If you run a business that sells digital downloads in any way – like online courses, music downloads or eBooks like we do here at Moneymagpie – you are going to have to comply with new EU VAT rules coming in in January or get a whopping fine.
It won’t affect every business but for some it could be horrendous.
So what do you need to know? See below for our quick guide.
From 1st January 2015 there will be a VAT change that will affect all UK businesses selling digital services such as apps, games, eBooks, video on demand and music to private EU consumers.
At the moment tax is determined by the supplier’s location, but from the start of the New Year the place of taxation for digital services will be determined by the location of your customers.
This means new regulations will require sellers to charge VAT based on the customer’s country, rather than their country of sale.
So, think about it for a moment:
- There are 28 countries in the EU
- There are 75 VAT rates across the EU
- You could potentially have to charge a whole new load of VAT rates depending on where your customers are when they buy your products
- Even if a British person downloads one of your products, but they happen to be in another EU country at the time, you will have to charge them VAT at the rate of the country they are in at the time.
This new legislation could cripple, and potentially force into closure, thousands of micro-businesses across the UK so take a action and sign this petition to help stop it.
Who will be affected?
This new rule has got a lot of people talking with some saying it makes no sense and others worried about the future of their business.
The changes will not only affect digital businesses but also people who sell stuff from home like music, eBooks, apps and many other online independent sellers too.
Specifically the ruling covers downloads of digital products and services that are provided electronically, such as:
- Music downloads
- Knitting and craft patterns
- Downloadable software
- Software as a Service
- Webhosting services
- Downloads of training course videos
Hugo Grimston, Finance Director at Paddle.com says, “The rules were introduced in order to stop internet giants (e.g. Apple, Google and Amazon) from selling their products out of Luxembourg, which has the lowest VAT rates in the EU.
They have been doing this which has meant that their prices were artificially low and the other EU countries were missing out on tax revenues on items that were sold in their countries.”
The new rules therefore are well intentioned, but, as ever, the unintended consequence is that practically anyone who sells any digital content in more than one EU country will be forced to register for VAT in all the other EU countries, which will pose a threat for small businesses.
To comply with the new rules here’s what you can do.
There are three possible avenues to take if you want to comply:
- Register for VAT/MOSS
- Sell through a third party
- Simply don’t sell in the EU
1. Register for VAT/MOSS
Firstly, you could register for VAT / MOSS to ensure you are charging people the right rate of VAT. This is a kind of one-stop-shop set up by HMRC to sort out the various EU registrations for you.
Vince McLoughlin, Partner at Russell New, a firm of business and tax advisors advises you to sign-up as soon as possible, “HMRC started accepting applications to register for MOSS from October 2014, enabling businesses to start using the scheme from 1 January 2015 so businesses at risk must start planning now or face unwanted administrative and financial headaches at the start of next year.”
Businesses can register for this new VAT Mini One Stop Shop, which does the hard work of registering for VAT in each member state so that small business don’t have to do this themselves. Click here to register now.
2. Sell through a third party
You call also sell your products through a third party such as an App store or marketplace. Selling through a marketplace might be an advantage for some to avoid dealing with the hassle of the new VAT regulations but it will mean sacrificing customer interactions and the App store will take a 30% commission.
This works because the rules don’t apply to business to business sales (B2B) only business to consumer sales. So if you sell through a third-party they are the ones who have to sort out the VAT confusion, not you.
If a business uses an online portal or e-marketplace, then the e-marketplace is responsible for accounting for the VAT. If your business already does this as many do then you will be unaffected by the changes.
3. Simply don’t sell in the EU
For some small businesses this might be fine if their market is limited to their country, however this option won’t work for everyone.
What do you think of the new EU VAT rules? Will it be affecting you? Let us know in the comments below or tell us on twitter @moneymagie.
As I pointed out above, this new legislation could cripple, and potentially force into closure, thousands of micro-businesses across the UK so take a action and sign this petition to help stop it. We’re going to!