Sell ebooks, software, courses or music online? If you or any of your customers live in a European country then a piece of legislation designed to deal with companies the size of Amazon might be about to give you a taxation headache.
When you sell digital products online, the world can seem a borderless place. I run a company from the UK, but 50% of our customers are not from Britain. There have always been hoops to jump through when selling to other countries, and as a small business you have little choice to comply with whichever rules are created — even when they were not created with small businesses in mind.
This change has huge implications for everyone selling and buying digital services online
An example of this is the change in “place of supply” rules in the European Union (EU), which cover how Value Added Tax (VAT) is collected. This change has huge implications for everyone selling and buying digital services online. (You may have noticed somewhat angry tweets using the #VATMOSS hashtag recently.)
In this article, I’m going to cover the situation as it stands today. As WebdesignerDepot has a large audience from outside of Europe I am going to explain the situation as it applies to businesses outside of the EU as much as within it.
(I’m not a VAT expert, I’m a business owner who has spent a long time reading up on this subject so I can comply, and also help other small businesses. In addition the situation is still changing frequently as individual member states in the EU refine their guidance. You should take this information as a guide and check with your own accountant or tax advisor before making any changes to your business.)
What is VAT?
VAT is a tax on purchases and is used in many countries around the world including within the EU. VAT is a percentage of the sale added to the selling price of the item. For example in the UK the Basic Rate of VAT is 20%. If I purchase an item costing £120, £20 of that price is VAT.
VAT Registered businesses collect the VAT and then pay the VAT they have collected to their tax authority. They can deduct from the amount due any VAT they themselves have incurred buying items for business use.
Which products and services are affected by the new rules?
The electronic services included in the new rules include:
- Download and online games
- E-books (e.g. Amazon Kindle)
- Download and streaming music and videos
- Cloud computing, including software provided as a service (‘SaaS’)
- Subscriptions to online journals, newspapers etc
- Membership fees to online associations, fan clubs or dating service
What is the current situation for sellers in the EU?
Currently, when selling an electronic service to consumers VAT is charged where the business is based.
If you sell just one product to a consumer in an EU country you are liable to pay the VAT to that country
This means that a VAT registered business in the UK selling a WordPress plugin to a person in Spain needs to charge VAT at the UK Rate of 20% and pay that to the UK tax authority via their VAT Return.
If the customer is VAT Registered (and not in the same country as the seller) then VAT is charged where the customer is. However what this means in practice is that they account for the VAT in their own VAT return under the reverse charge rules. All the UK business has to do is validate the VAT number of the customer and allow them to pay without including VAT. The UK business does not need to know about the Spanish VAT rate or pay the tax themselves.
What is the current situation for sellers outside of the EU?
Since 2003, businesses selling to EU consumers should have been paying VAT due via a scheme called VOES (VAT on e-Services). This scheme enabled businesses from outside the EU to register with a single member state and pay VAT there. In practice only the largest businesses complied with this, and usually by registering in a member state with a low VAT rate.
What changes on January 1st 2015?
From January 1st supplies of electronic services to consumers must always be taxed where the customer is based.
What this means is that a business in the UK selling a WordPress plugin to a person in Spain needs to pay the Spanish tax authorities VAT at the Spanish rate on that sale. The UK business therefore needs to know the Spanish VAT rate and verify that the customer is in Spain.
The rules with regard to sales to businesses who have a VAT number do not change.
Why the change?
This is an attempt to prevent large businesses, such as Amazon, from registering the VAT in an EU country with a very low VAT rate for some or all products. Luxembourg has typically been used for this purpose and, as this 2012 article in The Guardian demonstrates, other member states were keen to ensure they did not lose out on this tax money.
By moving the tax to the place where the service is used, this ruling ensures that tax is paid more fairly. On paper this sounds fine, in practice it has scooped up a lot of very tiny businesses with legislation designed for larger ones.
What is the MOSS?
The Mini One Stop Shop (MOSS) is a facility offered by EU countries to simplify the payment of VAT to all of the different member states. Businesses in EU countries register with the MOSS in their own country. Then they make one quarterly MOSS return that details the sales they have made to other EU countries and the VAT owed, make one payment to the MOSS and then that money is distributed.
The alternative, and valid, option is to register for VAT in each country that you trade in. This is unlikely to be a sensible option for all but the largest of businesses.
Businesses outside of the EU can choose to register with an EU business in order to report their sales through the MOSS in that country. You are eligible to register as a “non-Union” business if, you haven’t got a business establishment in the EU and you are not registered or otherwise required to be identified for VAT purposes in the EU.
Are there minimum sales thresholds before I need to register?
Unfortunately not. If you sell just one product to a consumer in an EU country you are liable to pay the VAT to that country. Some countries have minimum VAT thresholds, in the UK this is currently 81,000 GBP (about 127,000 USD). However these thresholds do not apply when the tax is due to another country, in that case the threshold is zero even if the country has a threshold for its own residents. It is for this reason that many small businesses are being forced into VAT Registration for the first time in EU countries, and in particular the UK. To register for MOSS you need to have a VAT Registration.
The UK is putting into place rules for UK businesses in this situation. I’m not going to delve into them here but if you are a UK business, read the information here for more information.
How do I prove where my customer is?
The issue of proof is a difficult one for many small businesses due to reliance on third party payment processing, shopping carts and delivery of digital products and services.
The EU legislation states that unless the service is delivered via a fixed landline, or some other method that means it is clear where the customer is at the point they use the service you need to provide two, non-conflicting forms of evidence as proof you are paying VAT to the correct member state. The possible options are:
- the billing address of the customer
- the Internet Protocol (IP) address of the device used by the customer
- location of the bank
- 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)
The location that is important is where the person buying the goods or service will normally use it. There is an example in the EU Explanatory Notes (page 56) of a UK resident purchasing MP3s while on holiday in Spain; their usual address is in the UK, the rights to use the MP3s do not disappear when they leave Spanish airspace, so UK VAT would be payable.
This means that for most businesses the billing address that is provided by the customer would be what you use to decide how much VAT is payable and then you need to find another piece of information to back that up. The most likely pieces of information being the customers IP address, run through a geocoding service to get country, or the billing address of the card used. You can usually get the card country back via the API when using a PSP. This is possible with both Stripe and PayPal.
On my own blog I have detailed more about what my company is doing with regard to proof, and also looked at the implementations of some other companies.
How long must I keep this proof for?
The proof you collect about the location of your customer must be kept for 10 years in case of a VAT audit.
Where can I find up to date VAT Rates for each EU country?
Up to date VAT Rates are published by the EU and can be found in PDF form here. There is currently no official API to retrieve these. It is worth noting that there are different levels of VAT, some items incur a reduced rate. This includes ebooks in some, but not all, member states. So if you sell a software product and an ebook you will find that you need to charge different rates of VAT for those items.
There is an excellent resource at VATlive, a site providing all kinds of information about VAT in a far easier to read format than the official EU information.
What about VAT invoicing?
If you sell products and services to people and companies in the EU you may already have been asked for a “VAT Invoice”. This is because VAT registered companies need to provide an official VAT invoice to claim the VAT paid back.
You need to provide a VAT invoice that details the amount of VAT paid. Requirements are different for different countries but the EU sets the minimum details required. If you use a third party accounting system that sends invoices you should check with them that their invoices meet the requirements.
My service or software sells digital products on behalf of other people, what should I do to help my customers?
If you have an e-commerce plugin, shopping cart or offer a delivery service for software or ebooks then it is likely that your customers will be asking for your help to comply with this legislation.
Take a look at the implementation details posted by SendOwl and Recurly, these are good examples of what services can put in place to help customers. With people scrambling to comply with the rules there is a competitive advantage for any service that can adapt quickly to help customers. The same is true for WordPress or other CMS plugin developers, you could really help people out and gain new customers by putting provision in place.
Can I avoid dealing with VAT?
The simplest way to avoid dealing with the VAT is to only sell via a distributor who becomes the seller of the product and pays you a royalty or cut of profits. Therefore ebooks sold only through the Kindle store will not cause you to need to register for VAT as Amazon is the actual seller of the product. Likewise Apps on the Apple App Store do not cause the developer to need to become registered for VAT.
You need to ensure that the third party does become the seller of the item or service, and has their company name on the invoices. Services that just give you the ability to host an online store or that deliver digital downloads for you will not exempt you from having to deal with the VAT yourself.
What problems is this likely to cause for people who buy digital products and services?
The biggest issue for consumers is likely to be price increases. Companies selling to consumers typically display prices inclusive of VAT, and now the amount of VAT due is based on the consumer location and not the sellers. Stores will need to price items so that they can afford to pay the highest possible amount of VAT for each sale. To take one example:
VAT on an ebook in the UK is 20%, in France it is 5.5%. I price an ebook at $10. A UK resident buys my book so I need to pay $2 in VAT to the UK. A French resident buys and I only need to pay 55 cents to France. Giving me an extra $1.45 profit each time I make a sale in France!
Amazon have issued guidance to their sellers with regard to minimum and maximum pricing due to this issue.
You may also find that businesses choose not to sell their product to people in EU countries outside of their own. There is some debate as to whether this is legal within the EU due to the fact we are supposed to trade openly with each other. However businesses outside the EU may decide it is just too much trouble to offer their products and services to EU citizens.
What happens if I don’t comply?
Businesses who do not comply with VAT legislation can be audited by any member state who believe that they are owed VAT. If you are within the EU then my understanding is that this would be instigated by your tax authority in the first instance.
How likely is it that EU member states will pursue non-registered small businesses from outside of the EU? That’s a question I can’t answer, however these businesses should have been paying VAT on supplies to EU countries since 2003 anyway. How the VAT needs to be paid has changed, but the requirement to pay VAT hasn’t.
Where can I find out more?
I am collecting information as I find it on a site at GitHub. I am trying to maintain this as an up to date resource as new information is found. If you have new information I’d love you to add it via a Pull Request, or just let me know.
Featured image, money image via Shutterstock.