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VAT treatment on Electronic Downloads – What you need to know now

An electronic download is comes under the definition of an Information Society Service whose definition is “Any service normally provided for remuneration, at a distance, by means of electronic equipment for the processing (including digital compression) and storage of data, and at the individual request of a recipient of a service.”There are certain rules and regulations, some of which are different to the regulations governing typical goods and services transactions. In order to comply with these rules, and not avoid fines and/or penalties, here is what you should know:

Electronic Commerce Regulations

Electronic Downloads are regulated in Europe by the Electronic Commerce regulations (ECRs) that came into effect in in August 2002 with the purpose of ensuring free movement of ‘information society services’ across the European Community. These regulations cover not only all EU Member States but all countries within the European Economic Area (including Iceland and Norway). The ECRs cover any marketing or selling of goods/services via the internet, email, interactive TV or texting and cover both B2C and B2B transactions. The ECRs stipulate the information that your company is required to provide your customers in all circumstances, including when you supply an information society service, when your contracts are concluded by electronic means and when you send out any commercial communications. The information that you are required to provide is mostly quite simple, such as the full name of your company and your VAT registration number, but for other information your company may be required to have processes in place to deal with them (you need to decide the technical steps that your customer must follow to conclude a contract and make them perfectly clear to all parties involved in the transaction.)

VAT on Electronic Commerce Transactions

The legislation surrounding VAT and electronically supplied services are some of the most complicated around and many will need to be reviewed on a case-by-case basis. Generally an electronically supplied service supplied in an EU Member State is taxable at the standard rate established by a Member State, unless an exempting provision in a Member State applies.

1. Supply to UK customer

Where a supply is made to a UK customer, the place of supply will be the UK. As a result, UK VAT will be chargeable at the current standard rate of 20% on these sales. This applies whether the customer is a business or private individual.

2. Supply to overseas customer

Where a supply is made to a company that is based outside of the UK, the treatment will depend on whether the customer is within or outside the EU and also whether the customer is receiving the supply in a business or private capacity.

Supplies to businesses

Under the General Rule for B2B transactions which was introduced in January 2010, the supply to a business in another EU Member State will be outside the scope of UK VAT. The business customer then accounts for the VAT due in their Member State under the reverse charge. Therefore, Incisive Media will not be required to charge VAT where the supply is to a business in another EU Member State. Incisive Media will need to complete an EC Sales List in respect of this transaction and meet the invoicing requirements.

Where the supply is made to a business customer based outside of the EU, this is deemed to be outside of the scope of UK VAT, and as a result, no UK VAT is charged. It is important to note that Incisive Media must be satisfied that the supply is genuinely used outside of the EU (rather than to a non-EU business who will effectively use the supplies within the EU). It is also necessary to recognise that if the customer is in a non-EU country, there may be VAT issues in their country, for example if the download is provided to them from a server in their own country. This would require consideration of the matter on a country by country basis.

Supplies to private individuals

If the supply is to a private individual in the EU, the supply will be liable to UK VAT at 20%. This is changing on 1 January 2015 when VAT will be due in the Member State of the customer – this will require local VAT to be charged by Incisive Media but there will be a one stop shop available.

If the customer is a private individual outside the EU, the supply will be outside the scope of UK VAT. However, as with the supplies to business customers, there may be VAT issues in the country of the customer. For example, in both Norway and Switzerland, there may be a requirement to register and charge local VAT because of legislation that has been introduced. We can advise on a country by country basis if required.

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July 18, 2012 um 5:05 pm
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