Selz has rolled out features to help support sellers with the upcoming VAT changes when selling to consumers in Europe. In this post, I’ll explain exactly what these changes are and whether they affect your budget and the products you sell. I’ll also give you some pointers on how you should deal with the changes in your business.
The change in “place of supply”
VAT is a tax on purchases used in many countries around the world. The countries we are concerned with in this instance are those that make up the European Union (EU). Until the end of December 2014, if you sell a digital product to a consumer, you charge them VAT at the rate in your country as the seller.
From January 2015, you will need to charge the VAT at the rate that applies in the country that the buyer is in, and then pay that VAT to their tax authority.
It’s important to note that at the moment this change only applies to digital goods and services, not physical products.
This includes things like:
- Web hosting
- Software as a Service (SaaS)
- Downloadable software
- PDF knitting patterns
- MP3 files
- Tutorial videos
It doesn’t include physical products. It also doesn’t include any service performed by a person or business.
Examples of things that are not included are:
- Designing a website for a client
- Online tuition where you are online at the same time as the students – for example via a webinar
- Physical products – anything you package and ship
In these cases, VAT would be charged, if necessary, at the rate applicable where the company is based.
VAT “registration thresholds” and these new rules
In some EU countries, there is a certain amount that you need to earn before you have to register for VAT. If you earn less than this, you are said to be “below the threshold”. You do not need to register and you do not add VAT onto anything that you sell.
The problem with the new rules is that thresholds do not apply when selling into an EU country that is not your own. So, a British person, who could normally earn £81,000 before registering for and charging VAT, has no threshold in Germany.
This didn’t matter when VAT was charged based on where the seller was, as the seller has a threshold where she is. However, the change in place of supply moves the VAT liability to Germany and now our seller is liable for German VAT.
It should also be noted that people from outside of the EU are also liable for this VAT, and no thresholds apply.
Complying with the new rules
Any digital products sold to consumers in the EU after January 2015 will be liable for VAT, charged at the rate of the EU Member State the customer will use the product in. You will need to collect proof, at the time of purchase of where your customer is so that you know which Member State the VAT money must be paid to.
The collecting of proof has turned out to be one of the most challenging parts of this legislation. For downloadable items, you need to provide two pieces of non-contradictory proof as to the location of your customer.
These should prove where the customer normally lives and uses the products (there are different rules for products used at the point of purchase – for example, wifi access bought in a hotel).
The proof that is possible to get as a small business relying on third-party payment processors comes down to:
- The billing address entered by the customer
- The IP address of the customer
- The country that the customer’s credit card is registered in
There are potential issues with all of these and it would be possible to have a customer who doesn’t have a match or two.
Paying the VAT due
Once you have the money and know who it belongs to, you will need to pay it to the Member State concerned. In order to prevent every business needing to make small payments to each individual Member State, the Mini One Stop Shop (MOSS) System has been created.
This allows companies to register with the MOSS in their own country, or choose a country to register in if they are not in the EU and make one report of VAT due, and one single payment.
The reason many small traders in the EU are upset about the MOSS is that to register for the MOSS you have to first be VAT Registered. If you are below the threshold this is termed voluntary registration.
Once registered VAT would normally have to be charged on all sales you make – whether in your own country or cross-border. You also have to charge VAT on all sales that are liable for VAT, not just the digital ones.
Therefore in order to continue selling digital products to other EU countries this ruling forces people into all of the admin required by VAT Registered businesses.
The UK thresholds and voluntary registration
The UK Tax Authority, HRMC, had declared that people under the UK threshold may register for VAT in order to use MOSS but submit nil returns for their UK Sales. You can read more about that decision here.
There may be similar rules in place for other Member States, and if you know of them please add a comment.
Businesses outside of the EU
If you are a business outside of the EU then you should register for VAT with one Member State. The Irish tax authorities have created a portal site for businesses wishing to register there.
You will then need to charge VAT on your digital sales to EU consumers, however, your other sales would remain outside of this ruling and be unaffected.
If you have identified that the products you sell will mean that you need to charge VAT based on where the customer is, you need to decide what to do. The decision you make is likely to be dependent on your location in the world and whether you are already VAT Registered.
Avoiding VAT by selling through a “marketplace”
If you do not sell your products from your own site, and instead sell through a store where you get a cut of profits, you can avoid registering for VAT. This is because the store is actually the seller of the items.
You have given the right to sell your products to that store. When using any of these marketplaces, the seller listed on the invoice should not be you, but the name of the marketplace.
Examples of such marketplaces are the Amazon Kindle Store, Apple App Store, FastSpring, Avangate, and ClickBank. I am keeping a list of these intermediaries on my GitHub resource.
The downside is that you will lose a chunk of your profit to the marketplace. In addition, you may find that you do not get much information about the people who buy your products, making marketing a second product to them difficult.
The marketplace will also be setting the terms that your products are sold under, and so you should check carefully what you are signing up to.
Getting set up to comply with the rules
If you don’t want to hand over control of your products to a marketplace, you need to prepare for January 1st. You should check with your own tax authority for any Member State specific details, however, you are likely to need to do the following things:
- Register for the MOSS (and VAT) in your Member State, or a selected Member State if you are outside the EU.
- If charging prices exclusive of VAT ensure that your online store can add VAT on top of prices at the correct rate.
- If charging the same price to everyone inclusive of VAT check your pricing accounts for this.
- Make sure that you know all of the VAT rates, and how they apply to your items. In some Member States ebooks, for example, are reduced rate VAT.
- Ensure that your online store can log all of the required data about which country the VAT is payable to plus the required proof of location of the customer.
- If you are developing your own system to do this then you can take a look at how we are dealing with this for my product, in this post. There are also third parties that just deal with the VAT reporting and location proving part of the puzzle.
It may be that, like many people, you use a third party store to take payment and deliver your product. Unlike with the marketplaces, these solutions leave you as the seller of the items. Your name or company is on the receipts, and you set the terms of payment and decide pricing.
Selz is one such provider, as they are hosting this article I’ll explain briefly what they can do to help.
In the case of Selz, you will be able to price your products inclusive or exclusive of VAT and the system will invoice the buyer the correct amount according to their location. This means you don’t need to keep an updated list of possible VAT rates yourself or work out where your customer is.
Selz will also log the required information about the location of your customer, and give you access to that data in a report. This should enable you to complete your MOSS return.
A scramble to comply
I feel that the worst part of this legislation is the short time people were given to comply with it. I run a VAT Registered business in the UK. I understood that there was to be a change in the place of supply rules, however, the onerous nature of the evidence required to prove location was never made clear. Even worse, however, no information was being sent out to those people who are most affected by the change – those tiny businesses who are not already registered for VAT.
The situation is not ideal. There are still many things that are unclear about the legislation.
I do encourage business owners who are struggling with this to get involved with campaigning for clarification of the issues, and a threshold for the smallest businesses.
While doing that, it is important to prepare our businesses, make sure we understand how this change applies to us and make the best decisions that we can.