What Startups Need to Know About VAT Changes


In case you missed the furore from musicians and small developers, there’s change afoot in the VAT world. From the 1st of January, developers of ‘digital products’, including music tracks and downloaded apps will be required to charge VAT based on where their customer lives, not where they’re selling. Let’s say you are a Danish company, selling an app to a Spaniard: you will need to charge Spanish VAT on it.

A lot of people are overly worried about it. Although it’s a change and it represents an onerous one for some businesses, most of our clients won’t be affected. There are specific provisions that exclude you from liability if you’re selling through a third party platform. So in our app example, if you’re selling it on the Apple AppStore, you don’t have to worry about it. Bandcamp, which allows musicians to sell their wares directly without the overhead of the Apple approvals process, have brought forward changes to become a platform to deal with it for their clients.

Broadly, most services will come under that definition. Software as a Service isn’t explicitly included, and as you’d expect from tax legislation, there’s a whole bunch of wiggle room on the definition (at Article 7). The definition starts:

1. ‘Electronically supplied services’ as referred to in Directive 2006/112/EC shall include services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology.
2. Paragraph 1 shall cover, in particular, the following:
(a) the supply of digitised products generally, including software and changes to or upgrades of software;
(b) services providing or supporting a business or personal presence on an electronic network such as a website or a webpage.

Although broad, it seems likely that providing a software as a service platform – accounting services like FreeAgent, or Salesforce – will come under that definition, so if you’re selling that directly to consumers (or businesses!), then you might be well advised to have a look at how you’re tracking and accounting for VAT.

We’ll have a more in depth look at how it’s operating through January!

(If you *are* really interested in what it means for musicians, then there’s a great blog here about it. )

If you are curious about R&D Tax Credits, Innovation Grants and Open Culture




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