How the new #EU #VAT rules are hurting buyers!

The new #EU #VAT cross-border digital sales rules don't just affect sellers, they hit buyers too, as if we have to charge VAT you have to pay more when you buy from us! That's no fun, is it?!

But it's even less fun when you realise that these rules are going to be extended to cover sales of anything that goes from one EU country to another, or from one non-EU country into the EU. Are you listening yet America? Canada? Australia? New Zealand? Japan? China? Rest of the world?

Low-turnover businesses have been covered by their home country's VAT threshold until 31.12.2014, and still are for sales they make within their home country, but get caught up in the VAT rules when they sell outside their home country, even if the item is a penny!

OK so what will happen if those digital sellers at the low-turnover end of the marketplace stop selling online? Will it affect you? You may think not, but you'd be so wrong!

Do you buy music from indie bands?
Do you buy apps for your smartphone?
Do you buy games or modifications for games for your computer?
Do you buy software?
Do you buy patterns for your knitting, crochet, craftwork?
Do you buy images for use in your projects?
Do you buy ringtones for your mobile phone?
Do you subscribe to a specialist digital magazine?
Do you buy ebooks from indie authors?
Do you undertake online courses to learn a new skill or hobby?

If you said yes to any of those questions then you are affected by this issue.

Juliet McKenna of the EU VAT Action team has been looking into the issue, after the team undertook a survey of more than 2,000 small traders whoc supply exactly the sorts of digital products I listed above. Her findings are worrying. Here is what she says,

If there’s a big company behind your chosen product, they’ll probably be able to cope. It’ll be a hassle for them, no doubt about it, but they have the resources.

If that business is run by just one person, working on their own? Then it’s unlikely they’ll be able to handle the new rules. Just how many of those resources come under the heading of “automated digital services”. In other words, they’re all now subject to the new rules requiring whoever’s offering them to charge the correct VAT rate where you live.

The administrative burden of trying to figure out, with up to 3 pieces of information, where your customer is and the choosing the correct rate from the EU’s 81 options is enormous. Most small businesses do not have the means to do this.

The people who create these amazing resources, unless they’re a big business with tech support, are more likely to close or to block your country than to be able to comply with the new EU VAT rules.  Here is the link to the full article.

Ahhhh, you say, but I don't buy things I get mine for free...  maybe you do, but not for much longer!  Your "free" product is actually paid for by the advertising revenue that is made by the site from which it is sold, or via ads within the product itself (those ads you see in apps are a prime example).  That advertising revenue now comes under the EU VAT rules so the seller has to register for VAT, and has to account for the VAT on the revenue and pay it to the relevant tax authority.  So what?! you might say... well here's what...  that all takes time to do, it costs money to do, as managing VAT returns means higher accountant's fees, it means registering as a data controller, and a host of other hassles that go with it and take up your time - and as we all know, time = money in a business! 

So, if you believe in a free marketplace where you can buy your digital products you really do need to take notice of what's happening with the EU VAT rules.  The answer is not to pull out of the EU, but rather to shout loudly to your MEPs that the EU has got it wrong. If enough of us shout they might listen.  If we don't shout, then we will all just be shopping for the same old things at Amazon and eBay in the future!

EU VAT rules are hurting the smallest digital sellers

If you are a small, micro or nano business affected by the changes to the EU VAT system would you please fill in the anonymous survey form which EU VAT Action are using to gather evidence that the system is hurting such small businesses, ready to present to the European Commission soon. http://euvataction.org/take-action-now/complete-the-survey/

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

 Well it gets better, as not only is there no threshold below which your sales outside the UK to other EU countries are exempt, but you have to work out which VAT rate applies for each product in each EU country - and most countries have more than one rate! - and present the price to your potential buyer in their own currency with the VAT included before they commit to buy. That's something which the majority of shopping cart scripts used by small online businesses are unable to do. It is too complex code-wise, but even if they could manage the coding there is still the issue of the amount of server processing power needed to make complex queries, and those sellers on shared hosting platforms will find that their webspaces will not be able to handle those processes.

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, for a digital service where your potential buyer has, in the past, just given you an email address and you or your payment processor has taken their card details, you now have to extract any 2 of the above bits of info from them - information which many people are loath to share online for fear of fraud, identity theft, or just plain desire for some privacy! But you MUST obtain at least two items from the list, and what's more, keep that evidence in a safe place for at least 10 years. Yes, you read that right - 10 years!

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.