Before I start, I should warn you I’m not an accountant or a lawyer and I don’t pretend to understand everything about the new EU VAT regulations. There is a good article here where you can find out more from qualified people. But I am a UK based digital entrepreneur – and therefore someone who will be affected by the new law. So I think that qualifies me to give my opinion on how it will affect many business owners like me (just don’t go taking anything I write as advice as to whether you’re personally liable or not – my explanation of the new rules is merely to illustrate my points.)
The headline is that from 1st January 2015, VAT liability will switch from the country where the product is sold to the country where the consumer buys it. But this only applies to digital products – like ebooks, ecourses, recorded training videos, music or audio downloads etc.
There are several issues with the logistics of this – especially for micro businesses (a business being run by a single person) using the most basic sales software.
1. It is not always possible to know where a buyer is when they buy your product – PayPal, for instance, just doesn’t always provide sellers with this information.
2. In order to charge VAT on a product in the country where your buyer is you have to be registered for VAT in that country. Given there are 28 countries in the EU with 75 rates of VAT, a seller of digital products would need to be registered in every country where someone buys their products – even if it’s only one customer buying one product for, say, £5.
3. There is an option to use the ‘Mini One Stop Shop’ (VAT MOSS) by registering for VAT in the UK (this will distribute the money to the EU making it unnecessary to register for VAT in other countries individually). The requirement threshold for registering is usually a turnover of £81k a year, but the threshold has been effectively scrapped for (and only for) businesses selling digital products.
This will make it necessary for a micro business who may only be doing, say, £800 a year to register for VAT (and all the extra administrative burden that brings) if they sell a £5 ebook to a single person in Spain. (Even if that person is a Brit who happens to be on holiday there when they buy it.)
If it sounds a bit confusing so far, take a moment to enjoy this example from a City AM article from last month:
“On board transport travelling between different countries in the EU (for example, by boat or train), the consumer location will be the place of departure for the consumer’s journey.”
This means a French person travelling from London to Paris by train, having passed through the Channel Tunnel, could purchase an online subscription, connecting to the French mobile network, with a French IP address, and using a French credit card, but it would be correct for VAT purposes to show this as a UK customer. Getting this wrong risks an unlimited fine, even though the VAT rate in both countries is 20 per cent.
So, absolute opaque clarity aside, there are many more issues of course, but let’s just sail straight on to why these rules are wildly unfair and discriminatory.
1. This only applies to digital products, so it won’t affect businesses delivering physical products or live services. Which means digital businesses get penalised while other types of small businesses are completely unaffected.
2. This will make building a business incredibly difficult. The current UK threshold allows businesses to grow to a point where they can make an income and afford to take on specialist financial staff before dealing with things like VAT. Many digital entrepreneurs will tell you that they only made a few quid in the first few months. It takes time and traction to build an audience and get your products out there. If you’re liable for VAT and the administrative activities that go with it from day 1, you’re never going to be able to get past those low earning few months – to be able to smash through that VAT threshold and deal with your taxes accordingly.
3. Many low earning digital entrepreneurs are mums who are trying to contribute to the family pot by earning money from sales of digital items, whilst caring full time for their pre-school age children. Or they’re fully intending to build a bigger business, but are doing it slowly – over years rather than months, because they have the childcare responsibility and can only work a few hours a week. Because of this, I firmly feel thatthis Directive will negatively impact on women who are mothers more than any other type of entrepreneur out there.
In short, this new ruling will be devastating for many people already in business who are not yet making the kind of money to be able to afford to register for VAT. And worse still, it sets the barrier to entry to business very high, which is likely to put off a lot of potential entrepreneurs – especially women who want to start a business on maternity leave and grow it slowly while their kids are young.
Entrepreneurs are a resourceful lot though – otherwise we would never have started our own businesses in the first place. In all the forums I’m in, talk has moved from trying to work out if we’re affected under this new scheme, to working out how to exclude EU buyers from buying our products – much to the upset of the Europeans in those forums.
Unfortunately though, that seems the only way out – at least while we’re in start up mode and cannot justify spending money on VAT related tasks. UK digital entrepreneurs will ignore Europe altogether and instead focus on the UK and rest of the world markets.
It’s a shame though – the internet has opened up so many possibilities for everyone to have a fair chance at entrepreneurship, and these rules stamp on everything that people like us are trying to achieve. If they were hoping to catch out the huge companies and stop them using low VAT countries to sell their goods from, they should know that companies with almost unlimited resources will find another way to circumvent the rules.
Meanwhile, the mum who writes an ebook at her kitchen table whilst breastfeeding her baby and wants to sell a few copies a month to keep that baby in nappies, is going to find that even selling digital products on the internet is no longer a viable option for her.
A fellow entrepreneur Isabel Zinaburg has set up a petition asking “Vince Cable to intervene and uphold the existing VAT Exemption Threshold for businesses supplying digital products.” Please sign and share this petition far and wideif anything I’ve said above has made you think there needs to be a better way to deal with this.