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Upcoming VAT changes – what they mean for YOU

This weekend, when we should have been planning for the new year we were made aware of something that will massively impact how Deadstar does business – and if you’re a small business in the creative field, or a client of one, it will likely affect you too.

Come January 1st 2015 a change to VAT regulations is going to make life very difficult for small businesses. Now, that might not sound like it affects you but it probably will. The change relates to where VAT is due – currently VAT is paid to the country that the seller is in. From now on, it will be due in the country that the purchaser buys in. The intention is to catch large businesses that take advantage of international tax law by basing themselves in nations with low VAT rates – now they will pay VAT at point of purchase, thus paying more VAT. Our prediction is that the long-term effect of these changes are that such businesses are likely to profit more… and small to micro-businesses will be driven out of operation.

That sounds like a bold claim, so I’ll explain: right now businesses in the UK don’t have to register to pay VAT if their turnover is below £82,000. Below this threshold, they can register if they wish but it isn’t mandatory. If you sell goods to another country then you may have to pay VAT to them if your sales in that country exceed that country’s threshold. The lowest of these within the EU is about €30,000 a year – so if you exceed that threshold you are likely already at or near the UK threshold and will be registered to pay VAT in Britain too. Below that, there’s no requirement to pay. As such, many small businesses pay no VAT, which allows them to keep prices low and be competitive.

The impending changes will wreak havoc on that balance. From 1st January 2015 anyone selling digital content automatically through a platform they control (most definitely your own website, but several third-party platforms like Craftsy and Bandcamp suggest that their arrangement with sellers will land sellers in this position as well) will need to comply with new regulations or face “an unlimited fine”.

To comply with the new regulations sellers must:

  • Obtain a minimum of two non-conflicting pieces of location data identifying the buyer’s location.
  • Keep this data for a minimum of ten years following sale on an EU-based server.
  • If you have sold to a buyer within the EU then you have a choice:
    • Register for VAT in the UK and use the Mini-One-Stop-Shop to make appropriate VAT payments to each country where a sale was made four times a year.
    • Register for VAT directly with the tax authority in each country you make a sale to.
  • Depending on the country you may have to send them a VAT invoice as well as their usual receipt.

If this sounds like a headache to you, how do you think it sounds to self-published authors, small presses, musicians, programmers, life coaches etc selling digital products through their own stores? Whereas with physical products there is a minimum threshold below which no VAT is due, if you now sell an ebook or a song to somebody in Germany you must either register for VAT within the UK (giving up 20% of your business income, less any VAT deductible expenses you are able to reclaim and pay 19% of the value of the sale through MOSS to Germany. Alternatively, you can register direct with Germany for VAT and hope you can navigate their financial rules.

The easy alternative is to sell exclusively through third party platforms (Amazon being a prime one) and accept losing up to 70% of revenue on products. There are less-easy alternatives but they all require dramatic changes in operation for most businesses:

  • Cease trading digital goods directly to customers. Continue to use third party sites (with the accompanying significant drop in turnover and net profit due to their sellers’ fees). This incurs no change to small businesses’ VAT reporting practices.
  • Continue trading digital goods directly to customers in addition to using third party sites – but block sales to all EU countries.
    • This is not practical on a technical level as it is not 100% reliable and seller is culpable if buyer masks their location when buying, and seller must still follow the recording process (see above) to prove that they have not sold to any EU locations. HMRC advice issued during a Q&A session on 27th November 2014 suggests that this will comply with VAT legislation but may breach anti-discrimination laws.
  • Do not register for VAT in the UK, but register for VAT in each European nation that a business may trade to.
    • As an addition to this businesses must then record a minimum of two location-identifying pieces of data for every digital transaction, keeping that information (which may require registering with Data Protection Agencies in up to 28 countries) on an EU-based server for a minimum of ten years in order to accurately assess how much VAT is due to each country every three months.
    • During the three monthly VAT return to each applicable country sellers must accurately navigate up to 28 countries’ tax codes to determine how much VAT is due even though their turnover is too low to warrant paying VAT in Britain.
  • Register for VAT in the UK and use the MOSS system to pay VAT owed to other countries.
    • This is the suggested method for compliance – however many small businesses operate on very tight margins already; paying UK VAT rates could effectively force businesses into closure. They would still need to record all location data and navigate appropriate payments through MOSS as well as paying UK VAT on all applicable income.
  • HMRC has stated that it is permissible to give a free digital copy of a physical product alongside the purchase of a physical product, so businesses could legitimately sell ebooks on a CD to be posted to the buyer regardless of their location without being required to record and retain location data.
    • This would fall under the VAT category for distance selling VAT thresholds – but if reached that for any specific country then businesses would almost certainly be operating on a scale where VAT registration was no longer a problem.
    • This also takes the sale of digital products back twenty years to a time before broadband and internet access was widespread – hardly appropriate for a first world nation.
  • HMRC has stated that the new regulations only apply to business to customer sales conducted automatically and that “minimal human intervention” in the sales process stops a transaction from counting for these purposes – so instead of a customer being able to pay for their digital product (ebook) and then being automatically able to download it from a website businesses could send customers a human-typed email at a later point with their purchased digital file attached and this would not require recording and retaining location information or reporting for VAT purposes.
    • We’re still seeking professional advice to confirm this will be a legal act and if so then for the time being this is the approach that we intend to take with Deadstar Publishing. It will mean additional work and ignoring a functional automated system purpose-built for ease of convenience to the consumer but it apparently complies with the law and introduces the least additional work for the business.

The reason this has become such a nightmare is because the EU member states have not agreed a minimum threshold for VAT liability on digital products sold cross-border and delivered automatically. There is currently a petition here: asking Secretary of State for Business, Innovation and Skills Vince Cable MP to urgently reassess this situation in light of the damage it will cause to small businesses in terms of massively increased administrative workload and potential for tax burden and for him to implement a minimum threshold similar to that which already exists for physical products sold at a distance before which VAT registration is optional, not mandatory.

If this comes in as intended it is going to cause chaos. Over the past twenty-four hours we’ve spoken with a number of businesses globally that would otherwise be too small to pay VAT based on income and who are now looking at whether it is feasible to even continue trading. The upshot of this is that even if you are not an affected business you a probably a customer of a business that will be affected. With businesses already considering closing digital sales or conducting transactions manually, think about the impact that this will have on you as a consumer as well as the business side of things. Would you be happy to buy an ebook or a music download that you then had to wait to be manually emailed to you?  Please make others aware of this situation as there is still time to show those in power how much of an impact this change will have.

There’s a lot more that could be said about this topic, but for now here are a selection of background links and research materials for you to use. Please share widely. The more people are told about this, the better chance small businesses have of obtaining the exemption to these new rules that are so desperately needed.