payment of VAT etc, will be fully explained in the European Commission (EC) Guide to the VAT OSS (under preparation at the time of writing). Practical guidance is given in the EC’s Explanatory Notes on VAT e-commerce rules.
The OSS is an extension of the MOSS scheme – it is not separate. So, for example, a UK business that has a range of B2C supplies of services will declare and pay all VAT on a single OSS return from 1 July 2021.
Jane the opera singer also sells downloads of her music to private customers throughout the EU. The music downloads are classed as an ‘electronic’ B2C service – VAT is payable at the rate that applies in the customer’s country. Her live concerts for private individuals in EU countries are a ‘performance’ B2C service, taxable where she performs. The VAT on both activities can be declared on the same OSS return from July 2021.
Note: a non-EU business does not get a threshold such that it can charge the VAT rate that applies in its own country for BTE B2C supplies up to a certain level of sales. The threshold is zero (ie, Jane must charge the VAT rate that applies in her customer’s country, even if she sells only one music download).
Some EU countries require a tax representative to be appointed in cases where non-EU suppliers register for VAT in their country. The tax representative acts as the liaison with the tax authority on behalf of the business and is also jointly and severally liable for any VAT debts. However, member states may not oblige non-EU suppliers to appoint a tax representative in order to use the OSS non-Union scheme.
It is possible that some UK businesses might have dual activities in the EU, where they can pay some VAT via the single OSS return but must still register for VAT in a particular EU country. As with many VAT issues, it is a case of considering the VAT treatment on a transaction by transaction basis.
Builder Bob is based in the UK – he has two activities:
- He rents a warehouse in Germany and holds a stock of building materials there, which he sells on a wholesale basis to German builders (B2B).
- He carries out roofing repairs for private homeowners living in Ireland, Hungary and Germany (B2C).
All of Bob’s income is subject to local VAT under the place of supply rules – the place of supply for land services is where the property is located. He must be VAT registered in Germany because he is making B2B supplies of goods in that country. However, he could choose any EU country to pay over the local VAT on the roofing work on an OSS return because these sales are B2C.
Note: if Bob pays local VAT on expenses relevant to the roofing work in Ireland and Hungary, he will need to submit a 13th Directive claim directly to the tax authority of the country where the VAT was paid in order to reclaim this tax. But he can claim German input tax on his German VAT returns for all costs incurred in Germany (ie, both for his sales of goods and services).
Bob cannot choose to declare the VAT on his German roofing work on his German VAT return – it must be declared on the OSS returns. If Bob chooses not to register for OSS, he must obtain separate VAT registrations in Hungary and Ireland, as well as Germany.
For businesses based inside the EU, from 1 July 2021 the OSS Union scheme can also be used to declare VAT paid on distance sales of goods between different countries – B2C sales only. However, it is possible that a non-EU business might own goods that are stored in one EU country and sold to customers (B2C) in other EU countries. In such cases, the non-EU business can register for the OSS Union scheme, choosing the country where the goods are held as its member state of identification.
Mike is resident in the UK and organises concerts in Hungary and Italy. He also owns a stock of promotional shirts in France, which are sold to customers throughout the EU via his website – all sales are B2C and VAT will be payable based on the rate that applies in the customer’s country under the distance selling rules. Mike can register for the OSS non-Union scheme to pay VAT on his sales of concert tickets, choosing any member state he wants as his member state of identification. But he must register for the Union scheme to pay the VAT on his distance sales of goods he owns in France.
Note: Mike is not entitled to the annual distance selling threshold of 10,000 Euros that would apply if he were based in the EU (ie, where he could charge French VAT on his shirt sales up to this limit on a calendar year basis). A zero threshold applies for a non-EU based business.
Mike from Example 6 only sells his goods held in France via an online marketplace (OMP). In this situation, he is deemed to be selling goods to the OMP, which makes onward supplies to customers in France and other EU member states. He must register for VAT in France where he holds the stock of goods – his supplies to the OMP are then “exempt from VAT with the right of deduction” (zero-rated). The OMP becomes the deemed supplier and is liable to collect VAT from the final customers. The OMP can use the Union scheme to declare and pay the VAT due.
The role of an OMP (or ‘electronic interface’) is covered in more detail in para 2.2 below.
From 1 January 2021, all goods arriving into an EU country from GB will be subject to VAT and customs duty. The exceptions are if the goods have a shipment value of less than 22 Euros, when there is no VAT to pay, and if the goods have value less than 150 Euros when there is no duty to pay. The VAT threshold will be abolished from 1 July 2021 leaving only the duty threshold of 150 Euros, so VAT will be payable on all shipments.
The VAT and duty are payable by the importer which, in many cases, will be the buyer in that country. However, the EU will introduce new procedures from 1 July 2021, the aim being to prevent non-EU businesses being able to sell ‘VAT free’ goods to consumers in EU countries (eg, by posting the goods directly to the customer without charging or considering VAT). The onus to pay the VAT will be on the non-EU supplier or, in cases where goods are sold through an OMP, by the OMP itself. The VAT on many sales (see below for criteria) can be declared and paid to the EU tax authorities by using the IOSS scheme.
If an importer of goods into the EU does not use the IOSS scheme, VAT will be payable to the tax authorities when the goods arrive in the country. They will not be released into free circulation until payment has been made, usually by the final customer. An extra charge for a customs clearance fee will often be payable as well.
The IOSS scheme will apply from 1 July 2021 in the following circumstances.
- Goods enter the EU from third countries or third territories (eg, the Canary Islands are classed as a third territory; GB is a third country from 1 January 2021 but Northern Ireland needs to be considered separately).
- The shipment value of the goods is less than 150 Euros excluding VAT – approx. £135.
- The scheme cannot be used if a shipment includes any goods that are subject to EU harmonised excise duties – typically alcohol or tobacco products.
- The goods are being sold to private consumers in the EU (ie, B2C sales, defined as customers without a VAT registration number in that country).
- The goods are either being sold directly by the non-EU supplier or through an OMP.
- Sales VAT will be charged rather than import VAT.
- The VAT collected from customers is paid to the tax authorities by the submission of a single monthly IOSS return to the member state of registration chosen by the supplier.
The IOSS is not mandatory but it enables a non-EU business to import low value goods into the EU which are free from import VAT. In effect, sales VAT is being charged to the final customer rather than import VAT – the customer therefore has certainty about the amount of VAT he owes on a deal because it will be paid when he orders the goods. With many transactions (considered below), the OMP will be classed as the “deemed supplier” of the goods and liable to pay the VAT on the supply to the final customer.
Goods start in GB and are sold to a private customer in France through an OMP. The value of the shipment is less than 150 Euros. The OMP will account for the VAT on the sale, which will be based on the rate of VAT that applies to the goods in question under French VAT law, and the final selling price to the customer. If the goods have a shipment value exceeding 150 Euros, then no VAT is payable by the OMP and import VAT must be paid when the goods arrive in France.
The concession that imports of low value consignments costing 22 Euros or less are not subject to VAT will be abolished from 1 July 2021 (ie, all goods imported into the EU will be subject to VAT). No customs duty will be payable if the shipment value is less than 150 Euros excluding VAT but a customs declaration will still be needed. The 150 Euros threshold excludes alcohol, tobacco and perfume. The aim of the changes is to create a level playing field so that the same VAT is paid on imported goods as on domestic supplies within the EU. Note: the 150 Euros calculation excludes transport costs if they are shown separately on the sales invoice.
Price of goods on commercial invoice = 140 Euros
VAT at 20% = 28 Euros
Total price = 168 Euros
IOSS can be used as the VAT exclusive price of the goods is less than 150 Euros.
Price of goods on commercial invoice = 140 Euros
Transport charges = 20 Euros
VAT at 20% = 32 Euros.
As transport costs are shown separately, the relevant figure is 140 Euros (ie, less than 150 Euros), so IOSS can be used.
The tax authorities consider that OMPs are often better placed to declare and pay the VAT on imported supplies of low value goods than the owner of the goods that is based in a non-EU country – also on goods that are already stored in an EU country but owned by a non-EU supplier. The OMP will therefore be a deemed supplier for the following sales made via its electronic interface:
- Low value goods – imported into the EU for a B2C customer in the EU, with a shipment value that does not exceed 150 Euros. The goods could be owned by an EU/non-EU seller;
- All values of goods – where they have already been released into free circulation in the EU, and are sold to customers in the EU – but the goods are owned by a non-EU supplier (see para 1.5 above).
The EU guidance refers to a “deemed supplier” as an OMP that is involved in the terms and conditions of a deal; links suppliers and customers; has involvement in the ordering/delivery process. It will normally be clear whether an OMP is involved and acting as a deemed supplier. The reference to an involvement in ordering/delivery is not limited to the physical delivery of the goods but also refers to situations where the OMP can in any way influence the delivery of goods.
The OMP will not be responsible for VAT in the following situations:
- High value goods – exceeding 150 Euros which are imported into the EU;
- All values of goods – where they have already been released into free circulation in the EU, and are sold to customers in the EU – but the goods are owned by an EU-based supplier.
In situations where the OMP is responsible for the VAT, there are two different supplies taking place: the owner of the goods (referred to in the guidance as the ‘underlying supplier’) makes a B2B sale to the OMP; the OMP sells the goods to the final B2C customer. If a non-EU supplier only makes sales of low value goods to EU customers via an OMP, it will not need to register for the IOSS. In such cases, the OMP fulfils all of the VAT obligations regarding the sales in question.
Alan is VAT registered in GB – he sells print cartridges through an OMP and has received an order for a cartridge costing £90 including VAT from a private individual in France. The order date is after 1 July 2021. The French VAT rate on cartridges is 20% – Alan will invoice the OMP for £75 (a B2B sale) and the OMP will receive £90 from the customer and declare £15 VAT on its IOSS return.
Alan in this example might make some sales of goods into the EU via his own website and other sales through the site of an OMP. In such cases, the sales from Alan’s website will be declared through his own IOSS registration but not those of the OMP, which will be declared on their IOSS returns. If Alan does not register for IOSS, he cannot use the OMP’s registration number for these sales – VAT will instead be payable by the customer when they are imported into the EU – this could delay the delivery of the goods.
- Alan is the underlying supplier and makes a deemed B2B supply to the OMP.
- The OMP makes a deemed B2C supply to the final EU customer. The OMP is treated as the actual supplier of the goods, (ie, it has purchased them from Alan and sold them onwards to the final customer).
- The deemed B2B supply by Alan is zero-rated – described in EU VAT-speak as “exempt from VAT with the right of deduction”.
Each transaction needs to be considered in its own right. For example, the OMP will be responsible for VAT on shipments into the EU with a shipment value of less than 150 Euros (deemed supplier) but not for goods already in free circulation in the EU that are owned by an EU based supplier.
The EU VAT Directive does not require VAT invoices to be issued for B2C supplies, which extends to B2C deemed supplies as considered in the above example. However, member states may impose an obligation for invoices to be issued for VAT purposes for these supplies – and the customs authorities may require supporting documents for customs clearance which cover typically a commercial invoice. There is also no obligation for the non-EU seller to issue an invoice but a commercial invoice will be needed for customs clearance purposes.
Records need to be kept for 10 years if a business is registered for the IOSS, in case there is a possible audit by the EU tax authorities.
A non-EU business can choose any EU country to register for the IOSS. For a GB business, it makes sense for this country to be one where English is commonly used (eg, Malta, Ireland, perhaps the Netherlands). The chosen country is known as the member state of identification. Assuming that the UK is accepted by the EU as a country with a “VAT mutual assistance agreement”, there will be no need to appoint a tax representative based in the member state of identification (ie, the supplier can directly register for the IOSS).
The non-EU supplier will be issued with an IOSS VAT identification number (with twelve alpha-numeric characters), which will be provided to customs authorities as part of the customs declaration to release goods for free circulation into the EU, (ie, those goods which qualify for exemption from import VAT). The number can be used for imports into all EU countries. If the VAT is being paid by an OMP rather than the supplier, the identification number of the OMP will be recorded on the customs documentation. The identification number should only be disclosed to parties involved in the supply of goods chain.
IOSS returns will be submitted and VAT paid monthly – the deadline date for both is the end of the following month. The returns will record the total value of goods sold, the total VAT payable and the rate(s) of VAT, for each member state where sales have been made for the period in question.
The return for July 2021 must be submitted and paid by the end of August 2021.
Here are the main situations when a GB business will register for the non-Union OSS scheme compared to the IOSS scheme:
- a) Non-Union OSS scheme – performance B2C services where the place of supply is where it takes place (eg, the place of supply for a singer performing in Italy is Italy, irrespective of where the singer is based); sales of BTE B2C services where the place of supply is where the customer receiving the service is resident; supplies by a non-EU supplier from a stock of goods held in an EU country, which are sold B2C to customers in other EU countries.
- b) IOSS scheme – imports into the EU from a non-EU country – the goods qualifying for the scheme must have a shipment value that does not exceed 150 Euros, and it can only be used for B2C sales.
Once the non-EU supplier has registered for the IOSS, a typical transaction will proceed as follows.
- Ordering of goods – usually from a seller’s website – the shipment value is less than 150 Euros excluding VAT.
- Acceptance of customer payment including VAT – the VAT rate is based on that which applies to the goods in question in the EU country where they are being delivered. The payment date becomes the time of supply for the purpose of the IOSS return. The VAT amount should be shown on either the VAT invoice (if issued) or commercial invoice sent with the goods for customs clearance.
- Shipment to EU – goods enter EU from a non-EU country.
- Customs import declaration – either by supplier or OMP – or postal operator/express carrier shipping the goods.
- Customs checks – IOSS number will be checked, goods value etc.
- Delivery to customer – no VAT is payable by customer – already paid at order stage.
- Monthly IOSS VAT return and payment – to the relevant tax authority chosen by the non-EU supplier/OMP.
- Record-keeping – the supplier or OMP must keep records of sales for ten years.
In cases of an invalid or missing IOSS VAT identification number, VAT will have to be paid upon importation of the goods into the EU.
Goods arrive in the EU with a value not exceeding 150 Euros, excluding VAT:
- IOSS registration
- Charge VAT to customer
- EU import of goods – VAT exempt
- Declare and pay VAT
It is possible that many UK suppliers of B2C services currently have VAT registrations in EU countries, in order to pay VAT due on supplies made in that country – see para 1.1. From 1 July 2021, the business can deregister from local VAT and instead register with the OSS non-Union scheme and pay the VAT on a single quarterly return, submitted to the tax authority that the business has chosen as its member state of registration.
Builder Bob is based in the UK and carries out bricklaying work B2C for customers in Ireland, Poland and Denmark, so has local VAT registrations in each country. The place of supply for builder services is where the property or building is based. From 1 July 2021, Bob can deregister in each of these countries and pay VAT by registering for the OSS non-Union scheme instead. He can choose any member state to register, although it would make sense to register in Ireland, where he already trades and which is an English-speaking country.
Note: the main disadvantage of deregistering is that Bob would lose the opportunity to claim input tax on the VAT returns submitted in that country. He will instead have to claim VAT paid on his expenses under the 13th Directive refund system (ie, by submitting a paper claim directly to the tax authorities of the country where the VAT was paid). This claim usually has to be made in the language of the country in question (eg, a claim to Poland must be submitted in Polish). Some member states have a poor record with the payment of these claims.
Bob cannot pick and choose in this situation – he must either declare all of his sales with local VAT registrations, or with the OSS non-Union scheme. He could not, for example, declare VAT on his Polish and Danish sales on an OSS return but keep the Irish VAT number for his Irish sales.
Until 31 December 2020, many UK businesses had to register for VAT in other EU countries under the distance selling rules. This registration was necessary when B2C sales of goods into an EU country exceeded either 35,000 or 100,000 Euros on a calendar year basis – each country could choose one of these two limits. The UK business would register for VAT in that country and charge local VAT on all of its future B2C sales. In some situations, larger businesses would need a VAT registration in all member states.
However, the distance selling rules no longer apply to UK businesses from the end of the transition period on 31 December 2020; the exception is for Northern Ireland based businesses, which have separate rules as a result of the Northern Ireland Protocol. After that date, all goods sold by a GB business to an EU customer become imports into that EU country, rather than distance sales, (ie, subject to VAT and duty on arrival). So, in practical terms, many GB businesses would deregister from local VAT on 31 December 2020.
The introduction of the IOSS on 1 July 2021 should not therefore create any new opportunities for a GB based business to deregister from VAT in member states if it imports goods from GB directly to a B2C customer in an EU country. However, a GB business might still need local VAT registrations in some member states (eg, if it holds a stock of goods there to meet future orders).