Is Internet Business Dying?

A melodramatic headline, certainly. But there is more truth in this statement than many would like to admit. The sunny uplands of a world of passive income and location independence is threatened, by a familiar foe. Government. Just like the Sith, every time you think they are gone they keep coming back to screw everything up.

In late 2014 I was all buoyed up, planning to start writing a video training series and to write some desktop software to sell it online. I wouldn’t say I was that confident in setting up things like PayPal but I knew I could handle it when the time came.

The fantastic thing about the Internet is that it allows businesses to be run from home with very little in the way of costs. A person can provide themselves enough to live on by their own efforts alone. Sensible governments should recognise this and encourage it.

Sadly most politicians’ ideas about business and the Internet (along with most of general populace) are woefully outdated. Internet businesses to them mean Silicon Valley style startups with spotty geeks in Dr Who t-shirts blowing VC money on a great new app. Not the single mum selling knitting patterns online so she can give her child a non-latchkey existence when it grows up.

The days of being picked by a Venture Capitalist or a Publisher or a Movie company are slowly disappearing. You can do it yourself for not much money. At least that was the case until 2015.

On Twitter in November 2014 I heard of something called #vatmoss. This is an awful hashtag as it doesn’t describe in any meaningful way the problem that it refers to.

VAT is a form of Sales Tax that countries in the EU (and elsewhere) levy on purchases. MOSS is the name of a scheme, as a part of some new regulations, that was introduced, changing the way the rules for VAT were applied for digital products.

Before January 1st 2015, companies with a taxable revenue under a level of about £80000 in the UK did not have to pay VAT. This meant that starting Internet businesses did not have to worry about charging VAT on their products.

Sadly the morons in the EU government had been faced with a problem and avoided the obvious answer and instead gone for a really dumb solution.

The problem was that companies like Amazon were basing themselves in the EU state with the lowest VAT rate and selling their digital products from there to the whole EU.

So for eBooks they would charge Luxembourg’s VAT of 3%, not the UK’s 20% rate for a sale to a buyer in the UK. This did not go unnoticed by the UK and other governments who were determined to stop it.

Politicians being politicians, the obvious solution of a unified digital VAT rate across the EU was ignored in favour of a Byzantine arrangement where the business selling the digital product had to work out where the purchaser was and charge them the rate of the country that they resided in.

But this is actually not an easy task online. People have an IP address – this is a code that can be used to work out roughly where a person is in the world, but it’s not reliable and can be easily “spoofed” to be in a different location. So, no, this wasn’t enough. So poor old online business got dumped with the requirement of having to find two “non-conflicting” pieces of evidence for where the customer is located. Some of these other acceptable pieces of information was bank card country or Paypal location.

The problem with using anything apart from IP address is that you can’t tell anything about a customer unless they have visited your site before. This is all right for huge companies like Amazon, with their own login details, but for most companies this meant that you couldn’t quote the actual price you would charge until you’d ask for payment (unless you took the hit for say a Hungarian paying their 27% VAT for them).

Another amazingly dumb thing that the EU did was to not apply any minimum threshold in terms of sales on these new VAT regulations. So I discovered to my horror – this would affect me from the first sale!

Being a former software developer by trade, in fact spending a fair amount of time actually coding tax systems for a FTSE 100 company amongst other things, I thought I’d see if I could code a solution.

Can’t be that hard I thought. So I looked up the original regulations. Here are the UK government’s summary of the EU regulations https://www.gov.uk/government/publications/vat-supplying-digital-services-to-private-consumers/vat-businesses-supplying-digital-services-to-private-consumers

The EU originals (which I also trawled through) are even worse. They were clearly written by lawyers with no idea about the Internet. In fact it takes some skill to actually interpret what you should do if you sell something from, let’s say, a website. There is lots of stuff about what you should do if selling down a telephone or cable but really very little about websites.

The rules make it extremely hard for anyone to comply without huge amounts of custom development work. Apart from the obvious fact that in some cases it isn’t very clear what on earth anyone should do (customer with an IP address in Switzerland, a French bank card and a physical address in Italy anyone?) there is also the fact that the rules seems to be written by someone who thinks that there is some little person sitting inside the computer who can make decisions on what rate to apply on a case-by-case basis. The whole convenience of websites is that it is quick and painless! You don’t want to having to go off somewhere and wait for someone to tell you what VAT rate should be added to your bill.

So what did I do? I abandoned my plans. Like many others I ended up herded into using “marketplaces” like Amazon, Udemy and the like, as they then become responsible for the VAT charges. But you miss out on so much with this – you can’t sell in the place where you may have won the business in the first place, you miss out on retargetting and finding out who your customers actually are (Amazon doesn’t tell you who it sells your eBooks to…).

Now there are other ways around the rules. If your digital product has a manual element (say a Facebook support group) then it doesn’t need to apply these new silly rules. Of course, as with everything else with these rules, what exactly this manual element involves is left open for interpretation.

This is not however what I see as the threat to Internet business – just the hint of the real horror to come. The EU commission and the EU governments are now glacially talking about changing these rules, at the very least to add an exemption for small businesses again.

No the real horror is happening right now. Other governments around the world are starting to introduce their own tax rules in the same way as the EU has done. In fact the OECD, an organisation nominally set up to help economic development, is encouraging this.

What does this mean? If you sell online then eventually you will have to be able to look up where your customers are, based on potentially different rules for every country in the world, and charge and pay tax to those countries that think you should pay them VAT (or GST).

The general attitude of most people online is to ignore every other country’s tax rules – but this can’t last. Tax agreements between countries on VAT are almost certain to appear in the next few years, which could mean that eBook you sold to a kid in South Korea could mean a visit from your local tax office to claim the tax you didn’t pay the South Koreans at the time, possibly with an associated fine or jail sentence.

The biggest change will happen in the US of course. Sooner or later the US states will win their case to charge their own sales tax rates on online purchases. Even if they have a small business exemption, they will want to introduce tax treaties with other countries to get their hands on all that international tax revenue.

So then online business will descend into a world of hundreds of rules or massively geo-blocking. I hope I am wrong, but we might all have to be selling via Amazon and the other big players rather than from our own websites in a few years time.