21 November 2017

A guide to VAT for tech start-ups

Start-ups and growing tech businesses should be aware of their rapidly-changing VAT obligations and the special VAT rules that affect those in the sector.

As a start-up or growing business, you may find that your VAT obligations rapidly change. There are also special VAT rules which affect the technology, media and telecoms sectors.

VAT registration

As your start-up develops, you may have a mandatory obligation to register for VAT, or alternatively you may choose to register voluntarily.

Generally, businesses have an obligation to register when their VAT taxable turnover, which is the value of all taxable supplies, exceeds the VAT registration threshold (currently £85,000) in any 12-month rolling period.

Some early stage tech companies may choose to register for VAT before they are required to do so. This might be an attractive option for boosting cash flow if the business has incurred substantial VAT on start-up costs, including professional fees. Additionally, VAT registration can provide a more professional appearance and credibility in dealing with business customers.

It is advisable to regularly monitor the business turnover in order to correctly identify when VAT registration becomes obligatory, and make the application on time to avoid penalties.

VAT accounting

Once registered you will be responsible for charging and accounting for VAT correctly.
You will be required to prepare and file (normally) quarterly VAT returns in order to declare and pay this VAT on to HMRC. However, you may also be in a position to recover VAT which you have been charged on your business expenses, including potential VAT incurred prior to VAT registration.

Place of taxation – special rules for electronic supplies

Whether you should charge VAT, and the amount to charge, will depend on the nature of the supply, the place of supply and who you are supplying to. Your supplies may fall under the ‘general’ place of supply rules, or, along with many other tech companies, you may find that special rules apply to you.

Under the special rules providers of digital services (such as music and game downloads, e-books, online streaming of music and videos, and website hosting services) to private individuals in the EU must charge VAT at the rate applicable in each individual customer’s jurisdiction, and not that of their own country. This is because the special rules aim to tax digital services where they are consumed, and effectively ‘used and enjoyed’.

This can create substantial challenges to digital service providers as they must develop procedures for establishing the customer’s location and appropriate VAT rates in each jurisdiction they operate in. This often means they may be required to register for VAT in a number of countries.

Mini One Stop Shop (MOSS)

If your tech start-up is required to register for VAT in multiple EU countries, you can relieve much of the administrative burden by applying for a MOSS registration. MOSS allows businesses to register in just one EU country, such as the UK, and submit one quarterly VAT return covering all its European sales.

Agency relationships

Commonly, tech start-ups will operate through an agent or platform. In particular, digital supplies are often made via companies such as Apple, Google and Amazon.

How an agency relationship is set up will have a direct impact on the VAT liabilities of the supplies. Complexities can arise with third party agreements and this can lead to difficulties in determining the VAT position. Therefore, when entering into agency agreements, careful consideration should be taken over the contractual arrangements, and the commercial and economic reality of the relationships.

An agency relationship can be either a ‘disclosed’ or an ‘undisclosed’ one. A disclosed agent effectively acts in your name. While an undisclosed agent acts in its own name, meaning that your end customer will not know your identity.

For VAT purposes, an undisclosed agent is seen to act as ‘principal’ in making the supplies. Such arrangements can, therefore, be beneficial to your business, since the agent may absorb some of the more complex VAT obligations, e.g. registration requirements in multiple countries of the EU.

Looking ahead – Brexit

UK VAT is currently governed by European law. When the UK leaves the EU, this could result in changes to the way VAT applies to tech companies operating in the UK, and particularly those operating abroad.

Businesses in any sector should stay updated on the VAT implications of Brexit, as the changes may affect anything from the VAT rates applicable to certain goods and services in the UK to how VAT is accounted for on cross-border transactions.

To find out more about VAT and how it affects your business please contact Alan Glen