The Truth About The New EU VAT Rules and What They Really Mean if You Sell Digital Products
“Oh woe… THE END IS NIGH!!!”
If you listened to some so-called Internet marketing ‘experts’ in the last few months of 2014, you’d think the world was coming to an end…
Normally sensible and level-headed people were getting into a right old flap about the new EU VAT rules for selling digital products that were due to come in on January 1st 2015.
The doom mongers were predicting the rules would destroy countless small and micro businesses from info publishers to web designers, affiliate marketers to ebook authors.
Now the reason I haven’t mentioned this before is because…well… I guessed that the rules wouldn’t even make it out of the traps in January intact, and that they would be forced to change.
Look, I rarely talk politics but European lawmakers don’t have the best reputation when it comes to using common sense.
- I mean, who could forget the EU regulation that prohibits the sale of bananas that are ‘abnormally’ bendy…
- Or the law that ban producers of bottled water from claiming that water helps hydrate you…
- Need to buy a decent vacuum cleaner or hairdryer? Forget it! Since 1 September last year anything over 1600 watts is banned from sale… (that means Five of the seven Which? ‘Best Buy’ vacuum cleaners are now illegal to sell!)
And this latest EU regulation is no less absurd…
This is a half thought-out attempt by the EU to grab tax revenues from the likes of Amazon….
However, it’s punishing small businesses the most. And unless the EU is happy to drown its legions of budding entrepreneurs just to have a go at Amazon, this legislation isn’t going to last in its current form for much longer.
OK, let’s start with the facts…
Mad, bad, and backfiring already – the new EU VAT rules
Before 1 January 2015, if you were selling a digital product online, you’d pay the VAT based on where your business is located. So if you’re based in the UK and someone from Germany buys something like a Digital Web Study Course, you will have paid the UK’s 20% VAT rate.
However, that’s all now changed…
What’s known as ‘e-services’ are now charged at the rate of country in which the customer lives.
For instance, if you’re in the UK and someone from Germany buys your Digital Web Course, you will have to pay the German VAT rate of 19%.
To make it even more complicated, there are ‘reduced’ VAT rates in each country for certain types of product. For instance, in France eBooks have a reduced VAT rate of 5.5%.
For all the information on each European member country and what their VAT rates (regular and reduced) are, then take a look at this.
On top of this hassle, you have to collect two bits of valid evidence to prove the buyer’s location and keep that information for ten years, for instance:
- Billing address
- IP address
- This is the geographic location of the customer’s computer
- The location of the customer’s bank
- The country code of the SIM card the customer used
Many people are complaining that their shopping carts and payments systems aren’t set up to get this information and store it.
What’s more, to charge the right VAT at the point-of-sale, you need to know where the customer is located before you can display the correct price including their country’s VAT.
It’s pretty obvious these lawmakers have never run a small business!
And even if you CAN get all that sorted, the process of supplying this information might put a customer off the sale.
Does all this apply to you?
If you’re wondering whether this applies to you, well, it’s highly likely that if you sell anything to customers in the EU, then yes.
The term ‘e-services’ covers…
- Images or text, such as photos, screensavers, e-books and other digitised documents e.g. pdf files
- Music, films and games, including games of chance and gambling games, and of programmes-on-demand
- On-line magazines
- Website supply or web hosting services
- Distance maintenance of programmes and equipment
- Supplies of software and software updates
- Advertising space on a website
And these are just for starters: the ‘brains’ in Brussels plan to roll this out across most goods and services by the middle of 2016!
So what on earth should you do?
Don’t panic… just wait for the dust to settle
These rule changes are messy, ill-thought out and causing a storm of protest.
Just days before the rules came into force, campaign groups were lobbying the HMRC to make changes.
For instance, if your business supplies digital services to consumers in the EU, you can register for the VAT Mini One Stop Shop (VAT MOSS) scheme that solves the problem.
The problem is, to do that you have to register for VAT. And if you are under the VAT threshold, like so many micro-businesses are, then you suddenly have to add that to your UK sales.
However, days before the rule-change came into effect, campaigners forced HMRC to say that micro companies will NOT forced to charge UK VAT on their domestic sales.
What’s more, if you’re below the VAT threshold, you can use the information provided by your payment processor (eg PayPal) as your evidence for proof of place of supply until the end of June.
Campaigners, like EU VAT Action, are fiercely negotiating a reworking of the rules to shield small and micro-businesses from this red tape gone mad – and they are having an effect.
Over the coming months I’ll gather as much advice as possible while this fast-moving story develops and make sure you’re up to speed.
Of course, I’m not an expert in this field. As with any tax issue, it always makes sense to check with your accountant who should be completely familiar with the details…
And do look out for a full investigation and update in the next paper issue. If you haven’t subscribed yet, now is the time to do it. Click here for details of the risk-free trial.
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I know Sara has a very loyal following and will be missed by many. But rest assured you’ll continue to enjoy all the great advice and guidance you’ve come to expect from IID… and a whole lot more.
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