If so, then I’m sorry to spoil your festive season, but you might be about to get clobbered by changes to the VAT rules that are particularly unhelpful for small creative businesses.
From 1st January 2015, anyone in the world who sells ‘digital services’ to EU customers must charge VAT at the rate applying in the customer’s country.
There will be no threshold for VAT on digital sales. The UK has a very high VAT threshold of £81k, so many small businesses never need to get involved in it. But selling a single ebook to a customer in another EU country could make you liable to register and account for VAT on your digital sales – and, once registered, on everything else you do.
You may not have to engage with all this if you make some changes. There are options. But it is all a big mess.
This article is a short guide to help you to understand the basics of the changes and decide whether you need to read more elsewhere.
*Does it apply to me?
The new rules cover telecoms, broadcasting and ‘e-services’. I’m looking at the latter here.
Essentially, e-services are things that:
– are delivered via the internet (or similar network)
– are sold in an automated way, with no or minimal human intervention.
It took me a while to realise that this is not about types of products at all. It’s about delivery systems. You could probably think of it as a webstore tax. (If you were slightly more cynical you might see it as a tax on passive income.)
A lot of people are getting mixed up about the criteria, so pause to be sure you’ve got it. It doesn’t include physical products; services for individual clients which happen to involve internet communication; or live webinars (human intervention). But it would include a recording of the same webinar if you put it up for sale on a webstore.
The other criterion is that the new rules only cover business to customer (‘B2C’) sales, not business to business (‘B2B’). However, the only way to definitely establish a customer as a business is if they have a VAT number. You theoretically have leeway to class them as a business for other reasons, but HMRC warns that different countries’ tax authorities may have varying positions on what’s acceptable, so there’s a risk of getting caught out.
*What happens if I’m liable for this?
You will have to register, collect evidence for customers’ location, and submit quarterly VAT returns with appropriate payments.
You can register with a UK hub called MOSS if the prospect of registering separately with each EU member state doesn’t appeal. MOSS will distribute the money to the appropriate countries. But if anything goes wrong you might have to liaise with other countries’ tax authorities directly.
The data-gathering part is a big deal. You’re expected to gather two or three non-conflicting pieces of information about the customer’s location for each transaction. The simple ecommerce solutions most people are using simply aren’t geared up for that. People are scrambling to make new plugins and get payment providers to adapt their services. There are some complicated provisions about what counts as the customer’s location which may or may not apply to e-services.
You’re expected to store this data for 10 years. And it’s recently become clear that this may oblige you to register with the Information Commissioner’s Office, which the tax authorities seemed not to have realised.
Some commentators have taken the view that that it is practically impossible for small businesses to comply with all this. I don’t know about that, but I’m certainly not in a hurry to get involved!
*This is surprising, confusing and infuriating
A lot of people are saying so at the moment. Often in stronger terms!
The new rules have actually been in development for several years, but not many people know about them. In fact it’s being talked about now largely because a number of microbiz bloggers (I was one) heard about it, dug into it for themselves and started shouting on social media. (In fact the ‘VATMOSS’ label originated there and now everybody’s using it.)
It’s clear that the rules were written by people who don’t have microbusinesses on their radar and have a limited understanding of the internet and online business. They seem to have particularly overlooked the growing ‘expert industry’ in training and personal development, and an ocean of small activity in the crafts field.
Now that microbiz have engaged in HMRC in conversation about it, we know that:
– they’ve massively underestimated the numbers of small businesses out there who might be affected
– they assumed everyone was selling through large ‘platforms’ like Amazon and iTunes that would handle the relationship with the customer and therefore the VAT
– they handwaved the collection of data about customers that actually brings a lot of practical difficulties.
One month and counting till the new rules go into effect, those who will be affected are gradually prodding HMRC to provide clear answers to obvious practical questions. It’s a useful process but it might take a while yet. They seem to want to help, but their perspective is a long way from that of the people who need the info.
*What can I do next?
Frankly, a lot people online are overreacting to this. It’s a shock when they find out, it’s unclear when they try to learn more, and of course they get aggrieved. But there are ways to proceed.
Sign up for VAT, do the appropriate admin, rework your website to catch the data. If you have a significant income from digital and the capacity to do the work, this could be the right option for you. Just remember that the whole thing is still shaking out. The rules are still not entirely clear, and there isn’t yet consensus about practical solutions that people are happy to recommend. (HMRC is also talking about a possibility of splitting a business and registering EU trade separately, but this is confusing and we’re waiting for a written explanation. It’s probably not an option for sole traders.)
Stop selling things that would be liable. Some people, especially those making pin money from sales of knitting patterns and such, are ceasing those activities or closing their business altogether rather than face the additional hassle and cost. This can also be a temporary measure to avoid risk while the details become clearer – a lot of people are taking that line too.
Do things differently. There’s heated discussion at the moment around whether changing your sales process to do things manually would let you escape the new rules. For instance, your website takes the order but you write the email to the customer with the file they ordered rather than your webstore sending the link automatically. Most think this would be a ridiculous backward step, but some would do it if it let them carry on. HMRC may be saying this isn’t sufficient human intervention – there’s some confusion.
Block sales to the EU. That would get you round the rules, and a lot of people have been looking at it. After all, most English language sales are outside the EU. One issue is practical: on a public web page, how do you identify a customer’s country, and how do you control the options they see? What happens if an EU sale gets through – does that make you liable, or will some level of reasonable effort protect you? There’s also a legal issue. Folks from HMRC and the EU don’t want you to discriminate like this in the single market, but it’s not clear whether it’s actually prohibited.
Move to a platform site. By which we mean Amazon, iTunes, Etsy and many others that act as storefronts for multiple vendors. It seems most of them have been grappling with these rules at the eleventh hour too. There are some that state they’ll take care of the VAT (your relationship with them being business to business), but many are still developing their position. This seems particularly fraught for folks in the crafting community, where the platforms are themselves quite small operations. Amazon only started mailing Kindle authors with details at the start of December. Nevertheless, using a platform should be a solution that satisfies the EU lawmakers. It’s just ironic, as many are pointing out, that a law designed to stop large companies (many American) from taking advantage of low VAT rates is actually driving small producers to put more money into the hands of those companies.
*Finding out more
It’s what they call a fast-moving field. Weeks before the deadline, clear explanations of how it works are still being teased out of the tax authorities, and some important sales platforms are still to announce their positions. So you may need to do some research and perhaps go into a holding pattern till things become clearer.
My original primer on it is still a good introduction. I update it occasionally as new info emerges, and there are links to other useful articles.
A deluge of further info is available on Twitter hashtag #VATMOSS and in the Facebook group
Happy new year.
Tim Gray is a writer, communications guy, finer world advocate and geek. He helps people get their message across at Words That Change The World. Tim’s books ‘Crowd/Control’ and ‘The Radio-Controlled Message Bottle’ are available on Amazon. He’s on Twitter @messagewords.
Note: the author is not an accountant or lawyer at all, and definitely not responsible for any action you take as a result of reading this. Please get whatever advice you need.