Clause 97 - VAT: special schemes

Finance Bill – in a Public Bill Committee at 2:30 pm on 10 June 2014.

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Question proposed, That the clause stand part of the Bill.

Photo of Gary Streeter Gary Streeter Conservative, South West Devon

With this it will be convenient to consider the following:

Clauses 98 to 100 stand part.

That schedule 18 be the Eighteenth schedule to the Bill.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

It is a pleasure to serve under your chairmanship, Mr Streeter.

Clause 97 will change where VAT is charged as part of the final stage of the 2008 European agreement on changes to the VAT place of supply of services rules. I will come to its details shortly, as it is the main event, as it were, among the measures in the group, because clauses 98 to 100 are effectively supporting technical clauses.

At the moment, the Value Added Tax Act 1994 treats bodies corporate that are not in business as belonging in the country in which they are legally constituted. Clause 98 will change the place of belonging to the place of establishment, which is usually the principal place of business or head office, rather than where the business is legally constituted. The clause also introduces an explicit reference to “permanent address”.

Clause 99 will allow

“section 97A of VATA 1994…to be ignored…in relation to supplies made on or after 1 January 2015”.

In line with clause 97, it makes provision

“about the place of supply of electronically supplied services, telecommunication services and radio and television broadcasting services.”

Clause 100 disapplies the UK’s exemption from article 28 of the principal VAT directive of 2006 for telecommunication and electronically supplied services. The exemption currently allows the UK to see supplies through agents acting in their own name as though they were made by the agent.

The background to the clauses is that changes will be made on 1 January 2015 to the European Union VAT rules on place of supply of services involving business-to- consumer supplies of broadcasting, telecommunications and e-services—BTE. Those changes are being introduced as part of the final stage of the 2008 European agreement on changes to the VAT place of supply of services rules. As to what is covered by BTE, broadcasting relates to radio or TV programmes delivered over a TV network or the internet. Telecommunications refers to fixed or mobile telephone services for voice or data, and voice over internet protocol—delivering voice and communications services online. E-services relates to electronic services that are paid for and delivered over the internet, that are essentially automated, and that cannot be provided without IT. Such services include downloaded screensavers, films and games, traffic reports, digital newspapers and software upgrades, and website hosting, firewalls and online data warehousing.

At present, BTE supplies are taxed where the supplier is based. The changes will mean that, from 1 January 2015, the place of taxation will be where the customer is based. That significant change requires suppliers to keep track of additional information about the countries in which VAT will be due. To save suppliers from having to register for VAT in every single EU member state, a VAT mini one-stop shop online service has been established, which will allow the EU supplier of e-services to elect to register with the VAT authority of their country of identification and file a single VAT return detailing the supplies made to consumers in other member states, and to pay the tax in a single payment to the state of identification.

That is an extension of the scheme that was introduced for non-EU businesses in 2003 to file a single VAT return in the member state of identification, and to submit a single VAT return accounting for all VAT in all member states of consumption. The tax authority in the state of identification will be responsible for redistributing the VAT to the member state of the customer, which should relieve businesses of the burden of filing multiple VAT registrations and making multiple payments.

The system will go live on 1 January 2015, but suppliers can register to use it from October 2014. EU businesses can register to use the Union VAT MOSS online service in the member state in which the business establishment is based, which is usually the principal place of business or head office. The VAT MOSS online service is the collective name for two schemes. I have mentioned the Union scheme, but there is also a non-Union scheme for suppliers that are not established in the EU. They can register in the member state of their choosing to account for the VAT on all their BTE supplies within the EU on one MOSS VAT return.

There is a useful example on the HMRC website that shows what happens if someone registers for the VAT MOSS online service in the UK. People will be able to account for the VAT due on all their business-to-consumer BTE sales in any member state by submitting a single VAT MOSS return and any related payment to HMRC. HMRC will then send an electronic copy of the appropriate part of the VAT MOSS return and the related VAT payment to each relevant member state’s tax authority  on their behalf. The VAT rate used will be that of each member state of consumption at the time the service was supplied. The HMRC website also helpfully sets out clarification about how individual businesses are to decide where customers are based.

Concern has been raised about the proposals, primarily by the Institute of Chartered Accountants in England and Wales, which notes:

“The principle behind the changes is to provide a level playing field for service providers.”

It says that, at the moment,

“it is possible…for a service provider to provide services to consumers across the EU but be based in an EU country with a low VAT rate that is charged to all consumers, enabling them to undercut service providers in the other EU country who must charge customers the local higher VAT rate.”

Although the ICAEW supports the proposals in principle, it is concerned that the price of the level playing field could lead to the creation of

“considerably more complexity and administrative burdens that could discourage intra-EU trade and the efficient operation of the single market.”

It would be helpful if the Minister responded to those concerns, gave his assessment of the proposals, and told us whether he fears that they might have the results that the ICAEW highlights.

The ICAEW also states:

“In addition HMRC has indicated that it intends educational services, such as webinars, to be exempt from these regulations as a service of education provided where the service is hosted. However there remain ongoing discussions at EU level as to exactly what services would be categorised as e-services, and in the absence of clear agreement at EU level there is a danger that different countries will treat similar transactions differently.”

It notes that there is

“a danger that some businesses could find themselves providing services that are subject to double or non-taxation.”

Will the Minister comment on whether such uncertainty may lead to double taxation or non-taxation, and give us his assessment of those concerns? Is he worried that we do not yet have the result of ongoing EU discussions about exactly what services will be classified as e-services? Is there a danger that different countries may end up treating transactions differently?

Will the Minister outline his plans for publicising these changes and the launch of the VAT MOSS online service to minimise non-compliance and confusion for businesses? Clearly the change will require fundamental changes to existing IT systems. Is he confident that the new systems will all be fully functional by 1 January next year? How are the system upgrades progressing to date?

Photo of David Gauke David Gauke The Exchequer Secretary 2:45, 10 June 2014

As we heard, clauses 97 to 100 form part of a package to amend the UK’s VAT system to provide that supplies of broadcasting, telecommunications and electronically supplied services to UK consumers will be taxed in the UK. They also introduce optional accounting schemes, called the mini one-stop shop, that will allow businesses to submit a single return for payment for their EU digital supplies to consumers in all member states where they are not established. The final element of the package will be a statutory instrument, which has already been exposed to consultation and will be introduced  later in the year. Together, the measures will ensure that there is a level playing field for businesses by ensuring that those located in countries with low VAT rates, such as Luxembourg, can no longer undercut UK-based businesses.

The clauses, along with secondary legislation to which I referred, form the final part of a package of VAT changes that was agreed across the European Union in 2008 to align taxation better with the place of consumption. Currently, intra-Community supplies of broadcasting, telecommunications and e-services—known together as digital services—to non-business customers are subject to VAT in the member state where the supplier belongs. From 1 January 2015, that will change to the member state where the customer belongs, which will ensure that UK consumers pay UK VAT no matter where the supplier of the services belongs. The change could increase administration costs for suppliers, as they are potentially liable to register and account for VAT in each member state where they have customers so, as I mentioned, we are introducing an IT system called the mini one-stop shop that gives suppliers the option to register in just one member state. They may then account for the VAT due on supplies of digital services in respect of all their EU customers in the other member states on a single VAT return.

After strong lobbying from the UK, the EU agreed changes to ensure that app stores and other internet portals will normally be responsible for accounting for the VAT on downloads to consumers, which will simplify accounting for many small businesses. We are also changing the place where a non-business legal person belongs for VAT purposes, which will help to ensure that the UK system is consistent with our EU partners preventing some supplies potentially not to be taxed.

The changes made by clauses 97 to 100, along with the secondary legislation, will ensure that digital services are taxed in the place of consumption. The change is expected to result in an additional £300 million of revenue a year. It also removes an incentive for some businesses to consider locating elsewhere in the EU. The change will have an impact on large businesses that provide telecommunication and broadcasting services, and suppliers of electronic marketplaces such as electronic bookstores and app stores. It will affect many small providers of electronic services, such as software developers. We estimate that 34,000 businesses will be affected and the total additional costs of complying with the change will be £2.2 million a year, taking into account the benefits of the mini one-stop shop.

Let me respond to the questions raised by the hon. Member for Birmingham, Ladywood. She asked about an increase in administrative burdens, which I touched on in my earlier remarks. It is worth pointing out that businesses have been invited to contribute to the design and implementation of practicalities arising from the legislative change. The IT system has been designed with help from interested parties in the business community. Simplifications have been agreed by member states to make the process easier for businesses to administer.

In terms of whether this measure makes it more difficult for UK businesses to trade with EU customers and the impact on competition among member states, any potential disadvantage caused by member states’ differing VAT rates will be removed, as all suppliers of digital services will apply the VAT rate appropriate to  their customers’ country. There is no reason to believe that UK suppliers will be at a disadvantage compared with their competitors.

As for whether different countries will treat different services differently, e-services are clearly defined as services requiring little or no human intervention, so there should not be different treatment by different member states. However, we will, of course, continue to keep the matter under review.

On the question of what is being done to publicise the changes, the European Commission has published interim guidance on its website and is holding road shows throughout Europe, one of which has just been held in London. HMRC has published its own guidance and is engaged with stakeholder groups, and with industry and its representatives. HMRC will continue to publish guidance on an ongoing basis, and some information is already on its website.

I can reassure the Committee that the UK system is on course to be delivered on time. The Commission is monitoring developments in each member state and a fall-back system will be available if a member state cannot deliver its system on time. I am reassured—I hope that the Committee will be reassured—that, from the perspective of the UK, everything appears to be on course.

A sense of fairness is relevant to digital services. A number of UK digital businesses have faced difficulty over the years due to competition from businesses based outside the UK, not through providing a better service, but because of their ability to undercut UK businesses due to a lower rate of VAT. A tax at the point of consumption rather than at the point of supply is a sensible approach for digital businesses. It is to be welcomed that the Government are able finally to address that issue in the Bill, and I hope that the clauses will stand part of the Bill.

Question put and agreed to.

Clause 97 accordingly ordered to stand part of the Bill.

Clauses98 to 100 ordered to stand part of the Bill.

Schedule 18 agreed to.