Over the past decade, we have witnessed both a digital and an economic revolution on a global scale. The two primary contributing factors have been advances in technology and the worldwide recession that began in 2006.
We saw, on the one hand, millions of people being made redundant and struggling to find employment. Young mothers – who might not have chosen to work until their children were older – no longer had the luxury of being stay-at-home moms, and now needed a way to earn an income without becoming dependent upon full-time employment.
At the same time, digital technology boomed in leaps and bounds. The coming of Web 2.0 and social media, along with advances in digital publishing, automated email systems and mobile technologies have not only changed the way we communicate, but the way we create products and do business.
This unique combination of factors had a profound effect on our world:
It enabled millions of individuals, who in the past had been dependent upon employers, to become independent business owners – often sole proprietors.
Moreover, it enabled them to create their own jobs, express their own values and invent their own lifestyles. It also enabled them to serve their customers and clients in ways that weren’t possible through big business.
But now, there are new tax rules that will impact EVERY business owner who sells digital products to customers in the EU (European Union). If you’re not sure which countries are in the EU, here’s a list (yes, we in the UK are part of the EU): https://www.gov.uk/eu-eea. And yes, that includes business owners who reside in the US, Canada, Australia and anywhere else in the world. I’ve put that in RED, as so many of our readers live in those countries. So regardless of where you live, if you sell (or want to sell) to customers in the UK and Europe, I strongly recommend reading on.
Vital Income from Digital Products and Services
One of the primary income earners for micro-business owners is the digital (i.e. downloadable) product, i.e. eBooks, MP3 audio, apps, software, eCourses and so on.
Both for myself and my clients, eBooks and eCourses are especially essential to our businesses. Not only do they provide an income stream, but they are also stepping stones in our ‘marketing funnel’ in that they give customers an inexpensive option to buy from us, and allows them to get to know more about who we are.
Selling digital products on our websites has been easy. All it really took was an e-commerce set up and an auto-responder system. Of course, many of us have used large digital portals, such as Amazon, Google Play, etc. to sell our products, as well. While they take a cut of our revenue, they also make it easier to deliver and can often give us the benefit of higher visibility in search engines.
Whichever way we preferred to distribute our digital products, we micro-businesses have enjoyed a freedom of choice, which opened the door to many possibilities for us, both economically and creatively.
But with the new VATMOSS laws, this freedom of choice is about to crumble. To understand why, let me explain the ‘before’ and ‘after’ of this whole issue.
‘BEFORE’ – How VAT Has Worked So Far
If you live in the EU, you’ll be familiar with the term ‘VAT’, which stands for ‘Value Added Tax’. To Americans, VAT is the equivalent of ‘sales tax’. The VAT rate varies from country to country. Here in the UK, VAT is 20%, while the rate may be higher or lower across Europe.
To date, digital services sold business-to-customer (B2C) in the EU have been taxed at the location of the seller. This means a customer pays VAT of 20% on any digital service bought from a UK company. If we buy from a company in another EU country, we pay the VAT of their country.
To date, VAT has never been a concern for smaller businesses. A business does not need to charge their customers VAT (or register as a VAT company) unless their taxable turnover is over £81,000 a year. Few sole proprietors (especially those just starting out) would be so lucky as to have an £81k annual taxable turnover.
This threshold means most sole proprietors haven’t had to think about VAT at all. This has helped the micro-business owner in two significant ways:
- They haven’t been required to charge VAT. This has allowed them to keep their prices down for their customers and therefore compete with larger companies with greater volume and/or buying power.
- They haven’t had to keep track of and file VAT reports. This has helped keep their administrative and accounting costs down.
Furthermore, the law as it currently stands determines VAT/sales tax according to the country in which the business is based. This means:
- A business owner located outside the EU (in the US, for example) doesn’t need to understand anything about international tax laws.
- They also don’t need to worry about paying taxes outside their own country.
- Thus, online trade across international lines has been relatively easy for the small business owner, especially for the one-person operation.
But with the new VATMOSS rules, all that is changing.
‘AFTER’ – How the New VATMOSS Rules Will Change Things in January 2015
As of January 1st, 2015, a new VATMOSS ruling will come into effect. Under VATMOSS, there are several critical changes that will impact anyone who sells digital ‘services’ to customers who reside within the 28 countries of the European Union:
- The EU now defines downloadable eBooks, images, music, apps, software, as ‘services’ rather than ‘products’. Their reasoning is that they are ‘essentially automated’ (i.e. delivered automatically). Therefore, they are subject to these new rules.
- The ‘place of supply’ rule is changing. In the past, the ‘place of supply’ was the country in which the business was located. Now, in the case of digital services, the ‘place of supply’ is the country in which the CUSTOMER is located. This means that if a business sells any kind of downloadable digital product (um…’service’…) on their own website, they need to be able to detect where their buyer is located and charge their customers VAT according to the buyer’s country. For example, VAT is 17% in Luxembourg, 20% in the UK and 27% in Hungary.
- There are no VAT thresholds for digital sales made outside your own country, meaning you are now required to collect and report VAT from your very first EU sale.*
- All businesses are required to store their sales data securely for 10 years.
- All affected UK companies will be required to file detailed and SEPARATE quarterly UK VAT accounts and EU VAT transactions or face penalties.
* I should clarify that for a UK-based business, the VAT thresholds still apply for digital sales made WITHIN the UK. In other words, unless you have £81,000 of taxable turnover per annum, you do not need to charge or report VAT for UK sales.
What Kinds of Products and Services Are NOT Affected
The new laws ONLY apply to things that are considered ‘hands off’ (i.e. delivered automatically with little or no human intervention). So:
- If you’ve designed a bespoke product for a client that you sent them via email, you are not subject to VAT laws.
- Similarly, if you deliver training where you are live on the air with your customers, you are not liable to charge/report VAT. However, if you later SELL that same training as a stand-alone product and deliver it automatically (or passively, such as when you run a membership site), you would be liable.
In recent social media discussions, HMRC (Her Majesty’s Revenue & Customs in the UK) ‘implied’ that if you manually deliver a product via email rather than via an auto-responder, this is considered to involve human intervention. Some people online saw this as a loophole they could exploit, so they wouldn’t have to deal with the hassle of the new tax rules. But personally, I think the statement comes from HMRC being essentially ignorant of the way online businesses operate, and I wouldn’t be too quick to jump into that loophole, as I’m sure this comment will be contracted at some point in the near future.
B2B (business to business) sales are also NOT subject to VAT laws. For example, if you sell eBooks through a major sales portal like Amazon, you are technically selling it to another business, and Amazon is selling to the customer (B2C). Thus, in this case, Amazon is liable to track, charge and pay VAT to the respective countries, not you.
However, be aware that this new ruling will affect the COST of your products on Amazon, and in many cases you will be forced either to raise your prices (potentially putting off customers) or keep your prices low while taking a cut in profits. That’s not Amazon’s fault, but a result of VATMOSS.
The Difficulty for the New VATMOSS Ruling
The new ruling creates a quagmire of bureaucracy for businesses. In the past, if someone bought a digitally downloadable product from our website, we didn’t need to ask them for their physical address. In fact, most of us are loathe to give such private information unless we are ordering a physical product that needs to be shipped to us. But with VATMOSS, our customers will need to provide us with this information. And, of course, we need to have a way to collect it, store it, calculate the tax they should be charged, charge them, and then report our sales on a quarterly basis to as many as 28 different EU countries.
Doing this is both technically and financially out of bounds for many (if not most) one-person operations (or even those that are bigger). To make things easier, HMRC created something called ‘VAT MOSS’. MOSS stands for ‘Mini One-Stop Shop’. The purpose of MOSS is to give businesses a way to register for VAT in one ‘one-member state’ (i.e. their own country), rather than 28 different countries.
However, while registering for MOSS *might* make it easier to report our sales to the government (I was told by @Taxamo on Twitter this needs to be done quarterly), we are still left with the technical and administrative challenges of determining, applying and tracking VAT for all our European sales in the first place.
Furthermore, MOSS is for UK residents. I have no idea what other countries (including those in the US and Canada) are supposed to do.
The Options for the Business Owner
Essentially, business owners now have five choices:
- If you’re a UK business owner, you can register for VAT and MOSS and collect VAT on all UK and EU sales (you will still need to track and report sales to them quarterly).
- You can register for VAT in each non-UK EU member state separately (certainly the least practical for the smaller business owner).
- You can forget about selling directly to the customer altogether and sell ONLY through third-party retailers, such as Amazon.
- You can continue to sell directly to customers, but stop selling to EU countries altogether (except your own). In the UK, this would mean you could still maintain the £81k threshold.
- You can continue to sell directly to customers, but do NOT deliver your goods automatically to customers in an EU country other than your own. This would still mean you’d have to collect people’s country of origin information, and then manually send them the goods via email. While this is an option I see some people online toying with, I think it’s likely to prove extremely unwieldy.
The Irony, Contradiction, Discrimination and Potential Harm of VATMOSS
It is no secret that VATMOSS was originally conceived because big companies (more specifically, Amazon) were building a financial empire from sales made in Europe, but they weren’t paying a penny in tax to the countries in which these sales were made. Certainly, this has been a huge scandal here in Britain for at least the past year. Recently, the Association of Chartered Certified Accountants were pretty transparent about the link between cause and effect when they said VATMOSS ‘should remove the incentive for businesses to locate offshore and level the playing field for all digital service suppliers’.
The official stance of HMRC is that this new ruling would ‘level the playing field’ for smaller businesses who are unable to compete with companies like Amazon in the cyber market.
While it all sounds reasonable, there is a tremendous irony in the original purpose of VATMOSS and the ultimate ripple it is likely to create. I believe the new ruling law is so complicated and demanding that it will, in effect, drive micro-business owners – regardless of where they are based – to DEPEND upon large companies like Amazon for their digital sales within the EU, thus increasing revenues for the big corporates the government are trying to hold accountable.
This is also likely to have a negative impact on the income for many small business owners. For example, those who have been selling eBooks on their websites will take an immediate cut of at least 30-65% of their profits, as Amazon Kindle takes these fees from your retail sales, depending upon the retail price you have set. There are also some limitations to retail pricing, which can be restrictive to authors who have higher-priced items. For me personally, this is not such a big issue, as I pretty much use Amazon for my sales anyway. But not all our 7 Graces clients do (especially those in America) and I know this will hit them in the pocketbook.
And even though I tend to use Amazon for my own digital products (um…again…’services’), what I really object to is that I feel like using large portals for sales is now no longer a choice but a matter of having no other choice.
I also find the ruling contradictory in the light of other VAT exemptions. Here in the UK, books are actually EXEMPT from VAT. However, eBooks are not. I know this was already the case, and is not one of the issues that arose as result of VATMOSS, but I only became aware of this discrepancy when the whole VATMOSS scandal popped up.
I’m also concerned that VATMOSS will finally put the nail in the coffin for (mostly) American businesses who will decide it’s too much trouble to sell directly to EU customers. If that happens, how much is this going to compromise what we EU customers have at our own disposal online? How many resources will we cease to have access to because the laws are just too much bother for US business owners?
Sadly, I fear this ruling will increase the cultural divide that already exists between the US and EU.
So, while I have no issues with the government trying to hold Amazon and other companies like them accountable for their taxes, THIS IS NOT THE SOLUTION. It is unfairly discriminating against the small business owner, especially the sole proprietor. It leaves them with no choice but to lose income by one or more of the following:
- Lower sales, owing to having to raise prices to cover VAT and their administrative costs
- Lower sales, owing to having to eliminate certain markets from their customer base
- Lower income, owing to having to split sales with retail outlets
- Higher expenses, to cover the administrative costs of tracking, bookkeeping, etc.
What We Can (and Should) Do
Burying our heads in the sand or giving up on this issue will help none of us. I would like to call upon our readers to do the following:
- ESSENTIAL: Listen to the replay of this webinar with the HMRC and EU rep at https://www.eventbrite.ie/e/live-vatmoss-qa-with-hmrc-registration-14287754057.
- UK readers: please sign the petition ‘Uphold the VAT Exemption Threshold for businesses supplying digital products’ at https://www.change.org/p/vince-cable-mp-uphold-the-vat-exemption-threshold-for-businesses-supplying-digital-products.
- Join the Facebook group ‘DigitalVAT2015’ to stay informed of the latest developments (they are a VERY vocal group) https://www.facebook.com/groups/DigitalVAT2015/
- READ the articles and information in the resources below.
- WRITE to your MP or similar political representative.
- Above all, please DO NOT give up. Do not stop selling your digital goods to the EU.
- Leave a comment below, and share any thoughts or information you have with other readers.
‘Official’ Reading List
‘Vat on Digital Services in the EU’ by HMRC – https://www.gov.uk/vat-on-digital-services-in-the-eu
Explanatory Notes (92 pages) on ‘How VAT Works’ – http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/how_vat_works/telecom/explanatory_notes_2015_en.pdf
‘Register and Use the VAT Mini One Stop Shop’:
‘ACCA Guide to VAT Mini Stop One Shop (MOSS)’
Commentary and Additional info (DO read these!)
‘News EU Rules Threaten to Kill UK Micro Firms’, in The Telegraph – http://www.telegraph.co.uk/finance/businessclub/11254829/New-EU-VAT-rules-threaten-to-kill-UK-micro-firms.html
(and the follow up to the above) ‘Victory for UK micro firms as HMRC tweaks EU VAT MOSS rule’, in The Telegraph – http://www.telegraph.co.uk/finance/businessclub/11268706/Victory-for-UK-micro-firms-as-HMRC-tweaks-EU-VAT-MOSS-rule.html
‘VAT-MOSS Webinar 2nd December 2014 – Quick Notes & Comments’ by Clare Josa. http://www.clarejosa.com/vat-moss-webinar-2nd-december-2014/
‘Micro-businesses and #VATMOSS – your reaction to new EU tax laws’ in The Guardian. http://www.theguardian.com/small-business-network/2014/nov/27/micro-businesses-vatmoss-your-reaction-new-eu-tax-laws
‘Implementation of VAT MOSS in UK’ by Rita de la Ferer – http://www.slideshare.net/slideshow/embed_code/40681204
‘Twitter Storm – A Modest Proposal’ by Wendy Bradley – http://tiintax.com/2014/11/27/twitterstorm-a-modest-proposal/
‘Why #VATMOSS needs you’ by Enterprise Nation
‘How small companies and freelancers can deal with the VATMOSS EU VAT changes’ by Rachel Andrew http://rachelandrew.co.uk/archives/2014/11/25/how-small-companies-and-freelancers-can-deal-with-the-vatmoss-eu-vat-changes/
‘How VATMOSS fundamentally misunderstands the nature of direct e-sales’ by Juliet McKenna http://www.julietemckenna.com/?p=1524
‘They didn’t know the impact of #VATMOSS on really small business’ by Ysolda Teague http://ysolda.com/blog/2014/11/26/they-didnt-know-the-impact-of-vatmoss-on-really-small-businesses
2 December 2014
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LYNN SERAFINN, MAED, CPCC is a certified, award-winning coach, teacher, marketer, social media expert, radio host, speaker and author of the number one bestseller The 7 Graces of Marketing — How to Heal Humanity and the Planet by Changing the Way We Sell and Tweep-e-licious! 158 Twitter Tips & Strategies for Writers, Social Entrepreneurs & Changemakers Who Want to Market their Business Ethically. She is listed in the Top 20 of the Top Marketing Authors on Twitter by Social Media Magazine and was a finalist for the prestigious Brit Writers Awards. She also received the eLit Book Awards Silver Medal in Humanitarian and Ecological Social Affairs, as well as the Bronze Medal in Business and Sales. Lynn’s eclectic approach to marketing incorporates her vast professional experience in the music industry and the educational sector along with more than two decades of study and practice of the spirituality of India. Her innovative marketing campaigns have produced a long list of bestselling non-fiction authors through her company Spirit Authors.
Lynn is also the Founder of the 7 Graces Project CIC, a not-for-profit social enterprise created to train, support, mentor and inspire independent business owners to market their business ethically, serve society and planet, and restore all that is best about humanity.