Anyone selling digital products to EU consumers now has to collect VAT at the customer’s rate instead of their own, with the option of using a Mini One Stop Shop (MOSS) to submit quarterly returns and payments via a central point instead of separately to 28 member countries. This applies even if you only sell one item worth £1.00.
The trouble is, sole traders weren’t consulted when the decision was made. We only found out about it a few weeks ago. And we’ve learned the law is impossible for us to comply with, particularly in the UK with its £81,000 VAT threshold.
I’m caught up in this so-called VAT MESS even though my business is B2B, because if I sell to an EU customer who’s not VAT-registered, I have to treat them as a consumer.
I have spent hours researching possible solutions, and have actually lost sleep over it (which is most unlike me). To save you time, here’s a summary of the key points I’ve discovered.
How it affects you
You can’t buy my new online course to watch when you please. To escape MOSS, I have to add more than “minimal human intervention” so you may have to attend a series of live webinars instead. This rather defeats the object, don’t you agree?
You can’t buy my new downloadable PDF site review – perfectly timed for the new year. To escape MOSS (except in a few EU countries), I may have to email the file instead of allowing you to access it instantly. How ridiculous is that?
Fortunately, you can still buy my print books (not currently VAT-rated in the UK) and ebooks (which are). That’s because Amazon is handling the EU VAT for Kindle. Hopefully, the other online e-bookstores e.g. Nook will do the same. I haven’t yet had the chance to check.
If you sell digital products…
- You will need to register for VAT MOSS. Note that your MOSS return may have to be submitted on a different date to your usual VAT return
I’m already VAT-registered, but to add MOSS I had to cancel my online Government Gateway account as an individual and open a new one as a business/organisation (and then activate the new account via their archaic postal system and delete the old one)
- You may have to source third-party provider/s and/or add plugins to your own online shop
However, none of them seem to be fully compliant e.g. they can’t all generate EU VAT invoices (as required by some countries) or handle EU VAT refunds
- You will have to arrange secure data storage for 10 years
How risky is that?! Internet security today is completely different from 10 years ago. Can you imagine what it will be like 10 years from now? No, me neither.
- You may also have to ensure your bookkeeping service allows separate reporting for UK, EU and the rest of the world split by B2B and B2C, or change to a new one
This all adds up to wasted time, extra expense and lost opportunity cost for you, and higher prices for your customers.
You have to collect two bits of non-conflicting data to prove which EU country a customer comes from (which means collecting three in case the first two conflict), and store this for 10 (TEN!) years.
According to HMRC guidelines, this means:
- Billing address – but why would a customer bother giving you that information in return for buying a digital product?
- IP address – but that changes if a customer is on the move, and anyway can be concealed
- Bank details – but who would be willing to share those online?
- SIM card country code – but anyone can buy a SIM card for another country
- Landline country code – but landlines are practically obsolete
- Other commercially relevant information – but what does that actually mean?
As a marketer
- Anything extra you make a customer do is a chance to lose them. It’s not customer-friendly and slows down the purchase process
- Why would they risk giving a small business so much data and trust you to store it safely for 10 years when even big companies get hacked?
- If you use PayPal as your payment provider (as I do), it collects location data at the end of the transaction not the start, so you can’t quote VAT-inclusive prices in advance – which breaks another law in the UK and some other EU countries
- Ignore the new law and risk being audited by any of the 28 EU countries any time in the next 10 years with up to €3.5m fine
- Refuse to sell to customers in the EU and therefore break anti-discrimination laws
- Sell through third-party platforms e.g. Amazon BUT you lose control of your customer data and price points, and they take a commission (anyway, many third parties are still not compliant e.g. Etsy)
- Pay for plugins on your own e-commerce site BUT you have to upload 81 x VAT rates and keep them updated yourself on a daily basis
You can source them from an out-of-date PDF or VATLive but that’s inaccurate. Unbelievably, there is NO reliable automatic feed available
Three good things
- UK sellers below the threshold can register for VAT to use MOSS but submit nil returns for the UK
- HMRC has agreed we can rely on country information from payment providers for the first six months
- According to the Information Commissioner’s Office, there’s no need to register under the Data Protection Act (which some small businesses were originally worried about because HMRC said you did)
As a consumer
- You may find you can no longer buy certain digital items due to being based in the EU
- You may find prices have increased to cover the extra admin time
The law is planned to extend to physical products as early as 2016.
What do we want?
A small business EU VAT threshold.
When do we want it?
Some MEPs say it’s impossible to get all 28 countries to agree, but they did it for the 2012 cookie law (changing it the day before it went live to ‘assume consent’ instead of ‘opt in or out’). Hopefully, they can do it for this too.
Here are some useful links and further reading…
Hannah’s Bananas – brilliant analogy
Sign the petition
Write to your MP/MEP
Impossible things to do before breakfast
By Claire Josa, EU VAT Action Campaign
We have been collating a list of aspects of the legislation that are ‘impossible’ or at best economically unviable and unreasonable, for micro businesses. It’s a work in progress, as people start trying to comply, but here are five of our favourites so far:
1. Display the correct price. You don’t know where a customer is based until the final stage of the checkout process. The UK and some other Member States require you to display the VAT-inclusive price at all times. You can’t do this unless you know where your customer is and if you insist on them declaring their country before visiting your sales page, you’re likely to use the sale. Even if you could get their country, the 90% of businesses below 100,000 € turnover use PayPal’s ‘buy now’ buttons, rather than a shopping cart, so you wouldn’t be able to display the correct price. It’s coded into the website page, not the shopping cart. Most micro businesses are having to bypass this by applying a best guess ‘fudge factor’ to cover VAT and then work it out afterwards. This causes UK and worldwide prices to go up unnecessarily, to compensate for Hungary’s 27%, and is already costing people sales because the digital market is so price-competitive. And it’s a completely unjustifiable level of admin for the sale of, say, a €2.99 e-book.
2. Manually email, to bypass the VATMOSS rules, but actually get the email to arrive. We have already seen people whose Yahoo accounts have been blocked for spamming because manually sending a pdf to a stranger (a customer) multiple times a day sets off the spam alerts for the main free email providers. This effectively closes this person’s business until they can get their account unblocked. As requested, we will write to the key email providers for statements on this. Even if you can send the pdf, most incoming email servers automatically reject emails with large file attachments from people not in your address book or whitelist, because there is a high risk that these are from spammers or contain a virus file. So we have moved from instant downloads with happy customers to grumpy customers who have to wait for a manual email that may or may not ever arrive. Getting a reputation for spam can also cause your email address – and even your website server – to be blacklisted as a spammer, meaning you are then dropped from Google search results.
3. Apply the correct rate of VAT. Most of these businesses use PayPal or other very small business shopping carts. Some of these CAN handle country-based VAT, but not until the final stage of the checkout process. And they can’t handle multiple rates per country. If you sell an e-book (with ISBN) and a pre-recorded course to a customer in Italy, the transaction requires two different VAT rates. If you sell that same e-book with a live webinar, then the e-book is taxable in the place of supply, but the webinar is exempt from the new rules and is taxable in the business’s country. So you could have two different countries in one transaction. Micro businesses are not set up to handle this level of complexity.
4. Accurately collect the place of supply. Customers will quickly realise that, for example, pretending to be in Luxembourg gets them a discount. It is easy for a customer to declare a false address on a web page. It is also easy to use software to fake your IP location. If customers buy during their lunch break at work, most companies use secure VPN instead of IP, so you wouldn’t get the IP data. It’s not available from mobile devices. So the customer’s declared address and the system IP address are not reliable pieces of data. And most micro businesses don’t have access to data such as the country code of the landline / mobile used for the transaction or the credit card bank details – and nor should they. These businesses simply cannot comply with the place of supply data collection requirements. And if the customer is buying after clicking an email link then they potentially never visit your website, so you have no way of collecting anything other than their PayPal account address. And there are huge concerns with them storing this data for 10 years.
5. Get the Member States to agree on what ‘digitally-delivered’ means. The UK HMRC has been helpful and has issued clear guidance, clarifying it and adding definitions each time we have requested them. However, these definitions are quite different to those in, for example, Holland and Spain. In those states, the proportion that is ‘digital’ falls under the law and the proportion that is live doesn’t. In the UK, any product with more than minimal human intervention is exempt. A business cannot comply with the different definitions for each of the 28 Member States.
These examples illustrate some of the administrative nightmare that has now hit the smallest businesses, as a direct result of this legislation. The next size up of businesses have had to fund website developers to create hugely complex shopping carts to handle it for them. But even for them the cost has been huge. One business I spoke to yesterday has just had to pay £100,000 to upgrade their server to handle the data processing needed by the hugely expensive EU VAT-compliant shopping cart they have had to develop. This is still a micro business (turnover < €2,000,000), so the compliance has been a huge hit for them this year. The biggest companies, such as Amazon and iTunes, were already geared-up for international sales, so this transition has been easy for them. Ironically, a major side effect so far has been driving even more micro businesses into the arms of these 3rd party platforms, hugely cutting the micro businesses’ margins and increasing the profits of those whose behaviour drove the creation of this legislation.
Key points from the first week of implementation:
By Claire Josa, EU VAT Action Campaign
* We have heard from 200+ UK businesses who have closed completely because they cannot deal with the administrative burden that the new rules place on them. It was either economically unviable for them to comply or they simply couldn’t face the administrative burden and have decided it’s no longer worth running a business. The case study comments are heart-breaking and are a devastating unintended consequence of this legislation, which could be immediately rectified by applying the existing distance selling thresholds to digital goods – even on a temporary basis.
* We have seen many examples of people excluding EU sales from outside of their home Member State, to avoid the rules, which of course breaches fair trading & discrimination rules and causes the business to lose money. If you’re selling via a website, then your business is automatically worldwide. It is crazy to have to turn away customers, just to avoid the EU VAT administration burden.
* We have seen MANY examples of USA companies now refusing to sell to EU consumers, so that they won’t be hit by the new regulations, even though they already applied to the USA. This reduces consumer choice. Prices are increasing, too, to help cover the regulatory burden and the VAT ‘fudge factors’ (see below), so consumers are being hit twice.
* We are aware of thousands of businesses who have now dropped digitally-delivered services from their website, which will potentially damage their business and was never their intention, prior to hearing about the rules. It simply doesn’t make business sense to exclude digital products in this age, but they feel they have no choice.
* Many of the major 3rd party platforms, including Etsy (massive for sole trading craft sellers) have not been able to comply, even though their compliance was a requirement of the legislation. If they can’t comply, how can a sole trader?
The news we are hearing this week from businesses is that Estonia has done a good job of publicity and there has been some in the Netherlands and Germany, but that’s it. France is unofficially exempting those below the VAT threshold and Italy has failed to implement the legislation. The vast majority of affected EU businesses have still not heard about this legislation, which is why the UK is being so much more vocal than non-UK.