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Why have I been charged VAT?

Question:

Why was my purchase from Tracker Software subject to EU VAT?

Answer:

The rules of the European Union require that all sales to EU consumers are subject to VAT in cases where electronic fulfillment is used. This includes products such as online games, movies, ebooks, software and other products where no physical parcel/package is shipped, but the merchandise is downloaded in electronic format. These rules apply even if the supplier is not based in the EU, such as Tracker Software. (Our legal location from a business and territorial jurisdiction perspective is Canada). Therefore we are obliged to charge VAT to our customers, as otherwise our staff would be at risk of arrest if they visited EU countries. The relevant EU legislation is complex, and our accounting and legal advisors have advised us to comply with it in order to ensure that we do not encounter legal problems.

Resolution:

If your business is located in the EU and has a valid VAT number then you are exempt from these charges. Please ensure that your VAT number is provided when orders are placed to avail of this exemption. If your VAT number is not provided then we have no choice but to add VAT to the transaction.

Why does Tracker Software's EU VAT number fail the online VAT number validator that some countries provide?

Unfortunately, this happens because it is not possible for users to reclaim VAT in their own member country after the transaction has occurred (as is possible when purchases are made from offline suppliers within the EU). Again, this is a regulatory issue that comes from existing EU law - such transactions are not treated as reclaimable in the EU.

Further Information

Detailed below is an extract of an email from the United Kingdom's HM Customs and Revenue that explains some of the related rules and law:

"...The VAT on e-Services Special Scheme (VoeS) is only intended for supplies of electronic services to private individuals (B2C), who cannot reclaim the VAT. The VoeS identification number advised to you is correct but does not have a different format to a normal VAT registration number, which is why it cannot be checked using the EU VAT number checking facility. VAT on business to business (B2B) transactions is accounted for by cusomters in their own Member State, using the reverse charge accounting scheme. Please see extract below from VAT Notice 741A:

20.5 Can I use the special scheme if I make B2B supplies as well as B2C supplies to consumers in the EC?

You can use the special scheme for your B2C supplies to consumers in the EC even if you also make B2B supplies, subject to meeting the other conditions set out in paragraph 20.4. You are not entitled to use the special scheme for B2B supplies. You are not required to charge and account for VAT on B2B cross-border supplies of electronically supplied services supplied in the EC because your customers account for any VAT due in their Member State. The EU VAT Registration number checking facility, available through the Europa website, is intended for EU based businesses to check that the businesses they are making intra EU supplies to are VAT registered to allow them to zero rate the supply. If you have incorrectly charged VAT on supplies to business customers please see paragraph below. 

20.26 What do I do if a business customer requests a refund of VAT? 

The special scheme is intended for supplies to consumers who cannot recover VAT. Thus, a business customer who fails to provide a valid VAT registration number at the time of the transaction and is charged VAT, cannot deduct that VAT as input tax. However, if he subsequently produces a valid VAT registration number and requests a credit, you may refund the VAT. Please see guidelines below from Notice 174A on how to verify your customer's status.

19.2 How do I verify my customer's business status?

If you make B2B supplies within the EC the evidence required at the time of the transaction would normally be the customer's VAT registration number and country identification code prefix. The number must conform to the format for the registered person's Member State. See Notice 725 The single market. Under normal trading practices you will often know your business customers. Therefore, in such cases, you will need to routinely check all VAT numbers quoted, provided that the numbers conform to the correct country format. However, where a relationship has not been established with a business customer the VAT number should be checked when:

- the VAT involved exceeds £500 on a single transaction, or

 

- the cumulative VAT on transactions for electronically supplied services to a single customer in a VAT quarter exceeds £500.

 

Similarly, if you supply downloaded music, games, films and so on of a kind normally supplied to a private consumer, you would not expect a VAT number to be quoted in such circumstances. However, where a VAT number is quoted in what is clearly a supply to a private consumer the use of that number should be challenged. Full verification should be undertaken in all cases where you have any reason to believe that a VAT number quoted by a customer is false or is being used incorrectly.

If a customer claims to be in business but not to be VAT registered then alternative evidence should be obtained to support the claim. This can be in the form of other reasonable commercial evidence or records that should normally be available. Examples include contracts, business letterheads, a commercial website address, publicity material, certificates from fiscal authorities. A digital certificate from a reputable organisation can also be used for this purpose.

The VAT Information Exchange System (VIES) can support your decision-making process by providing an online verification system. The system can be accessed using the HMRC website, go to Businesses & Corporations and select the link to the EU VAT registration checker, or go direct to the Europa website.

You may also contact our Helpline to verify names and addresses as well as dates of registration and deregistration where appropriate. Other Member States may have similar systems by which it is possible to check the validity of VAT registration numbers.

If any of the above checks fail to confirm that your customer is in business or if there remains any doubt about the use of a VAT registration number, VAT should be charged as appropriate on all supplies to that customer including supplies that have already been made. Any VAT that has been charged in error may be credited under the normal rules..."

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