Krystal Hosting Ltd provides web-hosting services across the EU. It was VAT registered under the VAT MOSS Scheme from July 2017. The first three VAT returns had not been submitted on time. HMRC sought to cancel its MOSS VAT registration. The question that arose was whether this was necessary and allowed. Reason being that it was likely to cost Krystal a significant amount of money to remedy the situation. The FTT decided that it was.
The VAT Mini One Stop Shop (“MOSS”) was introduced by the EU for businesses supplying certain digital services across the EU. This scheme resulted in them not having the need to VAT register in a number of Member but rather, only in the country in which it was established.
Krystal Hosting Ltd (“Krystal”) provided web-hosting services across the EU. It was registered in the UK for VAT in July 2017 via its agent, GrowFactor. However, it did not submit its first three VAT returns on time. This resulted in HMRC cancelling its VAT registration in May 2018. It argued that it had not received notification of the impending cancellation of its MOSS registration.
Upon a business being de-registered from the MOSS Scheme, it is not entitled to re-join the scheme for a period of two years. Accordingly, Krystal would be obligated to become VAT registered in a number of European Member States in order to account for approximately £25k VAT, for this two year period. This would cost it in the region of £50k.
The question which was asked of the First Tier Tribunal (“FTT”) was whether the reminder notices issued by HMRC prior to the cancellation of the VAT registration, entitled / required HMRC to cancel the registration.
VATA 1994, Schedule 3BA sets out the domestic law as regards the operation of the MOSS Scheme. Various paragraphs with Schedule 3BA set out what the rules are regarding returns being for calendar quarters (para 9), when the return is to be filed electronically (para 10(3)) etc. Furthermore, additional regulations set out when a person is said to have failed in complying with their obligations to submit MOSS Scheme returns. Where the three immediately preceding calendar quarters are late, the business is to be de-registered from the scheme.
HMRC primary submission was that once the conditions for the cancellation of a person’s registration in paragraph 7 of schedule 3BA were satisfied, the taxpayer’s registration must be cancelled. Accordingly, HMRC had no discretion in relation to this and therefore Krystal’s MOSS VAT registration must be cancelled.
Conversely, Krystal argued that in order for a taxpayer to be treated as having persistently failed to comply with their obligations as a result of being issued with reminders, the taxpayer must have been given a reasonable opportunity to read those reminders and therefore to act upon them in order to correct any default. This had not happened.
Additionally, in respect of other taxes, HMRC do not only send electronic reminders but also send letters in the post both to the taxpayer and its agent reminding them of their obligations. This also had not happened in these circumstances. Accordingly, HMRC was neither required or entitled to de-register Krystal’s VAT registration.
The FTT decided in favour of HMRC. It commented that the provisions relating to the MOSS scheme as a whole were that it was intended to be entirely electronic. Therefore, there was no need to additionally send letters in the post to Krystal notifying them of the possible de-registration.
It referred to the EU Directive in which it was stated that:
“To simplify the obligations on businesses engaging in activities in Member States where they are not established, a scheme should be set up enabling them to have a single point of electronic contact for VAT identification and declaration.”
Additionally, it commented that Krystal had received various emails telling it that it had received email messages and therefore, Krystal “…had a reasonable opportunity to read the messages”.
The FTT decision can be located here
Who is Potentially Affected?
Any business which is currently operating the VAT MOSS Scheme
This decision is a good reminder of the rules when a business can fall out of the MOSS Scheme and the period of time within which it is not entitled to re-join thereby requiring overseas VAT registrations. The can result in an unnecessary cost for the business.
When you consider that a number of Member States also require you to appoint a Fiscal Representative in addition to the requirement to be VAT registered, this increases the costs and the administration hassle, at a time when businesses are considering the Brexit issues…… I am sure that it is a headache that many businesses would rather not have.
And finally, don’t forget that if you are operating the Union VAT MOSS Scheme, come 1st January 2021, it will not be available to your business going forward as we will have Third Country listing.
Please get in touch should you wish to discuss, as there are things you can do.