This post has been getting occasional edits, especially resource links added at the end, but this is a continuously-evolving field. If you’re affected, use the links to read further.
A few days ago a chance Facebook post by a friend asked if anyone knew about the new EU rules for VAT on sales of digital products. I hadn’t heard anything about it, so I checked it out. What I found was extremely alarming.
The new rules come into force in a few weeks’ time. They change the landscape of online selling in a big way, to the detriment of independent content creators. And very few people know about them.
From the materials I found, it was difficult to get a clear picture of how it works and what it means for me. This post sets out my current understanding, with the aim of giving others a clearer introduction.
(Please do not rely on it as advice for making important decisions. I’m not responsible for any consequences of acting on it.)
The short version
From 1 January 2015 new rules on VAT (value added tax) come into force across the European Union (EU). These will affect you if:
- you sell ‘digital services’ – explored in a minute, but yes, it does include ebooks, PDF products, training materials, software and music files
- you sell business to consumer (B2C) to EU citizens, wherever you are based (B2B, business to business selling, is not covered by these rules).
The essence of the change is that the ‘place of supply’ for VAT purposes will now be the location of the purchaser, not the location of the seller. Sellers will have to add VAT to the purchase price at the rate for the customer’s country, and ensure that the appropriate payment goes to that country.
Due to the effects of harmonising countries’ rules and the way the admin will work, if you fall under the new rules you will have to register for VAT. All your digital sales will be liable for VAT, and once you’ve registered you’ll have to account for it on all your other activities too.
The UK situation
Here in the UK we aren’t normally required to register for VAT until annual turnover reaches a threshold, currently £81,000. VAT registration means extra administration: information collected on every transaction, and quarterly returns submitted to a set deadline. Many microbusinesses prefer to avoid it.
If, somehow, you can filter out non-UK purchasers, I think you can continue as you are now. But that is tricky, and takes away one of the main benefits of selling online in the first place.
What is a ‘digital service’?
These new rules cover (only) three types of activity: broadcasting services, telecommunication services and ‘electronic services’ (or e-services).
E-services are the bits most of us will be interested in. There seem to be two criteria:
- delivered over the internet or other electronic network
- delivered through automation that relies on IT, with minimal human involvement.
So if you charge people for a live webinar, that’s not counted because it involves personal input. But if you put a recording of that webinar on sale in a web store on your site, it is counted.
Among specific exclusions are any physical goods (though they want to do something similar there soon); email and similar communications as part of carrying out work; online booking of event tickets and services like accommodation, restaurants or car hire. (If it’s a tangible thing you’re booking online it’s taxed in the country the event takes place.) Software delivered online and some ISP services are included.
Oh, by the way, ebooks are classed as services, not products. We have the situation, here in the UK at least, where physical books are zero rated for VAT but electronic versions of the same books are not. It’ll be interesting to see whether that lasts.
What would I have to do?
You can register for VAT with each EU member state separately. That might make sense if, somehow, your trade is restricted to one or two countries. But for most people it’s an unappealing prospect.
You’d probably want to register with your country’s MOSS (Mini One Stop Shop, a rather rubbish acronym). You submit returns and payments to the MOSS, and it takes care of sending everything to the appropriate countries.
You have to charge VAT at the appropriate rate for each purchaser, keep records of that and the VAT element of goods and services you buy, and submit returns within a few days (20 for the UK MOSS) from the end of each calendar quarter. If you’ve gained more VAT than you’ve paid, you send a payment; if the reverse, you claim a repayment.
You can show that a customer counts as a business if you have a VAT number for them. If you don’t, you have a certain amount of leeway to treat them as a business, but I’ve just read the EU guidance quickly and I couldn’t tell you how this works.
I would want clarification of whether sole traders (the UK terminology) are counted as businesses here, and whether I’d need to collect some info to prove it. (We don’t have business registration numbers for sole traders – I believe the comparable US thing is more formalised.) HMRC guidance warns that member states may take different views of what counts as evidence – if they disagree with you, you’ll become liable for the VAT. The new regime makes VAT numbers a step more important for online business.
You also need to establish a customer location for each transaction. The guidance has some complicated provisions for specific circumstances, and some language about what you ‘could have known and should have known’ – if that is pinned down I didn’t see it. In most cases, especially for e-services, you’ll need to get two pieces of ‘non-contradictory evidence’ – eg billing address, IP address, bank details.
I wonder whether suppliers will be faced with situations where the checkout data gathered by their software contradicts, and they have to contact the customer for a conversation about their location. I can imagine customers feeling as if they’re suspected of doing something wrong. But the guidance does give the seller freedom to interpret the data reasonably, as long as they’re not found to be abusing the system.
You can see there’s a substantial obligation to gather data that you don’t think about if you’re using a simple ecommerce solution. I think it needs an ecommerce provider who warrants that their software will get the right info and output it for you in a nice spreadsheet.
Oh, and you have to store this data for 10 years. I think I saw that this is because it’s the requirement in Portugal, and there’s some hope of reducing it later.
Why is this happening?
Fundamentally, governments see the digital economy going on and feel they’re not getting their piece of the pie.
It’s also about the increasing public dissatisfaction with the way large digital companies like Amazon and Google operate tax-wise.
Amazon is the most obvious example. VAT rates vary across the EU, I think from 15% to 27%, and Luxembourg has a special rate for ebooks of 3%. So Amazon based its European operation in Luxembourg, so it adds 3% VAT to ebook sales and other countries where ebooks are purchased get nothing. Points to Luxembourg for grabbing that opportunity while it lasted.
There’s an inevitable process of regulation, taxation, etc being applied to online activity. Countries have been slow to respond to this new and strange territory, but it has to shake out sooner or later. The question is how well it’s done, and whether it’s done in a way that actually fits today’s world.
Problems and punishments
Different member states have different time limits for submitting quarterly VAT returns and making payments. You have to ensure you meet the most stringent deadline of the countries where you’ve sold stuff.
Even if you submit returns through the MOSS hub, if something goes wrong or there’s an underpayment or overpayment, you’ll have to deal direct with the country in question to sort it out. That means dealing in their currency (not all use the euro), which your financial set-up might not be able to do, and could involve language difficulties.
If you don’t comply with your VAT obligations you can be fined, under the law of the member state whose rules you have broken. In some countries that’s an amount proportional to the VAT due. In other countries it’s a fixed payment, with upper limits of tens of thousands of Euros or even more.
The thing that leaps out at me about all this – being a very small and vulnerable operation – is that you open yourself up to a lot of bad stuff if something goes wrong. And we know that things do go wrong. You have to understand what you need to do, remember to do it at the right time, and carry it out properly. What if life intervenes, like you get ill at just the wrong time? What if, through no fault of yours, the official systems have a glitch, or you can’t get help when you need it?
Sellers outside the EU
These rules affect anybody in the world who sells direct to consumers in the EU. The EU guidelines page says it in black and white.
If you have a nexus/HQ in the EU, you’re expected to register there. If not, you can register with a MOSS in a country of your choice. I’d guess common language and existing connections would guide this, so US folks will tend to look at the UK.
This article at Taxamo may help: US digital companies and their EU VAT challenge.
I wonder whether this could give rise to a situation where a supplier pays two lots of sales tax, if their home country or state charges one where the service is originated.
If you publish through a platform like Amazon’s Kindle store, your relationship with it is probably business to business, making it responsible for the relationship with consumers and therefore the VAT. Make enquiries of any platforms you depend on. (And be aware that the pricing of your book will vary for different customers.)
I fired off a message to Kindle support, asking if they were going to take care of the VAT. The response was that they weren’t aware of this issue, and could I send more information. Taken at face value that’s rather alarming. Have they been preparing for the change? But given Amazon’s central position in the VAT issue, it’s hard to believe the company is unaware of any aspect of it. More likely, it just hasn’t filtered through to the support staff. Or, possibly, the company is saying as little as possible while it works on things behind the scenes.
If you’re selling work through your own site instead or as well, then you may be caught by these rules and should consider what action to take.
Edit 21/11/14. Heard from Amazon Kindle publishing support last night that it is aware of the changes and will provide detailed information to Kindle publishers in the coming weeks. Hopefully not too many weeks…
Edit 3/12/14. In the last couple of days people have reported letters from Amazon confirming that it will be taking care of the VAT for Kindle ebooks. It is going to change the way pricing is set – I think you set a VAT-inclusive price for purchasers in a store’s home country (eg 20% on Amazon UK), and purchasers from elsewhere will get a price adjusted for their home VAT rate.
On a Facebook comment someone said they’d heard that the people drafting these rules had assumed that everyone would be selling through online platforms that would handle the VAT for them; not that there would be lots of small businesses registering for VAT. That sounds very plausible.
Certainly, as I read up on this, there was a growing sense that it was drafted by people who didn’t really understand the internet in general and small-scale online business in particular. And of course that fits the profile for politicians and bureaucrats. (If you’re a small business you tend to find the only people who are really on your side are other small businesses.)
Someone with a cynical conspiracy theorist viewpoint could easily claim that this is an attempt to shut down emerging models of business that empower individuals rather than plugging them into established patterns of toil. I think you can explain it as lawmakers with worldviews that take no account of small businesses and independent content producers, but the effect will be the same.
A particular problem is that they seem to assume access to web pages is compartmentalised, whereas one of the main points of online selling is that it is not. If I put up a web page selling a digital product, anyone who finds it, is able to read it, and has a suitable payment method can buy and download that product. The internet connects you to a global audience interested in your kind of material, which enables people in niches to succeed.
The sales page is not only available to people from certain countries. Neither does it distinguish between businesses and individuals. Perhaps we’re going to have to use a plugin or something that does control access. Although if it makes a mistake – and how could you guarantee 100% accuracy? – and we run afoul of the VAT regulations as a result, we could suddenly be liable for interventions and fines from some zealous EU state.
Will they be zealous in looking for non-compliant small fry to chase? Who knows. But it is a source of income for them in cash-strapped times. It seems likely that states will set up small teams to chase this, and they may not always be sympathetic to foreigners.
The more I dug into this, the more a scary mess emerged that, as a small content creator, I really want to avoid getting involved in. At the moment my plan is to take products down from my site so that I do not fall under these regulations. That’s an easy decision at the moment because I haven’t managed to get sales going. What about someone who feels the same way and has an established income stream there? This might shut down their business.
It doesn’t help that with, what, six weeks before these rules kick in (including the Christmas period), very few people have any idea that it’s happening. I think that HMRC should have mailed everyone registered as self-employed for income tax. I wondered if they had and I’d overlooked it, but I’m sure there would have been conversation among people I’m connected to.
The big-picture conclusion might be that VAT is a stupid tax that isn’t fit for the emerging modern world. I think I’ve seen commentary that it is a regressive tax because it penalises everyone, as opposed to income tax which takes account of ability to pay.
It’s certainly an illustration that the bittiness of the EU doesn’t always work well.
What do I do now?
I guess there are three paths, and the one you choose depends on how invested you are in the way you’re doing things now (and how you feel about financial administration).
Do nothing and brazen it out. I wouldn’t. Remember that you’re dealing with people who think what they do is Important and everyone is obliged to know about it, even if they were never actually told. Also, note that this gives the state apparatus of 28 countries licence to take an interest in your activities. That’s a lot of different ideas and cultures about how government is conducted, and a lot of different personal attitudes toward your country. You can’t make assumptions about how they will approach this.
Get into the system. Register for VAT. I would guess only a few people in special situations will want to deal with member states separately, so most will want to hook up with the MOSS in the appropriate country. Get admin systems in place. Find out what info your shopping system needs to collect and make necessary changes.
Steer clear of the system. Stop doing things that will make you liable, and wait to see what happens. As the effects of the new rules become clear, they may be changed to give more palatable options. You could regard this as a short-term damage limitation exercise. Or perhaps you can hook up with services that take care of the VAT for you and let you carry on with modest adjustments.
Platforms are coming back in
I’m guessing that these changes are going to put a stop to people setting up their own sales pages with a simple payment button. We’re going to be looking for platforms/storefronts/marketplaces that will let us sell materials to our audience and reassure us that we’re on the right side of the VAT rules.
If you sell through a platform there is a question of whether you are making the supply to the platform or the customer. It looks like if the platform takes care of all the details of payment and delivery and puts its name on the invoice, it will be counted as making the supply to the customer.
I don’t have experience of platforms that cover training materials for heart-centred entrepreneurs and personal growth, but the new rules make this more of a niche so it’s likely something will spring up.
Ironic link – I’ve just seen someone suggest fastspring.com. I don’t know it but it looks good and is the only platform I’ve seen explicitly mentioning EU VAT so far. If you know any others please leave a comment.
Playing with options
I expect people will try different combinations of things to work around the rules. That’s one reason why we need to get really clear info about how digital services are defined.
For instance, if I have a PDF training product I’m selling, I might shift to charging for a live webinar on the topic and giving the PDF free to people who register. A trainer might use pre-recorded videos and interact with people on a Facebook group. Would these be accepted as legitimate, or penalised as evasion?
The EU guidance refers to a bundle consisting of more than one element. It must be decided whether it counts as a single supply or several distinct supplies, and that’ll have to be on a case by case basis (ie we need to build up precedent).
I guess there will be a period of settling down, with various uses becoming clearer.
I hope that has helped. When I heard about this a few days ago I felt ambushed. Then I tried to find out more and felt frustrated at the difficulty of understanding what it might mean for me and people I know.
You probably feel ambushed too. I hope this post has at least made it easier to understand what’s going on.
(Sept 2015) For the latest updates, check out the EUVATAction site. It’s run by owners of small businesses who have been doing amazing work lobbying the UK government and the EU. The current position from the authorities is that there will probably be changes (a positive shift) but they’ll take years to come through. The campaign says small businesses need help right now.
The rest of these links are about understanding the scheme as it came into force, and people’s commentary as they found out about it in late 2014.
Guide by HMRC (the UK tax authority) – VAT: Supplying digital services and the VAT Mini One Stop Shop. This is a decently readable introduction, though it’s not great at explaining what e-services are.
EU guidance page – contents may hurt your head
Rachel Andrews – The horrible implications of the EU VAT place of supply change. First piece I found by someone who’ll be affected starting a discussion, good intro.
Everyday Designer – Sole traders, digital products and EU VAT reform. Useful post about the changes, which also makes the point that online sole traders are so free and independent that it’s difficult for authorities to disseminate info even if they want to.
A Handcrafted Business – VAT rules for digital goods are changing. Short piece about the changes, with a couple of handy short videos.
Taxamo – Five digital EU VAT myths busted – people are running away with some wrong ideas, and this short post reins some of them in.
EU VAT Changes 2015 – What You Can Do by Rosie Slosek at One Man Band Accounting. Points out the nigh-impossibility of complying with the vaguely defined rules, and gives practical suggestions for small businesses.
How #VATMOSS is the end of small enterprise in Britain – and how we can change it – by Heather Burns at Idea15 Web Design. A bleak assessment from someone with a background in internet law and policy. Draws out the implications and impracticalities, including pointing out that the record-keeping would require registration for storage of personal data.
They didn’t know – the impact of #VATMOSS on really small businesses – by Ysolda Teague. Reporting on a face-to-face seminar with HMRC, the UK tax authority. She found that they simply didn’t know about the numbers of small businesses selling online, or the breadth of material distributed this way. I find that especially ironic as HMRC has the best database of self-employment in the country.
HMRC write-up of a Twitter Q&A on 27/11/14. May be useful clarification, but suffers from the character limit on tweets. Annex at end says more about ‘no or minimal intervention’, though some of this appeared to be contradicted in a later webinar.
Taxamo organised a webinar with Andrew Webb from HMRC and Esteban Van Goor from Baker & McKenzie on 2/12/14. Questions had been gathered through the Digital VAT 2015 Facebook group. Video replay here (long). Clare Josa has done a heroic write-up, which is probably a more effective place to start. It’s still maddeningly unclear, but inching in the right direction.
Some of the small business folks had a face-to-face meeting with senior HMRC people and a government minister on 4/12/14. Enterprise Nation post about that.
There was a follow-up meeting 10/12/14 – here’s another Enterprise Nation post. New guidance is about to be released by HMRC. If you read the comments you’ll see a lot of anger that nothing new is being promised, and that government reps still do not understand the effects it will have on microbiz. To me it reads like a promise to explain the basics of what is covered and how the system will work, which should have been done routinely months ago.
HMRC issued new guidance on 10/12/14. General consensus: it’s good to have more guidance, but it’s still piecemeal and confusing. It talks about what e-services are (and in my opinion makes the EU definition more convoluted). It also says more about the fudge, alluded to for a while by HMRC people, of recording UK and EU sales separately and submitting nil returns for UK activity if your turnover is below the normal registration threshold.
On Twitter it took a while for hashtags to get going (I found posts through a search for ‘eu digital vat’), but now discussion has now taken off under #VATMOSS and, Twitter users being a witty lot, #VATMESS. Lots of questions and knowledge being shared there. One good side of all this is witnessing a community of mutual support forming in a way that wouldn’t have been possible a few years ago. Yay internetz!