New digital download tax rules - be prepared by Steve Hodgetts, Head of VAT, Baker Tilly on 03-Jul-2014

With just six months to go before in the introduction of new rules regarding the taxation of digital downloads such as music, apps, e-books and software, Steve Hodgetts, Head of VAT at Baker Tilly is warning that many businesses may be unprepared and risk facing penalties.

From 1 January 2015, supplies of telecommunication, broadcast, media and content will become taxable in the country of the customer, rather than the country of origin, meaning that businesses will need to observe local tax rules.

Affected businesses will include those selling apps (including smartphone games), e-books, streaming services (of sports / film / TV / music), radio broadcasting, dating services and journals, newspapers and magazines that are subscribed to electronically.

While this is likely to lead to price rises for some UK consumers, businesses also need to ensure they are prepared. Failure to do so could damage profits through an inappropriate pricing strategy, have a potentially harmful impact upon the customer buying experience and lead to financial penalties and interest for non-compliance or late registration.

To be prepared for 2015, businesses will need to:

• Assess whether there is sufficient VAT knowledge in the business to handle the resulting VAT compliance across a number of jurisdictions and whether the IT systems and business infrastructure will adequately capture, record and declare the appropriate information.
• Consider how best and most efficiently to collect and record data concerning customers' locations without adversely affecting their purchasing experience.
• Have a clear pricing strategy in place. VAT rates for electronic services vary significantly throughout the EU - from 3% in Luxembourg to 27% in Hungary - and if these increase, it will erode profit margins.
• Consider the legal arrangements that the business has with suppliers and customers to ensure that the responsibility for dealing with tax and compliance issues is clearly defined.
• Consider registering with HMRC's VAT Mini One Stop Shop – an online service which will enable UK businesses to avoid having to register for VAT in every EU Member State where they have customers.

While some businesses have grasped the importance of these changes and put processes in place to ensure they are ready, others may well still be unprepared. With only six months to go before the new rules come into force, many will need to take urgent action to ensure they are not penalised for late registration or non-compliance in either the UK, or European Member State of the customer.

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