I'm not registered for VAT, so why does it matter to me?The new rules were brought in to prevent the widespread abuse of the VAT system undertaken by huge online sellers, who were able to manipulate their home country to take advantage of the country with the lowest VAT rate. The changes made now mean that VAT is charged on digital products at the rate in force in the buyer's country, not the seller's country.
As a principle it's not a bad one. But, and it is a huge BUT... what has happened, and is continuing to happen, is that the very smallest businesses, whose turnovers under UK's rules are below the domestic VAT threshold of £81,000pa, have suddenly found that if they sell any digital product outside the UK but within the EU, and that even means an item sold for just one penny, they have to register for, charge and account for VAT in the buyer's country.
Now consider the situation...What is a digital product? The EU has defined them on its website here http://ec.europa.eu/taxation_customs/taxation/vat/how_vat_works/telecom/index_en.htm and they include telecommunications, broadcasting and electronic services. Hah! you might say, how does that affect me as I write ebooks or sell downloadable knitting patterns or build websites and register domain names... well, guess what? All those things fall under the EU's definition of electronic services and so also are subject to the new EU VAT rules. Did I hear you scream?
Here's a handy list of what HMRC says are covered by the electronically supplied services definition...
Electronically supplied services
The rule change only applies to ‘e-services’ that are ‘electronically supplied’ and includes things like:
- supplies of images or text, such as photos, screensavers, e-books and other digitised documents eg, pdf files
- supplies of 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
But back to the VAT itself...Hah! I hear you cry, I bet there is a list of VAT rates somewhere. And you would be right... there is a list, and it changes as EU countries make changes, and you have to keep up with those changes and make sure that your sales page reflects the correct rate in force at the time your potential buyer visits. But first of all you have to figure out which country your potential buyer is in... now how will you do that? Did I hear you suggest using an IP address? Yes, it is one of the things the EU says you can use as your evidence of location... oh, did I not mention evidence before? The EU requires that you obtain two non-conflicting pieces of evidence to prove the location of your buyer, but the HMRC has provided a handy list so you can see what you can use as evidence.
Examples of the type of supporting evidence that tax authorities will accept include:
- the billing address of the customer
- the Internet Protocol (IP) address of the device used by the customer
- customer’s bank details
- the country code of SIM card used by the customer
- the location of the customer’s fixed land line through which the service is supplied
- other commercially relevant information (for example, product coding information which electronically links the sale to a particular jurisdiction)
So you still want to sell digitally online...?OK, so assuming you have a shopping cart, and can obtain the necessary evidence of buyer's location, what next? How do you actually pay the VAT you have collected? Well, you could register in each of the 28 member countries of the EU, and complete a return for your sales in each country... or you could send a silent thank you to the HMRC who have set up a VAT MOSS (one stop shop) where you can submit all your VAT returns for every country in the EU via them and they will disburse it for you. Do note though that you still have to work out which amount is payable to which country yourself, all MOSS does is save you that hassle of separate returns and payments.
My head hurts, is there not an easier way?In a word, no, or maybe yes. Under the EU rules a business is not supposed to refuse to supply,or block, sales to buyers in other EU countries, but the EU has confirmed in writing that where a business is seriously disadvantaged by having to sell outside its home country, then the EU will accept that they should not be forced to do so. But that does mean that any sales we used to benefit from outside our home countries will be lost to us. In many cases they are only small amounts, but for a very small, micro or nano business every sale could be the difference between staying in business and closing down.
This is just a European problem that doesn't affect the rest of the world, right?Wrong! Sorry but if you are a small business outside the EU you are still affected, as you are now expected to charge EU buyers VAT on your sale and remit that to the EU country involved too - yes that means you folks in the USA, Canada, Australia, India, Africa, and even little green men from Mars if there are any!
So what can we do...?Firstly, if you are affected by the new rules please do fill in the survey at the top of this post. Here's the link again to save you scrolling back up the page: http://euvataction.org/take-action-now/complete-the-survey/
Every bit of evidence we get about how these changes are hurting is important - not just for us here in the UK, but for sellers across the whole of the European Union, and those sellers outside Europe who want to be able to continue to sell to us Euro-folks. Our money is good anywhere, we're just sorry the new EU VAT system sucks!
Secondly, sign the petition on change.org calling for the immediate suspension by the EU of the new rules for micros-businesses and sole traders: https://www.change.org/p/pierre-moscovici-a-unilateral-suspension-of-the-introduction-of-the-new-eu-vat-laws-for-micro-businesses-and-sole-traders
Thirdly, if you are in UK or the EU, please contact your local parliamentary representative, MP or Euro MP and explain why the new EU VAT rules are hurting small businesses. If you are outside the EU you can still raise it with the EU directly, and the more folks who do, the better they will listen. There is some handy help on the campaign website http://euvataction.org/2015/01/21/time-for-an-action-challenge-for-eu-vat-you-might-enjoy-this-one-come-and-join-in/ Ask them to raise the matter urgently, and then tell the campaign what reply you get back. http://euvataction.org/contact-us/
Finally, spread the word. I was shocked to learn of these changes in the middle of January 2015. That's more than a fortnight after they came into force. I'm suspecting that there are a lot of people who still do not know about them. Those folks are at serious risk, as simply not knowing about the rules is no defence under the law, and the VAT-man has powers that would make your eyes water! Even if someone hears about changes to VAT for digital products in the EU they may not realise that they are affected by them, as they may assume the UK domestic VAT threshold still applies. IT DOESN'T!
Nothing has been sent to sole traders and tiny businesses about the changes. If you are not already VAT registered in the UK the chances are you have not been told by HMRC, and as this is one of the biggest changes to the VAT system since its introduction, that's pretty shabby. Despite the fact that HMRC has the name and address of all UK small traders who complete their annual tax returns, they have been sent nothing about the EU VAT changes, yet letters reminding us to submit our tax returns have been sent out at least twice in the last year. Why did they not pop a flyer in with those letters? I'll let your imagination answer that question. Perhaps if we had known sooner there would have been a big outcry from the thousands affected by the changes. So now we have to deal with what we have - a system which we cannot use for a host of reasons, or the option to close our businesses.
Please help small businesses fight this change. Just raising awareness amongst your friends, colleagues, and groups would be a huge help. I cannot find a dedicated group on LinkedIn which is tackling this, but there are two on Facebook, where so many of the smallest businesses start out. More info is available there, and offers of help and support would be welcome in both groups. Here are the links in case you want to pop along: https://www.facebook.com/groups/DigitalVAT2015 and https://www.facebook.com/groups/euvataction and thank you for sticking with me and reading so far.