A lot of ‘Internet Marketers’ have been fretting about this, and understandably so. European rules can be a bit heavy-handed at the best of times but, quite frankly, this is just insane.
However, as you’ll see, it’s not time to throw in the towel or give up on your business plans just yet. This is an ill-thought-out attempt to grab tax revenues that’s back-firing and getting a lot of negative press. The HMRC is already making allowances for small and micro-businesses.
First, let me explain the situation..
Why the VAT rules have changed
In a move to stop big companies like Amazon avoiding tax by setting up in low-tax territories, the VAT laws have changed as of 1 January 2015.
Until the end of last year, if you were selling a digital product online, you had to pay VAT based on where your business is located. So if you’re based in the UK and someone from Germany buys your software package or ebook, you’d have paid the UK’s 20% VAT rate.
However, as of 1 January, what EU calls ‘e-services’ are charged at the rate of country in which the customer lives. For instance, if you’re in the UK and someone from France buys your software package or webinar product, you have to pay the French VAT rate of 19%.
These rules apply where a UK business meets the following criteria:
- Supplies digital services from the UK to another EU member state (goods and non-digital services sold over the Internet are exempt).
- Supplies those services to a private consumer in another EU member state.
- Charges for that supply (digital services provided free of charge are outside the scope of VAT).
- The term ‘digital services’ covers the following…
- Images or text, such as photos, screensavers, e-books and other digitised documents e.g. pdf files.
- Music, films and games, including games of chance and gambling games, and of programmes-on-demand
- Online magazines.
- Website supply or web-hosting services.
- Distance maintenance of programmes and equipment.
- Supplies of software and software updates.
- Advertising space on a website.
Okay, so those are the basic facts. But here’s where the practical problems begin.
VAT rates vary…
As well as different EU countries having different EU rates, there are ‘reduced’ VAT rates in each country for certain types of products. For instance, in France eBooks have a reduced VAT rate of 5.5%.
You now have to collect more information from customers.
The rules are that you have to collect two bits of valid evidence to prove the buyer’s location and keep that information for 10 years, for instance:
- Billing address.
- IP address – this is the geographic location of the customer’s computer.
- Location of the customer’s bank.
- Country code of the SIM card the customer used.
Many people are rightly complaining that their shopping carts and payments systems aren’t set up to get this information and store this.
To charge the correct VAT at the point-of-sale, you need to know where the customer is located before you can display the correct price including their country’s VAT. Even if you CAN get all that sorted, the process of supplying this information might put a customer off.
All in all, this is an ill-thought-out attempt by the EU to grab tax revenues from the likes of Amazon. And it has been causing chaos…
- Businesses are closing – as they can’t deal with the administrative burden the new rules place on them
- Businesses are excluding EU sales from outside of their home country
- Prices are increasing, as businesses put up prices to cover the extra VAT and the huge amount of admin.
- Many businesses have dropped digital products
However, before you panic, things might not be as bad as they first appear. These rule changes are messy, ill-thought out, and rushed. Even before these EU rules came into force, outraged action groups were forcing changes on behalf of micro-businesses – and they are still campaigning hard, so expect many more changes in the coming months.
The good news…
The first bit of good news is that if your business supplies digital services to consumers in the EU, you can register for the VAT Mini One Stop Shop (VAT MOSS) scheme that solves the problem.
However, to enjoy this facility, you have to register for VAT first. So if you are under the VAT threshold, like so many micro-businesses are, then you suddenly now have to add that to your UK sales, which will hit your bottom line.
However, days before the rule-change came into effect, campaigners forced HMRC to say that micro companies will NOT be forced to charge UK VAT on their domestic sales.
A spokesperson for HMRC said: “Businesses below the current VAT registration threshold that can separate their sales to UK customers from sales to EU customers can voluntarily register the cross border element of their business, and then use that registration number to register for MOSS. This means that their domestic sales will remain VAT free.”
What’s more, if you’re below the VAT threshold, you can now use the information provided by your payment processor (eg PayPal) as your evidence for proof of place of supply until the end of June.
The second bit of good news is if you’re selling through a 3rd party platform, such as Amazon, that already complies with the rules, then you don’t have to worry.
There are third parties such as Etsy (crafts and hand-made products) and Bandcamp (music) that don’t currently comply with the rules, but these are likely to do something about it over the coming months.
I am not an accountant, so please check with one before you make any decision, but my best advice is, keep going with your business plans. Campaigners are fiercely negotiating a reworking of the rules to keep small and micro-businesses out of this mayhem – and they are having an impact.
I’ve also been in contact with other online sellers and received some excellent advice from regualr IID contributor Rob Cornish of GainHigherGround.com. He told me:
“Of all the selling platforms out there JVZoo.com’s response to the EU VAT rules has been the most innovative and in my opinion it provides the most complete solution.
As one of their product vendors you can:
a) Block Countries
Particularly useful for UK vendors who sell only a tiny amount into other EU countries – by switching off these sales you don’t have to register for MOSS and you can bypass all of the associated admin work.
[A potential issue here are the anti-discrimination laws in the EU. As I understand it (I’m not a lawyer and could be wrong)! an EU based business can’t refuse digital sales to customers in other EU countries without a valid reason.]
…or if you do wish to sell into the EU…
b) Choose to charge VAT or not (obviously switch this on to be compliant with the Jan 1st rules!)
c) If you enable VAT, whether to charge by vendors country or, to be compliant with the rules, customers country.
d) Allow customers to manually override their country (e.g. live in UK but buying in France)
e) Download full reports of transactions by country which can be uploaded into your MOSS account.
In my view this is a brilliant set up and definitely good news: If you want to sell into the EU then it makes the bureaucracy much less time consuming. But if you’d prefer to bypass the admin work altogether then you can simply opt out by switching off all sales to EU countries.”
As Rob indicates, this is a fast-moving story where many different businesses are trying different responses and approaches. I’ll keep you informed throughout the year.
Useful links…
- Registration for the MOSS one-stop shop gov.uk/register-and-use-the-vat-mini-one-stop-shop
- Campaign site EU Vat Action euvataction.org
- VAT rates for European member countries, including reduced VAT rates and product categories. www.vatlive.com/vat-rates/european-vat-rates/eu-vat-rates
What do you think about the new EU VAT Rule?
If you’ve found an innovative way to deal with these new changes, or have information you think will help other members, leave a comment beneath the online version of this article in the member’s area of the website.