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The pricing dilemma of the 2015 VAT changes


The 2015 VAT changes were brought about with the intention of preventing large organisations from exploiting the EU VAT laws for their benefit. To a certain extent, the changes are likely to achieve this but there are potentially significant ramifications for many companies throughout the EU.

For those who are not aware, from 1st January 2015, the place of supply for supplies of broadcasting, telecommunications and e-services (BTE) to consumers is changing. Instead of VAT being accounted for in the supplier’s country, as is currently the case, from 1st January it will become payable in the country that the consumer is established.

What is the reason for the 2015 change?

The motivation behind the change is to remove the advantage of setting up a 'fixed establishment' in a tax jurisdiction where the rates of VAT for BTE services are lower than the place from which an organisation normally conducts its business. For example, many suppliers of these services have established operations in Luxembourg where, in some instances, they get the advantage of charging the consumer 3% VAT, rather than the 20% they would charge if supplying from the UK.

My big concern is that by attempting to resolve this issue, greater issues are being created. What do I mean? There are many issues I could look at but I am going to focus on the pricing dilemma facing companies in 2015. Currently a UK supplier of BTE services will typically have a VAT inclusive price that is the same regardless of where the customer is located. This makes things relatively easy for suppliers to process and account for VAT.

Now, as a result of the changes in 2015, when a business makes BTE supplies to consumers, different rates of VAT will need to be accounted for depending on where the customer is located.  This means that a supply which traditionally attracted 20% UK VAT – will now be liable to many different VAT rates across the EU.

Companies are now faced with a pricing dilemma and it is vital that they select the best strategy – both commercially and financially.

The dilemma is – do they continue to charge all customers the same VAT inclusive price regardless of their location or do they vary their prices depending on where the supplies are being made?

Universal or differential pricing?

The table below illustrates the effects of both strategies on a UK company selling a standard rated BTE services to consumers in other member states.  Before the changes, this UK company sold the product at a VAT inclusive price of £10 to all their customers.  UK VAT would always be liable – so the net price was £8.33 and VAT element was £1.67.

Effects of different pricing strategies after 2015 VAT changes

Country sold to from UK

Current standard rate

Universal Pricing

Differential Pricing

 

 

VAT excl. Price (£)

VAT element (£)

Gross Price (£)

VAT excl. Price (£)

VAT element (£)

Gross Price (£)

Luxembourg

15%

8.70

1.30

10.00

8.33

1.25

9.58

Hungary

27%

7.87

2.13

10.00

8.33

2.25

10.58

Italy

21%

8.26

1.74

10.00

8.33

1.75

10.08

Germany

19%

8.40

1.60

10.00

8.33

1.58

9.91

France

19.6%

8.36

1.64

10.00

8.33

1.63

9.99

As you can see both options have their potential problems…

If you adopt the universal pricing strategy and continue to charge £10 to everyone – although your customers may be pleased at the prices being at a consistent level, your profit margins will fluctuate depending on which country you are supplying.  If you are selling to a country with a higher VAT rate than the UK, Hungary for example – your profit margins will be lower.  Is this something your company has factored in?  Will you need to raise your prices to a level that limits the impact of selling to countries with high VAT rates? If you raise prices, will you become more expensive than your competitors?

The other option of differential pricing may solve the profit margin issue by always charging the same VAT exclusive price – but it also has its potential problems.  How will a customer in Hungary feel about being charged £1 more than their counterparts in Luxembourg?  Can your current payment/ordering process handle the complexities of a varied pricing structure?

You should be considering this pricing dilemma now – you don’t have long until the changes are introduced.  Implementing a change in your pricing strategy is likely to have a cost – both monetarily and administratively, so make sure plans are in place for this.

This subject of pricing is just one of the unintended consequences of the 2015 VAT changes.  There are many more areas where companies will have important decisions to make. 

So, although the changes may help to ensure that big businesses stop benefitting from low VAT rates – it is the huge number of smaller companies that could suffer.  The consequence is that in 2015 all suppliers of broadcasting, telecommunications and electronic services to consumers will have a burdensome amount of VAT to account for and pay over to each of the respective tax authorities.

If you need to find out more about the changes and how they will affect your organisation in 2015, then you may want to consider attending our live online seminar 2015 VAT Changes & The Mini One Stop Shop on 15th January 2015 for just £149+VAT.  If you want to get up to speed with the changes before the end of the year, you can purchase a recorded version of the seminar – to arrange this, simply call us on 01704 878988 or reply to this email.

Stephen Smith
Managing Director
UK Training (Worldwide) Limited

 

 

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