Most of my readers are probably heartily sick of this already. The new #EUVAT laws – other hashtags #VATMOSS and #VATMESS – have triggered outraged tweets and blog posts all over the dang place. I have no new insights or information, so if you feel sufficiently well informed (or happily incurious), move right along. However, a friend asked for a helpful explanation, and I realised that while I’ve seen many very excellent posts on the subject, I don’t think I’ve seen any that touch on all the key issues. So – for the sake of completeness, and so that if anyone else asks, I’ll have a helpful link ready – here follows the email I sent her.
For starters (indeed, it may be quite enough all on its own), here’s a really good explanation by analogy. For more, read on.
The law aims to discourage big corporates eg Amazon from basing operations in tax havens such as Luxembourg, by levying tax on digital services based on the customer’s location, not the suppliers. Supposedly it applies equally to sellers in all countries – Europe, USA, wherever – although there is some scepticism over foreign parties’ obligation to comply with EU tax law. The principle has been law since 2003 I believe, but here’s the key point: as of 1 Jan 2015, all EU countries have removed their VAT threshold on these digital services. Ie: no longer can you operate as a teeny tiny business without registering for tax (in UK, for eg, you could do this until turnover reached around £70k); the second you make a single cross-border sale to any EU country, you become liable to pay VAT to that country at its prevailing rate.
Summary of the various horrors:
1. Theoretically you have to register for and pay VAT in every single country where you make a sale. Helpfully, each country is setting up a “mini one stop shop” (MOSS), so you can do the paperwork and submit payment in one place. You still have to check the current, applicable VAT rate for each country yourself; the MOSS portal won’t do that for you. Figuring out what VAT rate applies on, say, knitting patterns in Finland probably won’t be terribly straightforward – especially as (a) there’s a lot of confusion among authorities as to what category a pdf pattern falls under (eBook? service? As of today apparently Finland is saying knitting patterns aren’t covered by this law, though other countries specifically say the exact opposite), and (b) um, languages!
2. This can affect all your income strands, not just digital. To use the UK MOSS portal, for instance, you have to register for VAT within the UK (even though domestic sales aren’t included in the cross-border EU VAT rules). This means losing your threshold, as I mentioned above. It means having to pay VAT on every part of your income (although see further notes below). For example: if I were still in the UK, selling a single knitting pattern to a German customer would mean suddenly having to pay VAT on all my freelance editing work. Which would mean raising my rates 20% (or taking a 20% hit on income), which would most likely mean losing business.
3. Not at all insignificant detail: because tax is now charged on customer location (at the exact time of purchase), sellers are required to collect THREE non-conflicting proofs of address (but see below). And store them for 10 years in a secure location within the EU. This is not only basically impossible, it raises all kinds of further compliance issues regarding EU data security law.
4. Each country is interpreting and implementing the law independently. Sellers in different countries are being given wildly varying information – sometimes from the same authorities, because even within each tax office, nobody has a clue. Really. It would be hilarious if it weren’t so damaging.
5. HMRC – which has been at the forefront of dealing with widespread outrage, because English language (I’m guessing), and because “other EU countries aren’t having any problems with implementation” (because, I think, very few people have cottoned on to the mess because it’s being discussed mostly in English) – has hurried to make some adjustments to requirements. They will now (a) let you register for VAT, to get MOSS access, but still not actually pay VAT on your domestic UK sales; (b) let you split your business streams without formally registering separate companies, so that non-digital sales aren’t affected; (c) consider files that are manually emailed to customers, rather than automatic downloads, to be excluded from the provisions. (It’s, like, so 2008, man.)
6. I’m not clear whether this is coming from HMRC or the EU, but there has been some hasty backtracking on the data issues. Only two address records will do (eg IP + Paypal), and you don’t have to check that they match up before the sale goes through, and so on. Still a huge mess. And you still have a really interesting situation if the customer is, say, on a train from Italy to Switzerland – yes, the specific location of the train at moment of purchase really is supposed to make a difference.
7. The law has been written very broadly to catch “the platforms” who authorise delivery – Amazon and iTunes. But (a) there are many other, smaller platforms who are caught by the broad wording, but whose service is not structured in such a way that they CAN handle VAT. Ie, if payment goes directly to the seller, the platform has no way to skim the VAT off. (b) Changing their service so that they can comply would force them to charge much higher fees. (c) HMRC has been clear that it doesn’t want the actual sellers to register for/pay VAT, it wants the platform to handle it. Which means, again, sellers who are already VAT registered lose the option to handle their own VAT and save on the admin fees; while sellers who are not VAT registered lose their threshold.
8. Passing the buck to “the platforms” doesn’t actually make the problem go away, it just raises new problems. For instance, trying to set and display prices in compliance with various platforms’ own rules (tax exclusive?), as well as the law (tax inclusive – but since the tax rate varies in each EU country, this is not so easy). See this post from a writer, who shows how it’s literally impossible to comply with everyone.
Lawmakers were 100% convinced that all of this really wasn’t going to be a big deal, because “the platforms” – Amazon and iTunes – would handle everything. They were blissfully oblivious of the existence of thousands of microsellers selling directly to customers; or the smaller platforms with different business models; or all kinds of other fairly important details. (Fun fact: the UK MOSS website was user tested by exactly 4 people, and was designed with the express assumption that users would already be familiar with the VAT website interface. The removal of the threshold is fairly key but in the minds of The Powers, the little guys just don’t exist.)
So, to sum up:
The law was supposed to target Amazon and iTunes, to create a “level playing field” and further the “single digital market”.
- Masses of sellers are closing up shop or blocking EU customers, because they are unable to deal with the admin nightmare.
- So EU customers are losing access to all kinds of products – from software as a service, to music, eBooks, online courses…
- Other sellers are being driven to use special tax services, who of course take a large cut for handling the admin, or larger platforms that are able to comply with the new laws – and again, charge a stiff fee. I hear iTunes has just raised their fee considerably. Plus you have to factor taxes into your pricing, which will probably also mean a sales hit.
- Amazon and iTunes are pretty much the only ones who benefit (from reduced competition, and all the sellers being driven into their arms).
And the lawmakers didn’t have a clue. They didn’t know the first thing about the digital economy, and they didn’t bother to find out. They’re also mightily offended that anyone can get upset about it now, since the law has been in place for years (in the bottom of a locked filing cabinet, in a basement, on Squornshellous Delta?) and we’ve had so long to sort out compliance. Not that they went about telling anybody other than businesses who were already VAT registered…
PS: It seems knitters have been at the forefront of discussing, figuring out and campaigning against these changes, presumably because Ravelry. Casey has implemented a set of workarounds, for now, in the form of (a) partnering with Loveknitting to handle EU VAT for those sellers – including me – who choose that path, and (b) allowing sellers to turn off sales to the EU, if they want. Sadly, quite a few designers have chosen to do that, though I think most are either going with Loveknitting, or choosing not to comply. Given time, other options will apparently become available. Ravelry sellers or customers with any questions should head over to this thread.