Written by Kevin Okell on Friday 9 February 2018
In January 2015 the EU changed the rules on VAT for the supply of digital services. Since that date, the VAT rate has been determined by the location of the consumer rather than the location of the supplier.
Reactions at the time were familiar; does this really apply to us; don’t they understand how much it will cost to comply; and then, why don’t we just decline to deal with consumers outside the UK? It reminded me very much of early responses to FATCA and sounded a little hollow in the face of a rapidly globalising financial services market.
The knee-jerk responses were driven by the anticipated complexity of changing systems and that is in the design of traditional technology solutions that we need to look for insights.
Root cause of the problem
To understand the root cause of the problem, you need to look at the way systems have traditionally been conceived and designed. Developed to support specific tax and regulatory regimes in their country of origin, the more flexible of the current platform crop include sophisticated functionality to support new products in their market by combining and configuring discrete building blocks of functionality.
This kind of “product-builder” functionality has been very helpful in enabling providers to quickly support new products like Junior ISAs or Flexible Drawdown but it’s rather less useful for handling rules which vary for only a subset of consumers – like FATCA or the VAT changes. There have been attempts to do this by cloning products for specific segments and then treating those segments differently in some way but this invariably results in lots of manual activity and several unintended consequences down the line. Anyone who has been involved in “localising” one of the platform technologies from down under for the UK market will understand the challenges of this kind of adaptation.
A system of appropriate rules
What is really needed is a system which can apply appropriate business rules for tax, accounting, regulation and reporting on a per transaction basis rather than a per product basis. That system would take account of multiple variables (including location.) to determine which rules to apply and it would know how to handle the results.
Without doubt this is a daunting task but it has to be the direction of travel for systems in an industry whose product is essentially digital in a globalising market. The alternative is to continue seeking exemptions, limiting services to UK residents and managing the awkward conversations when they move. That doesn’t sound like a long-term plan to me.