Businesses who make and sell apps or provide digital services to consumers in the European Union will see their paperwork increase in January due to new legislation to counter tax avoidance, experts have warned.

Currently VAT on digital services is charged at the national rate where the supplier is. Providers of electronic services such as Amazon have been criticised for basing their European headquarters in countries such as Luxembourg where VAT rates used are much lower than the UK.

From the 1 January 2015, businesses supplying broadcasting, telecommunications and digital services to consumers will have to charge customers VAT at the rate of the country where the customer buys the service from.

So a UK business selling an app to a customer in Luxembourg, will have to charge VAT at 15%, but at 27% for same app if the customer lives in Hungary.

“There are 28 countries in the EU with 30 different VAT rates [which] creates a high administrative burden, plus enormous potential for mistakes,” said Ruth Corkin, VAT senior manager at accounting firm James Cowper.

Tax rules on digital transactions are further complicated because different technology platforms are categorised differently by the new tax rules.

Apple’s App Store, for example, is considered a marketplace with purchasers buying directly from Apple, and Apple automatically accounting for the VAT, Corkin said.

In contrast, Google Play acts as an agent taking a commission on sales, leaving the retailer having to account for the VAT themselves.

“A business selling the same app from both Apple’s app store and Google Play will have to account for VAT in completely different ways,” Corkin added.

In the UK, businesses can register once with HMRC for VAT in every EU country they supply electronic services to.

The online registration – called the VAT Mini One Stop Shop (MOSS) – is intended to make it easier for businesses to comply with the new VAT rules.

The service will start on 1 January but businesses can register to use it from October. HMRC consulted on the registration service over the summer.

Businesses will have to submit separate VAT returns for their cross-border digital services and pay tax due every three months. But the government’s online service won’t apply to Britain’s smallest businesses, which trade below the threshold for VAT registration, which is £81,000. These businesses will have to register for VAT in each EU country they sell digital services to.

This and other implications of the new VAT rules were discussed by tax experts during an AccountingWEB webinar in August.

Kevin Hall, a VAT specialist at Gabelle, said it may be hard for some businesses to work out if their service is defined as an electronic service for consumers under the new VAT rules. He advised businesses to start planning for the new rules.

“They may even need to consider whether some countries are not worth targeting [because of the new VAT rules],” he said.

Tax expert Rebecca Benneyworth said some small businesses below the VAT threshold – who will not be able to register with HMRC’s VAT registration service for electronic services – will have an “unenviable task”.

As a director of a small tax software company with European customers, Benneyworth said she would also be affected by the rules.

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