On January 1st 2015 a new European tax law (the snappily-titled “place of supply rules for digital services” aka VATMOSS) was quietly ushered in with virtually nothing in the way of publicity.
Despite apparently having been planned by the EU since 2008, publicity about the change has been virtually non-existent, meaning only a tiny fraction of small businesses affected are even aware of it yet.
The change in law affects the way VAT (Value Added Tax) is applied to sales of digital products to all customers in countries within the European Union. Sounds riveting I know, but please stay with me – it may affect you if you buy music, ebooks, software, apps etc. online!
In short, the new law says that digital products (e.g. music or spoken word mp3s, ebooks, software, apps, pdfs, craft patterns etc.) sold to customers within the EU must now have VAT added at the rate of the country where the customer normally resides. So if you’re an EU resident, I now have to charge you VAT at your country’s rate and then pay this on to your country’s tax department every quarter.
Previously this would have been taxed at the rate where the business was located. It seems obvious that the primary thinking behind the change was to put a stop to multi-national businesses (such as Apple/Amazon etc.) from setting up headquarters in low-tax countries. In essence this sounds like a good thing, and certainly something I support in principle, especially in light of the recent levels of tax avoidance from big businesses!
But the law has been implemented in such an unworkable one-size-fits-all blanket fashion that it’s penalising and killing the smallest of businesses (often known as micro-businesses and usually run by one or two people on miniscule operating budgets – and yes, this includes me!)
Before you run to get your violins out in mock sympathy, let me explain it isn’t just a case of admin burden in collecting and paying taxes to 28 countries that’s the problem (although that’s certainly another thing to put on the list). If it were simple enough to implement then it wouldn’t be a problem.
But there are no thresholds to differentiate huge multi-nationals between 16 year olds selling mp3s from their bedroom-run websites, pensioners selling knitting pattern pdfs, or 1-man businesses like mine who operate on tiny budgets. We don’t have budgets to pay for accounting departments to monitor and handle multiple tax rates and invoicing or technical teams who can implement geolocation, country-specific websites, EU-specific servers and data management to store the evidence safely for 10 years. If I had the resources of Amazon I’d be more sympathetic!
The law change was apparently supposed to provide “a level playing field” for all businesses yet it’s proving to be unworkable for many who are unable to adapt their systems and keep up with the requirements. There are a huge range of issues that have already forced many micro-businesses to close down for fear of being audited at any time by any one of 28 EU countries who can fine you up to unlimited penalties. Not to mention shouldering the cost of paying for technical solutions to cope with these new demands.
In actual fact, one way to avoid the hassle of collecting VAT is to sell your products through a third-party marketplace (such as… Amazon) so in effect it will drive even more business their way! The level playing field now starts to look more like a monopoly.
What are the problems?
One of the most difficult requirements comes from identifying and proving which country is the customer’s usual place of residence before the sale is processed. As soon as you enter my site I’m supposed to be able to determine where you normally reside, work out the tax rate of your country and apply it to the products you see for sale in my shop (as well as storing all this information for 10 years in case any country’s tax department wishes to investigate me).
Sellers now need to collect 2 pieces of non-conflicting evidence (e.g. your home address, bank address, phone number, computer’s IP address) and check that these match up before allowing the sale to go ahead. So I now have to ask my customers to fill in their address at the checkout when I have no need or wish to ask for this information. Previously you could just enter your name and email and that’s all I needed but now I have to be able to prove which country I make my sales to, so I have to ask for even more info (which in itself will cause customers to drop off at checkout).
It’s common knowledge to most web-literate users that faking your IP address and location with browser plugins or VPNs is easy to do. Sometimes this is done in order to get around country-blocked content, other times for reasons of genuine privacy in a climate of big-brother suspicion. Either way, locating a user by their IP address is not something that can provide any form of accuracy, just a best guess – and anything involving the word ‘guess’ is generally not a good idea for tax purposes! And don’t even begin to try and take into account examples like being on holiday on a train heading from London to Paris using a Spanish-registered credit card…
This law is supposed to be followed by all websites worldwide selling digital product, but many sellers from countries outside the EU have already (and somewhat understandably) said they have no plans to be unpaid tax collectors for foreign countries at their own expense. The problem is that many outside governments have already agreed to this law, so they’re putting themselves at risk. It also puts me at a disadvantage because I’m complying (as best I can) and they aren’t – so my prices are higher to EU customers than others who aren’t going to bother charging tax.
How will it affect you as a customer?
I’ve had to completely update this website to be able to take account of managing tax, so now when you reach the checkout you’ll need to enter your address in order to make a purchase. If you’re an EU customer you’ll also see VAT added at the rate of your country. I apologise that I have to ask for your address details and to add VAT for EU countries. If there was a sensible threshold in place I wouldn’t have to do either of these things (note: sales to UK customers are unaffected and won’t be charged VAT as HMRC are allowing UK businesses to keep our threshold for domestic sales).
One unfortunate side-effect that you might see on other websites is that some businesses are now refusing to sell to anyone in the EU because of the problems it creates for them. If you’re an EU customer trying to buy digital products, you may well find you’ll be blocked at checkout by some companies. This is a ridiculous situation to be in 2015 and puts ecommerce back by about 15 years!
There’s a whole lot more detail as to why this is unworkable and problematic but I’ll stop there and point you to a few links to explain it better. Also, if you’re an EU customer unhappy about the changes, please contact your MPs, MEPs and your government and explain why.
There are many of us micro-businesses who have grouped together to try and get sensible changes put in place using Twitter, Facebook and various petitions. But at the moment the EU commission is refusing to admit there is a problem. Because we’re small operations, there’s little incentive for them to take any notice of us as long as bigger businesses pay their taxes. But without the ability to grow and flourish at small level, many micro-businesses won’t have the room to expand, so the only choices you might end up with are a handful of huge corporations!
EU VAT Action
EU VAT Action Facebook Campaign Group
Definitive Guide To The New EU VAT Rules