"VAT on Digital Products" Topic

A lot of us are producing digital products – books, rulesets, PDF downloads, games and so on –that will be affected by new EU legislation coming into effect on January 1st.

Change.Org is currently running a petition aimed at Business Secretary Vince Cable and it's important that you understand what is about to happen:

"The new EU VAT regulations coming into force in Jan 2015 mean that micro-businesses supplying digital services (such as Ebooks, music downloads, apps, guides and courses) direct to customers (B2C) will forfeit their VAT exemption threshold by doing digital business in Europe. Why should small digital businesses be treated differently to other categories of small business in the UK?

This new legislation will cripple, and potentially force into closure, thousands of micro-businesses across the UK – just as this government claims to be trying to make it easier for small businesses to grow and create jobs. Even the Head of Tax at the Institute of Chartered Accountants (England & Wales) is saying that micro digital businesses should consider the option of not selling in Europe as a result of this law!

From 1 Jan 2015, the new ruling means that should you make a sale to the EU (how one can prevent that with online services is not clear) from the first £1.00 GBP of revenue your business earns you will need to be VAT registered in the UK and under the VAT MOSS Europe-wide scheme – meaning that you will immediately have to apply VAT to all your services, including those in the UK.

Furthermore, this this means a quarterly obligation to submit VAT returns, increasing the accounting burden significantly; as well as, the cost and complexity involved with meeting the letter of the law regarding the capture and retention of evidence of its customers' location will bring (which needs to be retained for 10 years)."

If this legislation is enforced as-is, then I, for example, will no longer be able to sell back issues of my magazines or other digital products direct from my website: the administrative burden and cost will simply be prohibitive.

I would have to register for VAT and submit quarterly returns even though my solo business income falls way below the VAT threshold, simply in order to register for the so-called MOSS scheme. If I fail to do this, then, get this, I would have to track sales made in every single EU member state (all 26 of them, currently) and make returns to each and every one of their governments.

You can get more information from link

In the meantime, you can sign an online petition aimed at excluding micro-businesses from this ridiculous bit of eurobureaucracy:

link

Henry
MWBG

Signed

Jim

Hmm, so what are the implications for those selling through places like Wargames Vault?

tried to, but I got a bad gateway error at the site. I bet someone doesn't want this petition signed.

The Two Fat Lardies must be worried! :-(

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Martin Stephenson
Vexillia: Wargames Miniatures & Accessories
Shop | Rules | Offers | Facebook | Twitter

Looks like a boon to businesses based outside of the EU, who will not be subject to those laws.

Perhaps another reason to secede from the EU, as well.

Plus TMP for selling advertising space to EU based businesses…

Mako, non-EU suppliers supplying to EU consumers are technically caught. Obviously enforceability becomes an issue…

If I have read this information correctly, if you do not sell outside the UK then these rules do not apply.

Hmm, so what are the implications for those selling through places like Wargames Vault?

I suspect that depends on precisely how the contracts are arranged – ie. does Wargames Vault simply facilitate the supplier selling to the customer, or does it buy from the supplier and resell to the customer? If the latter, no problem, but if the former, yes problem….

As a PS, I think Henry's rather harsh calling the overall scheme a "ridiculous bit of eurobureaucracy."

The basic intent is sound (ie. to stop companies like Amazon funnelling all electronic sales through Luxembourg at 3% VAT rather than compete on a level playing field with smaller firms and physical suppliers.) The issue is applying legislation that's really aimed at tax-dodging multinationals to all businesses, which *is* bloody excessive bureaucracy….

The issue is applying legislation that's really aimed at tax-dodging multinationals to all businesses, which *is* bloody excessive bureaucracy….

If that is true (and I can only assume that it is) why apply this ruling to companies BELOW the VAT threshold?

Almost certainly because nobody at the top thought of it – this is not a rare occurrence. The rules were drafted with a perfectly sensible aim, which they should succeed in achieving. But I strongly suspect no went through them looking for unintended consequences….

Simply changing the place of supply and leaving the registration thresholds unchanged would have stopped the avoidance measures of Amazon and their like. Eliminating the thresholds means that this is aimed at small businesses in a move that will hamper trade within the EU at a time when the Eurozone is in financial . Calling it a "ridiculous bit of eurobureaucracy" is flattering it. I've got better descriptions.

In my limited experience, much legislation aimed at the rich and powerful often only succeeds in inconveniencing and penalising the little chap: the former can employ expensive accountants, advisers and lawyers to find ways around it.

So long as different EU countries charge different rates of VAT, multinationals will inevitable structure their affairs so transactions legally take place in the lowest tax zone. That's the way laws work. And anyone who has an ISA – a tax avoidance scheme set up by the UK government for UK national savers – can hardly complain about companies arranging their affairs to avoid tax without being rather hypocritical.

I've signed. I do hope this petition will succeed!

It won't. Vince Cable is powerless to do anything about it, even if he wanted to. It has been passed and will take effect on 1/1/15.

Eliminating the thresholds means that this is aimed at small businesses

The thresholds haven't been eliminated though. The problem is that the One Stop Shop (which removes the worst of the onerous compliance issues) assumes you are VAT-registered, and can't be used if you're not. Thus if you want to stay unregistered you have to deal with VAT returns separately for every EU country you sell to. I see cock-up rather than conspiracy….

Just one more reason to leave the EU…..

Wise words – the job losses that will follow leaving the single market (and big firms shutting down UK-based "European" HQs and factories to relocate to the continent) certainly won't outweigh this in terms of overall harm….

I suspect that technicality will be ignored by many, if not most, outside of the EU.

The fact that you have to deal with VAT in every member state where you sell means the thresholds have been abolished. Large organisations can employ departments to do that, small businesses can't – want to make a VAT return in Slovene, Bulgarian, Greek and Portugese every quarter? No? Then:
A. Stop selling PDFs to the rest of the EU (probably illegal under the Single Market);
B. Stop selling PDFs in the EU including your own country;
C. Register for VAT in order to use MOSS and add 20% to all your prices and carry out the compliance work.
The guy who wants to market his own rules and supplements in electronic form would be advised not to bother.

A. Is perfectly legal – rules against restricting sales within the single market apply to governments; companies are always free to choose which countries they will and won't deal with.

I'd also propose:

D. Sell through a third party platform so the VAT headache is theirs not yours.
E. Sell direct to UK and ROW customers only, and use a third party platform for European sales only.
F. Sell direct yourself, but only make direct downloads available to UK and ROW, while shipping CDs to European customers.

None of them ideal, but a lot less drastic than B and C….

Not convinced with what you say about A. There have been cases where companies have been prosecuted for restricting sales across borders. Sales of cars was one.

D. The third party will want their cut e.g. Wargames Vault charges 35%.
E. Will work but see D above.
F. Might work subject to A. above but will involve more work and costs which must be paid by either the customer or the trader.

The effect is to make all cross-border digital sales in the EU VATable but like all new taxes people will aim to work around them and they will ultimately not meet their projections.

Hence the phrase "none of them ideal" – they're damage limitation, not solutions, but rather more practical than shutting down. Which is best will depend on your price point – if it's low, then E is probably worth a look, if it's higher then maybe F, although obviously it impacts on ease of acquisition for EU customers, as well as the couple of quid a physical CD actually costs to buy and post.

As for your point on A, from the Europa site:

If you sell products online, you may not refuse to deliver to customers in other EU countries unless you have a valid reason. To avoid confusion, you should indicate any delivery restrictions clearly on your website.

(Bold print is theirs.) So looks like I was wrong in thinking you can refuse any country on a whim, but you can refuse if you have a reason for doing so, which this extra administrative burden would qualify as.

PS – Obviously yes I've signed the petition and hope that they find a proper solution, but I think it's wise to look for ways of dealing with the situation as well as hoping they'll change it so you won't have to….

Dom, what do you reckon the legality is of, for example, selling a physical product such as a starter pack of figures and having digital product bundled free? Assuming of course that the starter pack is also available without rules at the same price.

Of course, this leads us down the road of selling promotional items such as tie-pins, lapel-buttons, T-shirts and so on as the product, with the downloadable digital rules tacked on as the free element.

I've signed too even though I'm not at all optimistic about its chances.

I look on this as one of those legislative and compliance hurdles that crop up and have to be crossed.

I take it then that the normal rules for VAT won't apply to these businesses:

"You must register for VAT with HM Revenue and Customs (HMRC) if your business' VAT taxable turnover is more than £81,000.00 GBP You can register voluntarily if it's below this, unless everything you sell is exempt."

Dom, what do you reckon the legality is of, for example, selling a physical product such as a starter pack of figures and having digital product bundled free? Assuming of course that the starter pack is also available without rules at the same price.

It's a slightly hazy area, where there's some case law, but no proper hard and fast rules. Bundling goods is fine, but what they should be classified as for VAT is complicated. If you can reasonably claim the physical item is what's being bought, and the electronic goods a freebie, that should be OK, but when the bundle is definitely the customer paying for both it gets murky. There's a decent piece here:

link

Of course, this leads us down the road of selling promotional items such as tie-pins, lapel-buttons, T-shirts and so on as the product, with the downloadable digital rules tacked on as the free element.

Go far down that road and I foresee extreme legal strife. If there's a reasonable perception that the bundle's value lies in the egoods rather than the physical item, HMRC would definitely have grounds to tear you a new one – if you can't make a very solid case that the physical items would sell, for that price, without the electronic ones being supplied too, then you're definitely selling digital content….

Cameronian – see all of the above – the £81.00 GBPk threshold remains, but access to the clearing system for European VAT requires a VAT number, so businesses that aren't VAT-registered in the UK would have to deal with the VAT authorities separately in every other EU country they sell electronic content to….

Dom, it's why I was mainly thinking about a starter pack of figures – something that does have value on its own, that is related to the rules, and that would be sold at the same price with or without digital rules.

But basically it's easier to take a step back on the technology and sell as a physical product, rather than a downloadable one.

Hmm, so what are the implications for those selling through places like Wargames Vault?

Been researching the issue and businesses outside the EU selling to customers inside the EU are liable to pay the VAT and therefore should register.

The liability is clear, whether they get caught is another matter entirely.

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Martin Stephenson
Vexillia: Wargames Miniatures & Accessories
Shop | Rules | Offers | Facebook | Twitter

Been researching the issue and businesses outside the EU selling to customers inside the EU are liable to pay the VAT and therefore should register.

Yep – as far as I'm aware that's actually been the case for a while now, but umm, I can't say I've noticed it actually happening very often….

Yep – as far as I'm aware that's actually been the case for a while now, but umm, I can't say I've noticed it actually happening very often….

I couldn't see how the EU could force a non-EU company to comply. It's like passing a law that affects companies based on Mars or the Moon…

Yep – unless they have an EU presence, it's all a bit theoretical…. Mind you, US income tax laws are even more extra-territorial – it's a complicated world….

My accountant has sent me another link for information:

link

Henry

My immediate thought is to not sell to mainland Europe, which would be a great pity. It might be difficult to prevent sales to Europe, though, in any case. I'll have to look at the software in my shop!

There's a piece in yesterday's Telegraph about it.

link

I've written to my MP, for what it's worth.

My gut call is that the least bad option is probably physical CDs for mainland Europe. That said, the biggest concern I see is the record keeping requirement:

1.5 Record keeping
If the presumptions referred above don't apply, you'll be expected to obtain and to keep in your records 2 pieces of non-contradictory evidence from the following list to support your taxing decisions. Examples include:

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 to him
other commercially relevant information (for example, product coding information which electronically links the sale to a particular jurisdiction)

Once you have 2 pieces of non-contradictory evidence that is all you need and you don't need to collect any further supporting evidence. This is the case even if, for example, you obtain a third piece of evidence which happens to contradict the other 2 pieces of information.

As I see it, this is probably the biggest emance, as if you're selling downloads with payment through Paypal (pretty standard for wargames firms) the billing address is about all you get. Reliably getting something to confirm that is likely to be a major hassle, and is of course required for *all* customers, not just European sales.

Dom.

link

Blimey! It just gets better. :-(

Yep, that one seems the big stumbling block to me – stopping EU downloads is a no-brainer if they don't make changes, but you still have to have sufficient records to satisfy them that your downloads really aren't EU…. :-( Rather hoping a bit of sanity prevails, but we'll see….

Yes me, too! It is Kafkaesque. I don't believe it would be possible to capture more information than the customer's address.

Sometimes it makes one wonder who draws up this sort of legislation…

There's a possibly simple answer to all this – don't actually sell anything. Give it away…

Producers of software programs (the first digital products?) have been doing this for years.
fsf.org

Good luck making that work in a niche hobby market….

Yes me, too! It is Kafkaesque. I don't believe it would be possible to capture more information than the customer's address.

I suspect you can get an app or similar to log IP addresses which would give you the second reference you need, but obviously that's not always reliable, and it's likely to up automated download systems, since you can't rely on IP verification working every time, so need to verify that it has before the transaction can be completed….

On the flipside, there may be a question of whether you *have* to record it yourself, or whether they'll accept the information being held by an intermediary. (Specifically I'm wondering if requiring a verified Paypal address might be deemed sufficient – by the letter of the rules no, since you only have one confirmation of country, but it might be a point they'd concede, as that one point has multiple confirmations.) If you process card payments directly, address plus identifying the card issuer is sufficient, so problem solved there at least.

Good luck making that work in a niche hobby market….

link

Yes, and what do they do for a living…?

Yep – as far as I'm aware that's actually been the case for a while now, but umm, I can't say I've noticed it actually happening very often….

It has been – and as followup posts have indicated if the business is entirely outside the EU they seem to be able to ignore it. If they have an EU presence then they follow it.

When the law/regulation/whatever was either established or looked at and enforced suddenly a bunch of online gaming services started charging VAT to EU customers if the company had EU existence – so Everquest run ultimately by Sony started charging whereas at the time WWII Online was purely US based and didn't….

Yes, and what do they do for a living…?

Sell products that are not digital, perhaps?

HMRC has just posted a clarification.

link

It basically says that if you deliver any digital product or service via an automated system, you are liable. Only if you send your product as an attachment via email to each and every customer individually can you escape the net. So, for example, if you use any kind of automated shopping cart system that delivers digital product to the customer without your personal intervention, tough luck.

Henry

The clarification makes a huge difference. In effect, the new rules do not apply if a retailer manually sends a PDF after a purchase as opposed to an automated download at the time of purchase.

In effect, the new rules do not apply if a retailer manually sends a PDF after a purchase as opposed to an automated download at the time of purchase.

That's a thoroughly ridiculous place to draw the line, but back to the 1990s it is then. Utterly artificial distinction, but I suspect for many micro-businesses it's the easiest option by far. (Particularly as it gets you out of the horrible address confirmation requirements, which will apply to *all* download services, not just ones selling to the EU.)

Assuming of course it's correct – I definitely wanted to see it in something more solid than a Tweet, but it's an encouraging development if they've got it right, and at least the compiled Q&A has stuck with it for their little flowchart…. :-)