European VAT on Digital Products and VATMOSS: A practical guide
On January 1st the UK and European governments introduced a new legislation that is, at the very least an enormous pain in the a*** for small business owners, and at the most will result in lots of micro business owners pulling their digital products off the market or even deciding to close down.
Most of the articles that I’ve read seem to have a lot of hype and over-reaction going on, so I wanted to offer a really practical guide here so that you can keep selling your digital products.
Yes it’s a mess, but we can either be victims or we can take charge and find a solution that works for us and our businesses. I know which one I’m going to choose.
This is my practical take on what is an ever changing piece of legislation (make sure you keep an eye out on the HMRC website and news for any updates) that should hopefully keep you compliant over the next few months, but please note, that this is not legal advice and any action that you take is your own and no responsibility of mine or of Women Unlimited’s (that’s the necessary legal part out of the way).
Firstly a bit of perspective…
The UK government, while they might be a bit slow on getting all their ducks in a row and having absolute clarity on how this is all going to work, even though it’s live already, are not usually unreasonable (unless it’s their own VAT that they are chasing). They also want to make this work for small businesses as well as big businesses.
Secondly, most of you will not actually be selling to many people in Europe. So, the number of transactions that we’re talking about here are very small. If you do sell a lot of your products in Europe, you will probably already be well aware of these changes and hopefully have a decent system in place.
Thirdly, the other European Countries don’t seem to have their heads around this either, so there is going to be some leeway for a while.
Lastly, the government has also cut micro business owners some slack and have agreed that the proof of location compliance requirement won’t come into effect until June 30th, so we have almost six months to get our acts together on our websites but I do suggest you don’t wait too long.
Ok, so what’s the fuss all about
According to the HMRC (this has been lifted directly from their VAT: businesses supplying digital services to private consumers document updated on December 29th…
From 1 January 2015, the rules around the European Union (EU) VAT place of supply of services will change. This will affect the sales of digital services (broadcasting, telecommunications and e-services) from a business to a consumer (private individuals and non-business entities eg, public authorities or charitable bodies). The place of taxation will be determined by the location of the consumer. This means that the taxation rules will be determined by the country that the customer lives in.
Where digital services are supplied on a business to consumer basis, the supplier is responsible for accounting for VAT on the supply:
- to the tax authority
- at the VAT rate applicable
…in the consumer’s EU member state.
So, in a nutshell, if you sell ebooks, video courses, photographs, membership sites, software, patterns, recipes, online magazines, hosting, or anything that is classified as a digital service, to someone who lives in Spain, then you need to pay VAT to the Spanish Government whether you are VAT registered in the UK or not.
Who you sell to
The new VAT rules only apply to Business to Consumer, not Business to Business. If they are a business, they need to prove it though either by providing their VAT number or by providing proof of business address and that they are trading as a business.
Electronically supplied services
What is an electronically supplied service you may ask… well, the HMRC have defined it as:
- 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 (this one was a surprise to me!)
But there are some exceptions, so make sure you check with them about your specific products and services. The HMRC has also provided a handy checklist that you can look at to see whether what you are selling constitutes an electronically supplied digital service:
In the UK, if you are collecting and storing information about your customers, you also need to be registered for the Data Protection Act with the Information Commissioner’s Office. It’s pretty easy to register and costs £35 per year. Click here to find out more. There is some question about whether this is required, but if you are collecting identifiable customer information, you should be registered anyway.
How can you stay compliant?
Here are some potential solutions:
Use a Simple Shopping Cart: There are lots of simple shopping carts that you can implement where you can ask for the information you require at the point of sale. The government has suggested that all you need is the billing address for their credit card and their phone number including the country code. A couple of suggestions are: Easy Digital Downloads which has an extension or Woo Commerce, a more complex shopping cart that also has an extension. You can also use sites like E-Junkie which recommend using the next strategy down.
Manage your pricing: If you don’t sell a lot of European countries, marginally increase your price and this should average out over the long run and you can afford to pay the VAT in the European countries as required. The HMRC document that I’ve used as the basis for most of this article, states that you can either charge one price and just pay VAT as required (easy) or you can choose to vary your price dependent on the country that the digital product is bought (hard).
Use a Marketplace as your sales channel: If you sell digital courses, Udemy is a great option for video courses, and it has the advantage of being a place where lots of people go looking for courses! They do charge you 30% of the price for the privilege, but my understanding is that you can create your own link for your community and they don’t take commission for sales from that link. And you may get your product in front of a much larger audience than you would anyway, think of it as an affiliate fee… There are lots of other marketplaces for different types of businesses, so check in your industry whether they’ve got it sorted out yet.
According to EU VAT Action, it seems that Etsy haven’t quite got themselves sorted yet, but I have no doubt that they will soon.
Create a product that falls outside of their definition of digital service. Apparently, if you email the download personally rather than have it as a download from the website or sent as an automatic pdf, then you don’t have to pay VAT (I know, ridiculous, right?!) Or if there is a ‘live’ element to what you are doing, then it also doesn’t require that you pay the EU VAT.
Redirect people from different countries to different pages. This can feel like it’s complex, but it is actually easier than you might think. If you have a WordPress website, you can use a plugin called GEO IP that I have used on one of our courses, which redirects people based on their Country IP address to different pages on your website. The same developer has also created a second plugin which looks really interesting (but I haven’t used it) that allows you to create country specific content from within the same Wordpress post called WP Country Content Shortcode.
Using these the GEO IP Plugin, you can redirect people from the EU countries to specific pages relevant to them. Your UK customers can be sent to a different page and International customers to a another page again. Alternatively using the WP Country Content Shortcode you can create specific content for people from different countries all on the same page.
In the UK
If you are not currently VAT registered in the UK, you do not need to charge VAT to UK customers until you reach the VAT threshold. But you are still required to pay EU VAT, regardless of your total earnings, to the other European countries.
If you are VAT registered then you will be required to complete and pay 2 VAT returns. One for the EU and one for the UK.
The HMRC have made it easier to pay VAT in the other European countries through the VAT MOSS (Mini One Stop Shop) system, where you complete one return and it will distribute the money to the relevant countries. You have to register for this through the UK VAT system. This looks pretty straightforward.
You do have an option to pay each country individually as well – I’m not really sure how this would work, but may be a viable option for you if you don’t make a lot of European sales.
After lots of complaints and liaising with small business representatives, the government have said that you can register for UK VAT and not charge or pay UK VAT until you meet the UK revenue threshold which is currently £81,000.
If you would like to learn more about this, get in touch with HMRC and speak to them about your requirements. There is a lot of material on this floating around the internet, make sure you keep up to date with the changes. Don’t be overwhelmed by it all as there are some simple solutions, you just want to figure out which one is best for you.
HMRC : VAT Businesses Supplying Digital Services to Private Consumers >> this gets updated regularly
Register for the Data Protection Act
Xero.com >> My accounting software & they are already to go with VAT MOSS
EU VAT Action >> get regular updates
Email! You can email the HMRC VAT Moss team here
Etsy (apparently not ready yet)
Folksy >> folksy are really on the case. This is a link to a blog post on their website
Webinar on Wednesday January 14th
We’ve put together a panel to discuss VAT MOSS and how to stay compliant. Feel free to join us tomorrow (January 14th at 10:00am). Click here to register.