I don’t usually rant on this blog, but I recently came across something from HMRC (the UK tax authority), with regard to new EU VATMOSS rules, which made my blood boil…
VAT: supplying digital services and the VAT Mini One Stop Shop
Since then, I’ve taken some time to read up on the topic of the VAT Mini One Stop Shop (VATMOSS) and how it will affect small businesses around the world. This has given me a chance to calm down (a bit!) and gather some information which may be of assistance to other introvert business owners who are, as yet, unaware of the new VATMOSS rules which come into effect on 1st January 2015.
I would like to make it clear, right here, that this article does not constitute advice or even comprehensive information about the VAT Mini One Stop Shop (VATMOSS). I am not an accountant or an expert on tax or VAT. What I have written here is purely my opinion, based on what I’ve read so far – and the more I read, the more confused I get. I’m also including links to several related articles at the bottom of this post, which might help to clarify things for you.
So what’s the big problem with VATMOSS?
It seems that, according to an EU directive which will come into effect on 1st January 2015 (and which we have only just started to find out about), anyone who trades with “consumers” in the EU, will have to start collecting VAT on sales of “digital services” and pay them to the relevant tax authority. Furthermore, VAT will have to be charged at the rate defined by the buyer’s location, not the seller’s, and paid to the tax authority in the buyer’s country.
For small businesses in the UK, this is galling, because the VAT threshold is currently £81,000 – in other words, if you do less than £81,000 worth of business in the year, then you don’t have to collect VAT. But from 1st January 2015, if you sell “digital services” to consumers in the EU, then you may have to register for VAT – either in the UK, through VATMOSS, or in each individual country where your purchasers live!
Digital services versus Live interaction
The definition of what constitutes “digital services”, or “live intervention” isn’t, as yet, very clear. “Digital services” seems to define anything which is primarily automated – for example where a buyer visits your website, clicks on a Buy Now button and gets an instant download of a digital product.
But, of course, nothing is ever that simple…
Even if you include some live interaction in an on-line training programme, it is currently unclear how much live interaction is required, for the programme to be exempt from VAT.
VATMOSS doesn’t just affect the UK
A lot of people are making the mistake of thinking that this will only affect small business in the UK, so they don’t have to do anything about it. VATMOSS will affect ALL businesses – worldwide. If you want to sell an e-book, downloadable software, a video training course,… or various other “digital services”, to a consumer in the EU, then you will have to charge them VAT at their local rate, and pay it to the local tax authority. Oh, and by the way, there are reported to be 75 VAT rates within the EU.
The good news: if you only sell to businesses, you don’t have to collect VAT. However, it can be difficult to check whether someone is buying on behalf of a business, or as an individual consumer. Sole traders in the UK, like me, for example, do not have a company name, VAT registration number, or anything that can identify us as a business – except for the fact that we have told the UK tax authority (HMRC) that we are trading as a business, and we submit our accounts through an annual tax return. Perhaps the changeover will be simpler for small businesses in the EU, because they already have to be registered for VAT, even if they only earn €1.
Why is VATMOSS such a big deal for Introverts in Business?
I have been trying to encourage introvert business owners to reduce the energy drain by making the most of the internet – not only as a means of promoting the business, but also for the delivery of goods and services. And a lot of what the internet has to offer, as far as delivery is concerned, is automated “digital services” which can be set up once and run continuously – thereby cutting down dramatically on the energy drain.
Even training programmes which are run over the course of a month or more can be automated in part, by using auto responder e-mails and pre-recorded or filmed audio and video content – while using Facebook groups, teleseminars and webinars injects an element of live interaction into the programme and brings you closer to your audience without the energy drain of face-to-face workshops.
Like several of my colleagues, who run similar businesses to mine, I have been intending to create ‘self-paced’ versions of some of my longer programmes – to give more people a chance to benefit from the content, without being tied to a particular time-frame for completing the training course.
However, under the new VATMOSS rules, a self-paced – and therefore totally automated – e-course would be liable for VAT, if it is being sold to a consumer in the EU, although not if it is being sold to a registered business. So the price would have to go up, to accommodate increased admin costs that would be incurred in collecting and reporting on VAT in 28 different EU member countries.
This might price small businesses like mine out of the market, unless we reduced our profits even further… which might put some people out of business altogether.
At the moment, it’s unclear how much live interaction is needed, to change the definition of an e-course from a “digital service” to “live” – so it’s too early to make any definite decisions in that regard, although there is a glimmer of hope according to Lisa Marie Robinson’s VAT Tax Factsheet.
Some of the options for VATMOSS compliance
(as mentioned in the disclaimer above, this is only my opinion, and in no way constitutes advice)
If you’re already VAT registered in the UK / EU, or you will be selling “digital services” to consumers in the EU (regardless of your business location) through your own website, rather than a third-party platform, then the only route appears to be registering through a VATMOSS system in one of the EU member countries (including the UK), which will enable you to report on VAT for the relevant EU member countries through a “Mini One Stop Shop”, rather than registering with each individual EU member country.
If you would rather not have to get involved in the admin required to collect and reporting on VAT, from what I’ve read (and am still reading – new information is coming out daily, if not hourly…) it would appear that there are some options which are exempt from VATMOSS:
- only sell to businesses – you will have to collect 2 pieces of non-conflicting, non-duplicated evidence (therefore, 3 pieces would be safer…) to prove that the buyer is a business, not a consumer. According to HMRC: “VAT registration number or business bank details / other commercial documents. If you don’t have that information, then you have to assume it is a consumer and add VAT to that supply.” So any small business in the UK which is classed as ‘self-employed / sole trader’ rather than a Limited Company, and is not registered for VAT, will be treated as a consumer. You will also have to keep the information gathered for 10 years, in case of an audit by the tax authorities in one of the EU member countries. Which also raises data protection issues…
- only offer “live” services – e.g. live webinars or teleseminars, or any service where the internet or telecoms is only used as a means of communication with your clients, rather than a way of automating your services. So a Facebook group which is an integral part of the programme might be considered “live”, but the jury is still out on this. And it gets even more complicated – according to the EU Commission Explanatory Notes – published 3 April 2014 : “Where a bundle includes goods or other services not covered by the 2015 changes, it is necessary to determine whether the bundle is a single supply and if so, how to qualify the supply.” Of course, from an introvert point of view – the more “live” interaction you include, the greater the potential energy drain. 🙁
- only sell your “digital services” via a third party platform – it is then the responsibility of the third party to collect and distribute VAT. However, some platforms are either saying it isn’t their responsibility, or they’re not yet ready, so it’s a good idea to check. My understanding is that e.g. Clickbank and e-junkie will be compliant by Jan 2015, Udemy will announce their policy mid-December, and FastSpring state that they are ready now, whereas Etsy and Craftsy haven’t yet confirmed. Clare Josa suggests “write to your chosen 3rd party platform and ask them specifically how they comply with the requirements in 1.4 and 1.5 here.” Note that payment gateways, such as Paypal, are NOT considered to be third party platforms – so, although they *might* be able to provide you with the information needed to make a decision about whether or not to charge VAT, VAT compliance would be your responsibility.
- stop selling “digital services” to EU countries – there has been a lot of discussion about whether this would be classed as discrimination, so I’m definitely not recommending this option. It’s best to check the legislation in your own country and in the EU to be on the safe side – but the chances are, it would be seen as discrimination, which is not permissible.
- stop selling “digital services” altogether – this is the most drastic option, but it’s a reality for a number of very small businesses who sell low-priced products and either don’t have the option to add live interaction, or can’t afford to go down either the VATMOSS or third-party platform route. Take heart, though – it might only need to be a temporary measure until things become clearer…
By the way… although the rules coming into force on 1st January 2015 currently only apply to “digital services” rather than digital products, my understanding is that digital products are likely to be the next on the list for the same VAT rules – which kind of makes sense, since the rules seem to be aimed at anything which is “automated” rather than “live”.
The VATMOSS compliance option I’ve chosen
Taking into account all the information I’ve read so far (and, as I said, I’m still reading, so my decision might change…), the conclusion I’ve come to is this.
- From the end of December 2014, I will stop selling e-courses that include an interactive Facebook group, until it’s clear whether my involvement in the Facebook group constitutes adequate “live” interaction to make the whole programme exempt from VAT – and therefore something I can continue to sell direct from my website. This will affect my Video Creation for Introverts programme, which was due to start in February 2015.
- From the end of December 2014, I will stop selling ‘self-paced’ training programmes, which consist entirely of pre-prepared videos, audios and PDF training materials – until I can find a third-party platform which will handle the sale and the correct VAT collection / reporting on my behalf. Unfortunately, that will involve price increases, to cover both the third party platform fees and VAT.
- From 1st January 2015, once the dust starts to settle and the VATMOSS requirements are (hopefully) clearer, I shall begin to re-structure my offerings to make them do-able for me (as an introvert with limited energy reserves) and affordable for my clients.
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UPDATE 1st December 2016 from Clare Josa and the EU VAT Action Campaign Group
“Just announced by Pierre Moscovici of the European Commission:
Threshold promised for EUVAT €10k cross-border sales and the simplifications we asked for, for the first €100k. More as soon as we have checked the fine print.
Obviously, still needs to be negotiated and passed as law.
But this is a phenomenal achievement. Thank you all for your support.
Clare, Juliet & the EU VAT Action Campaign Group”
Join the Digital VAT 2015 Facebook Group for updates and news of discussions with HMRC on VATMOSS
There is also a Twitter hashtag for #VATMOSS and #VATMESS, where you can join online discussions with HMRC and others, and post your own questions.
Some useful articles on the topic of #VATMOSS #VATMESS:
Enterprise Nation – When VATMOSS met HMRC
Clare Josa – VAT-MOSS webinar 2nd December 2014 – quick notes
Lynn Serafinn, of The 7 Graces of Marketing – #VATMOSS – New Tax Law Discriminates Against Small Businesses
Lisa Marie Robinson, of Balanced Tax Services – VAT Tax Factsheet (Note: Lisa is a US tax accountant, and is currently writing from the point of view of a business in the USA trading with someone in the EU. However, she is planning to update the document to include more information that pertains to the businesses that are located in the UK, following another discussion with HMRC during w/c 1st December.)
John McCarthy, CEO of Taxamo writes a guest blog for The Accountancy Cloud – The new VAT rules and what they will mean for businesses supplying digital services cross-border to customers in the EU
Rosie Slosek, of One Man Band Accounting – EU VAT Changes 2015 – What You Can Do
Ysolda Teague, of Ysolda Original Patterns (knitting patterns) – They Didn’t Know – The Impact of #VATMOSS On Really Small Businesses
Heather Burns, of Idea15 Web Design – How #VATMOSS is the end of small enterprise in Britain – and how we can change it
Tim Gray, of Words That Change The World – New EU VAT rules change the game for digital businesses