From 1 January 2015, VAT payable on the supply of digital services (telecommunications, broadcasting and electronic) will be determined by the location of the consumer in all circumstances. This means that VAT on digital services supplied will be paid for in the consumer’s country and charged at the rate applicable in that country.

It is important to note the circumstances in which this actually amounts to a change to the current law. Supplies (including digital supplies) made by a supplier within or outside the European Union (EU) to a business consumer within the EU are already subject to VAT at the rate applicable in the consumer’s country, such VAT being collected through the operation of the reverse charge mechanism by the consumer. Supplies made by non-EU suppliers to individual EU consumers are also currently subject to VAT in the jurisdiction of the consumer. The legal position has changed only in relation to supplies made by an EU business (or fixed establishment) to an individual EU consumer in another state. However, as is discussed below, the procedural position has also altered for non-EU businesses making supplies to individual customers within the EU.

The rationale behind the new rules appears to be twofold. First, it reduces the incentive for EU businesses supplying affected digital services to locate in low-VAT jurisdictions, as the supplier’s location will no longer be the determining factor. Second, it equalises the treatment of EU-based and non-EU-based suppliers, as both will account for VAT at the rate applicable in the member state where a non-business customer is located. It is also noteworthy that the new rules are consistent with the aims of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting initiative.

Administration and MOSS

To mitigate the administrative burden of these rules, from 1 January 2015 suppliers of digital services will be able to make a single payment of VAT in respect to the payments they owe across the EU using a single tax return. This new procedure is known as the mini one stop shop (MOSS). This will replace the special VAT on e-services (VoES) scheme that was formerly available to non-EU businesses in relation to the supply of digital services. Thus, both EU and non-EU businesses can anticipate registering through MOSS. EU businesses may register only in the jurisdiction where they are located or have a fixed establishment. Non-EU businesses may register in any jurisdiction of their choice.

Payments made through MOSS are shared between the member states to which supplies are made, and only the tax authority with which the return is filed will be empowered to raise enquiries in respect of the return, albeit such enquiries may be made on behalf of other member states. What MOSS does not do is to facilitate input tax reclaims. Businesses that are registered in a member state can recover input tax relating to supplies in that state in the ordinary way through their VAT return. Other businesses will need to claim input tax through the electronic cross-border refund scheme. The MOSS return deals only with accounting for VAT output tax charged to consumers.

Technical considerations

Where the only thing being supplied is a digital service, the application of the rules is apparent. However, digital services can be supplied as part of a wider supply (for example, the acquisition of a CD often includes a right to download the tracks). If this is the case, it may be worthwhile to consider whether more than one service is being supplied (multiple supplies) and the VAT treatment of each element of the supply. If only one supply is being made (composite supplies), it may be prudent to look at the predominant supply so that VAT can be addressed correctly. These are factual questions that involve looking at the reality of the transaction.

Supplies of digital services can involve long cross-border supply chains. By way of a simplified example, the supply of a downloadable music track might involve a supply by the artist to an online portal through which individual consumers purchase the songs. In a situation such as this, where a digital service is supplied through a telecommunications network, interface or portal, it may be worthwhile to consider whether for VAT purposes there is one supply (from the artist to the customer) or two supplies (from the artist to the portal and from the portal to the customer). The significance of this is that where the customer is a consumer, if there is one supply, the artist would have to account for VAT in the customer’s location. If there are two supplies, then the portal (as a business) would have to account for VAT in its home jurisdiction on the first supply (through the reverse charge mechanism) and in the customer’s location for the second supply. As a result, the use of a telecommunications network, interface or portal can provide some flexibility as to who is responsible for VAT compliance.

Business action points

Affected businesses should consider registering with MOSS. However, there are further practical issues. EU businesses supplying to consumers should ensure their internal systems can adapt to these changes. VAT being due on digital services in accordance with the rules of the consumers’ member states can result in complex requirements. Although VAT is an EU-wide tax, different countries charge different rates of VAT and have different exemptions. Suppliers would also be required to comply with the invoicing requirements of their customers’ home jurisdictions, which may differ.

It appears essential for businesses to set up their computer systems in such a way that enables compliance. Where the price of digital services varies depending upon the amount of VAT to be charged, the website may need to be set up so that the contract to supply the services requires the customer to pay the VAT element of the purchase price according to the rates in the consumer’s home jurisdiction. Businesses should consider reviewing their accounting systems to ensure that any VAT logic embedded in the systems remains accurate, and as well as their supply agreements to ensure that correct rates are applied.


These changes impact a fast-growing and complex area, and HM Revenue & Customs has expressed concern that there is insufficient awareness of the existence of MOSS. Furthermore, it may be far from apparent whether, in many cases, businesses are actually impacted; guidance in this area may potentially prevent unnecessary administration.