The EC Directive (2002/38/EC), concerning VAT levying arrangements, came into effect from 1st July 2003, writes John MacGowan of Bloor Research.

This removes the obligation for EU suppliers of electronic services (i.e. software, music, videos) - which can be downloaded from their websites - to levy VAT when selling in markets outside the EU.

These changes are what e-business retailers had been campaigning for and are intended to "level the playing field". Non-EU based businesses supplying electronic services to customers domiciled in the EU must levy VAT at the rate imposed by the customer's EU member state; which can vary between 13% to 25%.

Simplified VAT collection arrangements have been implemented. Non-EU businesses (rather than registering for VAT in each EC country where their customers reside) can now use a taxation authority dedicated website (one for each Member state) to access a simple, automated, system for declaring and paying their VAT dues online and at a single location to cover all their EU customers.

For the UK the VAT collection is the responsibility of HM Customs and Excise.

Adoption of this Directive has resulted in US companies AOL/Time Warner, eBay and Amazon, which previously were exempt from charging VAT, now having to comply.

Freeserve, which recently moved their servers to Madeira to take advantage of a VAT rate of 13%, have been reported as estimating that AOL saved £150 million (since 1996) by not paying VAT in the UK.

Please note, for physical products EC-based retailers are still required to charge VAT.

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