Last week I looked at the changes we can expect from Facebook as the new year begins. Today I’m going to outline another change that looks like it may have an even greater impact on internet marketing.
From 1st January 2015 new European VAT rules come into force. These were originally aimed at stopping tax dodging by large web based companies like Amazon. Billions of Euros of tax have been lost due to these large multi-nationals basing themselves in low tax jurisdictions. To get around this the new rules focus on the location of the customer, not the seller.
So if you sell digital products to people or businesses in Europe you’re going to be affected, even if you’re in the US, Australia, or anywhere else outside Europe.
Who does this effect and what are they expected to do?
The rules require anyone selling digital products or services, such as ebooks, computer software and web hosting, to charge VAT at the rate that applies in each European customer’s country, rather than the country from which it is provided.
In the U.K. this will include businesses with a taxable annual turnover of less than £81,000, the current threshold for registering for British VAT. This means many small businesses and solopreneurs who have never had to charge VAT will now have to take on a load of new administrative responsibilities.
When I say small businesses this includes anyone working from home and selling something in a digital format. That means work from home mums, retirees, carers and disabled people trying to make an income. It applies whether they are selling comprehensive ten module courses or a couple of knitting patterns. It will even include local bands that sell their music on iTunes.
The Europen Union consists of 28 member states, each of which has its own value-added tax (VAT) rates, and its own minimum thresholds for having to charge VAT. Thankfully businesses affected will not have to register with the tax authorities in each of the 28 different countries. Instead, each country should have set up a service that provides a single point of contact through which to collect and distribute the VAT on sales to other EU countries.
Each business affected is expected to sign up with the local service if its taxable turnover is under their country’s threshold. In the U.K. this is the MOSS (Mini One Stop Shop) scheme. So a U.K. business that previously didn’t have to register with the VAT authorities will need to register for a VAT number and submit quarterly VAT returns (declaring nil VAT on U.K. sales), and also register separately with the MOSS and submit quarterly returns to them too.
The challenges
As you can imagine there are a number of challenges in complying with this legislation.
Firstly you have to know the location of every buyer so you know whether the new rules are applicable. If they are you have to record the transaction together with the country code of the customer’s bank, and the customer’s billing address.
This may be problematic. For example, at the moment PayPal will only provide the country code. The business will have to collect the billing address themselves.
In addition, any business that collects this sort of data becomes a ‘data controller’ under EU data protection legislation. In the U.K. this means they’ll have to register with the Information Commissioner’s Office (ICO) for a small fee. However this will be peanuts compared to the costs if you have to start using a bookkeeper and an accountant to keep track of everything.
Having collected the data each business is expected to keep these records for ten years. Two issues here: storing the data long term, and storing it securely. If major companies can get hacked for customer data, the only real hope for ‘kitchen table’ businesses is that they are too small to bother with.
There is also another challenge to deal with before you even make a sale. Businesses that charge VAT often raise their prices to include the tax. However the taxes in European countries range from 3% in Luxembourg to 27% in Hungary. So if you want to add the tax to your prices you’ll probably have to go for the average in Europe and hope you don’t get most of your customers from Hungary. The new legislation could also mean the end of delivering a digital download ahead of a physical product. This enables a customer to use part of your product while the physical product is in transit. The consequences of this are not absolutely clear at the moment, but you may have to declare the physical part of the sale for U.K. VAT calculations, and the digital part to MOSS.
The solution?
Although the above may seem daunting there are some solutions being proposed.
One is to stop selling to customers in Europe. This may not be easy to do if you sell via a website that can be seen worldwide, and some are questioning whether doing so would contravene equality laws. Some businesses outside of Europe have already anounced they will cease trading digitally with the EU when the new year begins. Hardly what the EU was set up to encourage.
Others point out the legislation states that live webinars aren’t covered by the changes (but recorded webinars are.) Therefore you could sidestep the new rules if you include some element of live contact, like a Facebook group or weekly webinars.
The legislation also says that if a third party platform handles the payment and supply as well as sets standard T&Cs then they are responsible for VAT, not the business that created the digital product.
Unfortunately, that does not mean every third party platform is set up to collect and store the data that will enable them to comply with the legislation. Many of those outside Europe may not even be interested in making the changes required.
Currently it seems only Clickbank are set up to take care of the VAT issue. Paypal and JV Zoo are not. Hopefully they will decide that making the changes required will be in their interests.
I have nothing against the principle of the new rules. Large companies should not be able to dodge the amounts of tax involved without consequence. Yet setting up the legislation in such a way that discourages small businesses trading across borders does not seem right either.
I’m quite fortunate in that I sell through Clickbank. However I was about to start using JVZoo next year, simply because you can offer 100% commissions with their platform. This course of action will have to be suspended until JVZoo make their position clear.
If you want to follow how this issue progresses go to http://euvataction.org for more details.