The VATMOSS VATMESS — The New EU VAT rules on digital products.
What’s this all about?
On January 1st 2015 new rules come into force in the EU regarding the accounting of VAT on sales of digital goods and services.
What happens now
At present when a UK business sells a digital product to a consumer in another EU country, the “place of supply” is deemed to be the UK and, if we are VAT registered, we therefore charge UK VAT at 20%.
In the UK a company only needs to be VAT registered if they turnover more than £81,000 in UK sales.
If we sell to a company in another EU country we do not have to add VAT but we have to prove the buyer is indeed a company and realistically the only way to do that is to collect their VAT number and verify it.
What will change
As of January 1st if we sell a digital product or service to a consumer (not a business) in another EU country the place of supply becomes the customer’s location and we therefore have to collect VAT at their rate. So we have to charge VAT at the current rate for that customer’s country.
Furthermore there will be no threshold on these EU sales.
Why is this happening?
For a long time large companies like Amazon have been able to register in places like Luxembourg where VAT rates are low in order to boost their margins and drive down prices. This gives them an unfair advantage against smaller retailers and denies tax revenue from countries they are selling to.
How will this happen?
Companies can register in every country they wish to sell into, but that would be, well, quite a burden. So instead HMRC have created something called Mini One Stop Shop or MOSS which is a portal where they will be able to submit EU VAT returns.
As yet no one has any idea what this looks like because even if you are registered — as I now am — you cannot access it until it is actually time to submit a return which won’t be until 1st April next year.
Companies of all sizes will now have to become VAT registered if they are to sell to the EU, even if their UK sales are below the £81,000 threshold.
Companies will need proof that the customer is where they say they are and will have to hold this documentary evidence for 10 years!
Two pieces of evidence are required. Evidence can include IP address, billing address, card address, and they must not contradict each other.
What are the technical implications?
Well, first of all it is clear that we need to store things like IP address. We also need to check it against billing address etc.
Most micro businesses do not have the technical knowledge to do this. And in any case the details will often not match.
Here’s an example of a scenario that often prevents itself to me: A German customer with a credit card issued by a Belgian bank is currently working in the Paris office of a US multi-national. They are accessing the internet from a corporate network with a public IP address that geolocates to the USA. While they wish to use the software at work the cost of it is too low to warrent going down the official IT procurement process so they buy with their personal credit card with the aim of claiming back on expenses later. They don’t enter a VAT number for this reason, even though ultimately it will be used in the company, so we have to treat them as a consumer.
What VAT rate do we charge? What happens when we do our EU VAT return and nothing matches up?
You see, IP addresses were never meant to identify the location of the end user. They don’t do that. They don’t themselves contain geographic information.
There are third party databases and web services which link IP addresses to the location of its owner. This would usually be the ISP, or company, who purchased the IP block that the IP address belongs to. But the real person connecting to your website, who gets allocated the IP address when he connects, could, for various reasons, be anywhere in the world. He might not be in the same country as the ISP or business which owns the IP address. This is especially common in the EU where people live close to borders.
On top of that there is no single official source of IP geolocation data. There are various third party services which offer services for looking up IP address location. And as with all services there are cheap options and expensive options and as you would expect the cheap ones often aren't as complete or as accurate as the more expensive ones. Some are more reliable than others and may fail to respond when the customer checks out.
So which service does the EU want us to use? Which one is “legally” recognised?
The technical difficulties of IP address location can be overcome by people like me — developers running software businesses. But there are thousands of micro businesses who don’t have technical expertise. Many, probably most, use PayPal to sell their wares. They simply stick a PayPal button on their site and off they go.
Suddenly they are being asked to register for VAT, submit VAT returns, all just in case someone in Italy buys their PDF tutorial. And they have no idea how they will collect the IP address, which PayPal currently doesn’t provide and has no obligation to do so.
I have spoken with some such small businesses who tell me they will simply cease selling downloadable goods because it either isn’t worth their while to comply or they don’t know how to. This is wrong. We should be supporting small businesses not making them suffer.
Why should these businesses now make UK VAT returns when they didn't before? Why should a small business that sells eBooks have to register for VAT and make returns when a business of the exact same size which sells printed books doesn't have to?
Today HMRC clarified the situation a little by saying that companies trading below the UK threshold will be able to make “nil” returns in the UK. All very well, but they still have more burden than they used to and there is still no threshold for EU sales.
This was not the response people were looking for. To paraphrase, it is pretty much just saying “Stop whining, it won’t effect many of you because you sell through marketplaces and anyway we’ve been telling you about it for years”.
Well, from the responses there and on twitter, it is quite clear that they have not been communicating this well at all. I myself only found out about this and understood the implications in the last few months, and that was from third party blogs, not from the HMRC. I have not received any direct communication from HMRC or my accountant.
And not even HMRC’s own VAT helpline knew what the Mini One Stop Shop was only last month. Just listen to this audio of a phone call I made at the end of November (a little over a month before the law that requires MOSS kicks in):
As for companies using marketplaces I simply don’t believe this is true. By marketplaces they mean websites which sell your product and are also responsible for the tax — in other words they are legally resellers. As mentioned above I think it’s far more likely that most people use PayPal which is not a marketplace. PayPal simply facilitates the payment and the seller is still responsible for taxes.
Now, one solution for small businesses would actually be to move their products to marketplaces that handle all this for you. But of course this would cost more money — they’d lose revenue in commission.
And who exactly are these marketplaces? Well one such is Amazon. So, the very companies this law is supposed to get more tax revenue out of will benefit anyway from an influx of smaller retailers using them to sell their products. Amazon et al might have to pay a few more percent in VAT here and there but will make that back up in commissions from more marketplace customers while those small businesses will be worse off. Less money will make it back into the economy and Amazon will continue to pay minimum wages and syphon more money out of the EU.
Another solution would be to replace digital goods with real ones. Instead of selling a PDF download, print it out and put it in the mail! It would be simpler, cheaper than paying commissions and you can carry on as normal. It’s just not very good for the environment and seems a step back in time.
A possible “loop hole” seems to exist if there is “manual intervention” but there is little agreement on what that constitutes. A recent tweet shows a letter from a senior VAT agent who says that if you manually write the order confirmation email and attach the PDF (or whatever digital good it is) to the email this would apply and you would fall outside the scope of the rules.
This to me just makes a mockery of the whole thing. Assuming you can do it fast enough the customer knows no difference. The end product is no different. It’s still a PDF which ends up on the PC of the customer, wherever he is in the world. But this act changes the “place of supply” and suddenly there’s no need to account for EU VAT. It will be interesting to see how people interpet these rules. How much copy and paste is deemed manual? I look forward to the first test case!
One of the main aims of the EU is to promote “economic cohesion” and simplify cross border trade. This new law simply doesn’t do that. With 25 different EU states with about 10 different rates which could change at a moments notice, the requirement to collect an IP address which could have nothing to do with the customer’s location … there’s simply no cohesion in this at all.
But I’m not surprised. A few years ago I phoned HMRC to get some advice as to how I can prove a customer buying from my website is a business (when you sell to EU businesses you don’t need to add VAT) and was told “You’ll have that info on their letterhead”. Huh?
When’s the last time you wrote and sent a letter when buying something online? They simply didn’t seem to comprehend that you might sell something automatically without any prior relationship with the customer and that when selling online the more information you ask of the customer the less likely the sale will happen.
HMRC appear to have absolutely no idea what it’s like to be a small business and even less understanding of how things work online. They didn’t understand then and it’s no wonder we’re now facing this sorry mess.
And I haven’t even touched on the requirement to keep records for 10 years, which will force every small hobby business to register under the data protection act.
It is quite right that we do what we can to stop companies like Amazon from finding tax dodges. But this should not happen at the expense of small businesses — ordinary people. And when it comes to corporate tax dodging there are bigger issues to deal with. This change in VAT legislation does nothing to address the fact that Amazon UK only paid 0.1% of 2013 revenues in corporation tax.
What can you do now?
Sign the new EU wide petition calling for a suspension of these new laws for micro-businesses.
Visit the campaign website.
Check out #VATMOSS on Twitter for more on this or to join in the discussion.
You’ll find me on twitter @MarcusTettmar