VAT Moss and E-Commerce Business

Disclaimer: Policies discussed are as of the January 8 2016 changes to the HM Revenue and Customs VAT MOSS guidelines for E-Commerce businesses in the United Kingdom. All UK VAT and VAT MOSS guidelines can be found here.

In 2015, as an answer to large companies driving sales through countries with low VAT rates, the European Commission issued changes to VAT laws forcing E-Commerce businesses to apply VAT rates to their digital services based on the consumer’s location in the European Union, as opposed to the business’.

In essence, the same £100 service would now be £120 if sold to a customer in the UK (20% VAT rate), £121 if sold to a customer in Spain (21% VAT rate), and £124 if sold to a customer in Finland (24% VAT rate). This proposed an immediate problem for every E-Commerce business across the EU- there were 28 different countries with 81 different VAT rates, the prospect of accomplishing the admin work alone seemed insurmountable. As opposed to registering for VAT in every country your business sold a product in, the EC offered the highly attractive option of registering instead for a VAT Mini One Stop Shop (VAT MOSS) to E-Commerce businesses. While VAT MOSS did solve a huge problem for e-commerce businesses across the EU, much confusion arose and remains about its exact operation and regulations.

What to Know & When to Register

The main goal of VAT MOSS is to simplify things for the business, and it only applies to business to consumer sales of digital services. If you aren’t sure if your product qualifies as a digital service, HMRC defines them in extensive detail here.

VAT MOSS was introduced as a platform to distribute quarterly VAT returns directly to each country digital services are sold in, as opposed to you submitting VAT reports individually to each country. VAT MOSS requires you to submit one return quarterly that identifies your business’ total VAT accumulation in each country digital services were sold.

In order to register, your business must already be VAT registered in each country you have a fixed establishment. There are no thresholds for the new VAT laws, so even if your business falls under the £82,000 UK VAT threshold, you must still pay VAT on digital services sold in other countries. This means if you own a micro e-commerce business under the threshold, then you must voluntarily register for VAT (don’t worry, you won’t have to pay VAT on services sold in the UK) in order to use VAT MOSS.

Remember, you only need to register for business to consumer sales of digital services. A consumer is any person or business that is not VAT registered, so if you are selling services to a business that is not VAT registered, you must treat it as a business to consumer sale. There are also exemptions if your sales fall under non-business activities, which are explained here.

VAT MOSS Returns

HMRC requests when using the VAT MOSS scheme that your business keeps records of each sale for up to 10 years. These records must include the member state of sale or the member state of consumption, the date, the taxable amount and currency, the VAT rate applied, the VAT due and currency, the payments received, the invoice issued, and the information used to determine the customer’s location. The list seems extensive, but most of the information is required on your service invoice. Apart from the data on your invoice, documentation of the customer’s location is the primary record that must be kept. Most businesses must keep two sources of information, but businesses under the UK VAT threshold only need to keep one. This may be information provided by the payment service provider, an IP address, billing information, etc. Almost any documentation that confirms your customer’s location will suffice.

When filing your VAT MOSS return each quarter, you will require, for each member state services were sold in, the VAT rate type (standard or reduced), the VAT rate percentage, and the total of all taxable digital services sold. You must also submit a separate VAT return for services sold in the UK (micro-businesses who had to voluntarily register for VAT may submit nil returns). If you are leery about filing your first return, the HMRC provides a detailed walkthrough for first-timers using the VAT MOSS scheme.

While VAT MOSS remains imperfect, as evidenced by continual EC gatherings and amendments to the laws, learning to use it has become essential to reporting and paying VAT returns across the EU. It is our hope that some of the trepidation regarding VAT MOSS has been alleviated, and that you now possess an understanding of the benefits VAT MOSS can have for your e-commerce business.

Cash Flow

Many business owners I talk to don’t have a problem growing their business, they have a problem managing that growth.

Often when a business grows rapidly without being prepared it can lead to strains on the owner’s time, stretched resources, unhappy and disengaged employees and pressure on the finances of the business.

Put simply, sometimes high growth businesses are too successful for their own good, or should I say that’s how they appear, when in all reality this can be managed before getting into cash flow difficulties.  Sometimes the peculiar situation arises whereby a successful business appears to really be struggling financially when they don’t need to be.

What follows is some practical guidance for businesses of all sizes and in all industries for managing their cash flow.

Cash Flow Fundamentals

First and foremost it’s crucially important to understand how the cash flow of a business works.  This is not the same as the profit a business makes.  It is absolutely possible for a profitable business to go bust if they don’t manage their cash properly.

At the most basic level, cash flow is the difference between cash coming in to the business and cash going out of the business. It’s that simple right?  Well, not exactly, some attention is required to maximise cash inflow and minimise cash outflow.

To ensure that cash flow is optimised we can concentrate on 3 key areas for maximum effect.  These being Inventory, Accounts Payable (or Creditors) and Accounts Receivable (or Debtors).  Let’s have a look at each in turn.

  1.    Inventory

The purchasing of stock which will be re-sold at some time in the future, possibly as it is or possibly after some adaptation, has the potential for tying up your cash.  If a business has its money invested in stock sitting in a warehouse then this can’t be spent on other things which may be of more immediate benefit to the business.  Not to mention that the longer that stock is held increases the risk of waste, theft or obsolescence.

Only enough inventory should, therefore, be kept to fulfil firm orders unless the item is something which can be used in many product lines as this could increase response time to customer orders.  The management of stock will require an effective supply chain but only that which is required imminently should be kept on hand.  Keeping large amounts of inventory can mean increased costs associated with storing, managing and securing that inventory.

  1.    Accounts Payable

As a general rule of thumb, paying suppliers as late as reasonably possible will positively impact cash flow.  Businesses large and small can take advantage of maintaining an effective and lean accounts payable function.

Where suppliers invoice on credit try to pay as close to the due date as possible, if you have a good reputation for paying on time you may also be able to negotiate extended credit terms meaning that your money stays with you for longer. Occasionally suppliers offer discount incentives for early payment, you should weigh up the benefit of the reduced cost against the benefit of extended payment terms at a higher amount.  It very much depends on each individual situation and would need to be balanced against how much cash you have and whether your cash receives any interest invested anywhere else.  If you’re short on cash you would probably be better not paying earlier than necessary.

A cautionary note, however, would be that not paying suppliers on time regularly can lead to reputation damage, supply chain interruption and withdrawal of credit facilities.  This is not a position you want to find yourself in if you already have cash flow worries and will certainly make managing growth harder than it should be.

  1.    Accounts Receivable

If selling to a customer on credit the first step before anything would be to determine the risk of selling to them by checking their credit history, whilst no guarantee it should reduce the risk of default on invoice payments.  If a prospective customer has a history of non-payment then you need to determine whether you want the sale more than you want the money in the bank…the two are not the same thing.

Quite the opposite of accounts payable, the aim in accounts receivable is getting paid as quickly as possible.  One way of doing this would be to reduce payment terms for as long as your customers will accept this.  Another very effective way of getting paid on time is making it as easy as possible for customers to do so. There are a variety of ways that this can be done from electronic invoicing to accepting other payment methods or offering incentives.

In addition to all of the above, consideration should also be given to the selling price of products based on how complex they may be to create and deliver, so that you charge commensurate with the complexity involved.

One of the larger costs that businesses often incur is staffing, it’s always important to review workload and determine up to date and realistic staffing requirements- perhaps hiring staff to work in support functions is not the best option, that’s where specialist professional services companies come in.

On a final note it’s important to realise that often the business owner’s time is not best spent managing the day-to-day cash flow, that’s where accounting and bookkeeping businesses such as Sanay can help.

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