What technology and media businesses in the B2C sector need to know about VAT

Many technology and media firms have significant B2C markets that they are operating in. Whether it is selling an app (maybe via one of the multitudes of online marketplaces led by the Apple store and Google play) to distributing via their own website, it’s a growing area of revenue generation for many businesses.

This has been a particular trend over the lockdown period, with many businesses venturing into the online world whereas before they had been operating on a 1-2-1 physical basis. For example, exercise classes previously held in a gym have moved swiftly online with either live or on demand sessions taking their place. Many businesses have adopted a subscription model for these services, helping them generate steady income streams.

Taxation at the place of consumption

This innovation has undoubtedly helped businesses expand, the ability to use digital marketplaces opening up global customer bases. This does though bring a need to understand new tax regimes which is very true for VAT with there being an on-going adoption by countries of the OECD’s guidelines to have B2C intangible services taxed at the place of consumption. The consequence for businesses is a need to understand VAT rules across multiple territories which can result in significant extra costs if not managed correctly.

Countries to have adopted these rules so far include the EU, UK, Iceland, Switzerland, New Zealand, Australia, South Africa and Japan with many more making plans to implement similar operations. Being compliant with these rules can be fraught though as each country has its own different rules to follow which dictate how the VAT is collected.

For example, in the EU is it possible to sign up for the one stop shop (OSS) which allows you to declare and submit the VAT due across the whole EU in one single return. In other countries though, individual registrations will be required and often there will be no sales threshold to exceed before having to account for that local VAT. There might also be circumstances where a marketplace has to account for the tax, reliving the supplier of obligations it might also have had.

How Crowe can help

We’ve helped a number of clients both understand their VAT obligations and also manage situations where they needed to bring their compliance position up-to-date.

One client we have recently assisted is involved with selling subscriptions to an online game. It is free to download the game (via an app or PC download) but income is generated from selling tokens, which allow progress through the game. Sales are made via both its own website and also the apple store.

When we started helping our client they had been accounting for UK VAT on all the income they had generated for the past two years via all platforms. As you will have gathered from the above, this wasn’t the correct approach and so we assisted the client by doing the following:

• understanding the VAT rules applicable to their income – was VAT due where they were located or where the customer was located?
• who had the obligation to account for that VAT? This varied between the client in some countries, but the marketplaces in others
• how to account for the VAT. Some countries had simplified registrations in place which made the position much simpler compared to some other locations
• what rate of VAT applied, with it being different in every different country
• declaring VAT due in the past which had not been accounted for correctly, including mitigation of penalties where possible
• making a claim to HMRC for UK VAT over declared incorrectly in the past.

Our client now understands their position and has been able to ensure that VAT is being accounted for properly. As a result, they have also looked to change some of their pricing so as to consider the different VAT rates in play. The client has also updated its terms and conditions for the sales they make.

For any clients making these supplies, knowing their VAT obligations is critical to ensure that they account for the right amount in the right place at the right time. As it’s a tax on transactions, not getting this right can have significant impacts and hence it should be focussed on whether you are a small start-up or established business. This is especially true given the constant change in rules we are seeing across the globe.

If you want to discuss any of the issues above, please get in touch with Rob Janering or your usual Crowe contact.