While I’m busy with my day job in Canada, Juliet McKenna and her colleagues are beating their heads against the brick wall that is Whitehall. Juliet’s latest post is here, and in it she explains how HRMC found a solution for her problems. It involved sacking her existing publisher, who was clearly incompetent, and instead signing up with one of those outfits that will charge you £500 to make an ebook (which they probably do by automated conversion). I guess if you are making that amount of money off the gullible then you can afford all of the administrative nightmare that is VATMOSS.

The trouble, as Juliet makes clear, is that the people she is dealing with don’t have a clue. Not do they seem to think it is at all important.

If Wizard’s Tower were my means of making a living then I’d be a lot more sanguine about the whole thing, though if my net income from it was around £12k/yr (which is approximately what I earn from the day job) then the addition of at least £1k/year in dealing with VATMOSS would not be very welcome.

Our beloved government, however, thinks that a small business is one with 200 employees and an annual turnover of £30m. Single-person businesses, of which there are around 4.6 million in the UK, are barely on their radar. Many of those single businesses will have difficulty surviving VATMOSS.

However, the businesses that will really suffer and the countless (literally, as we have no idea how many there are, because no one has bothered to count them) businesses like Wizard’s Tower that don’t make enough money to support even one person full time. The annual turnover of Wizard’s Tower in my last annual accounts was around £5k, and the business made a loss that year because it bore most of the costs of Airship Shape & Bristol Fashion while enjoying little of the revenue from it. Add £1k of admin costs to that and you are in serious trouble.

The nice gentlemen in Whitehall don’t seem to think that this is a serious business. If you can’t even provide the livelihood for one employee, what right do you have to call yourself a business? Who cares if you go to the wall? From my point of view it would not matter than much, because I have such slim profit margins (thanks, Amazon, for competing with me). Other digital businesses might bring in their owners a few thousand a year. What does that pay for? It might mean the difference between being able to afford a holiday or not; it might mean nice Christmas presents for the grandchildren that you couldn’t afford on a state pension; it might mean not having to go on benefits because your job at Tesco doesn’t pay enough to cover the rent and feed the kids. Naturally all of this seems like something out of a Dickens novel to someone on a fat civil service salary. They don’t believe that it happens.

And then there’s the other thing. Most of the people involved in this campaign are women. Most of the people we are dealing with are not. We know that their understanding of ecommerce is woefully lacking. We haven’t even tried explaining the crowdfunding issue to them, because it would be like telling them we were cloning dodos for all they would believe such a thing were possible. But from their point of view it is a clear case of the little ladies not understanding technology, and if only they would stop nattering for a while and listen while someone mansplained the Internet to them, why then their problems would all go away.

Head. Desk. Repeat.

First the good news. I have email from HMRC assuring me that I do not have to register for VAT provided that I sell exclusively through third party sites that collect VAT on my behalf. This means Amazon, Google Play, and probably a few others that I haven’t confirmed that yet.

What that also means is that I can’t sell direct, I can’t sell through non-compliant third party stores (such as Weightless), and I can’t use crowdfunding.

Us book publishers get off lightly. In other business areas the main sales platforms are non-compliant. I’m thinking in particular of Etsy (for crafters) and Bandcamp (for musicians).

And now the bad news. The petition has got past 10,000 signatures, which means that the government has had to make an official response. Sadly whichever policy wonk wrote this for Vince Cable is hopelessly out of the loop.

Essentially what the Cable response is doing is regurgitating the old HMRC line that we were getting a couple of weeks ago. As this blog post explains, that was based on consideration of what the government described as an SME (Small to Medium Enterprise). The official definition of this is, “the category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro”.

As you can imagine, most of the businesses in trouble over VATMOSS don’t make anywhere near that. Typically they are sole traderships (1 employee) and have turnovers not exceeding 50 thousand euro.

There are apparently 4.6 million such businesses in the UK at the moment, and while not all of them will sell digital products that’s still a huge number of businesses affected. A lot more than the 34,000 that HMRC estimated.

Anyway, I have to go on a business trip shortly, so I am leaving all of this in the capable hands of Juliet, and now also of Talis Kimberley, whom many of you will know from her music (yes, she is affected), but who is also now the Green Party’s Prospective Parliamentary Candidate for South Swindon. With any luck, by the time I get back they will have knocked a few heads together.

Thanks to the fine folks at Enterprise Nation, Juliet McKenna was one of many concerned people who got to meet a bunch of HMRC and Treasury bods in Westminster yesterday. As you’ll see from this report, Wizard’s Tower got mentioned. That also led to our getting a mention in the Financial Times today. It is behind a pay wall and they got their facts wrong, but hey, my little publishing company got mentioned in the FT.

It is a little early yet to know exactly what will come of this, but from what Juliet has told me we have at least been listened to, rather than getting fobbed off with platitudes as has been the case before. Also the government now has a much better idea of the scale of the problem.

While the possibility of getting the UK government onside is encouraging, these regulations are EU-wide, and we won’t be able to fix the problem without taking the campaign to Brussels. I have spent part of today emailing friends in Europe trying to find out how other countries are tacking the issue. If you happen to know anything about the situation in other EU countries, please get in touch.

Some of you are doubtless sick of all this VAT stuff by now, but it is consuming my life at the moment so I have nothing much else to write about. Sorry.

The current view is that a small press will probably be OK, and an individual writer will definitely be OK, if they stick to selling through VAT-compliant marketplaces. We think Amazon will be deemed compliant. So far so good. We don’t have to register for VATMOSS, as long as we close any direct sales outlets and stop selling through non-compliant stores. But what if the press wishes to raise money in some other way, such as a project on Kickstarter, or via Patreon?

This is where things start to get very murky, because it isn’t clear that anyone at HMRC knew what crowdfunding and patronage were before we started telling them. They certainly don’t seem to have appreciated how important these things are becoming.

With regard to crowdfunding, there is a lot of hot air blown over the subject of whether rewards count as “sales” or not. People go through all sorts of verbal gymnastics trying to prove that rewards are an investment in the company, or a donation, or some other thing that is not taxable. None of the accounting advice I have seen has any truck with this sort of thing. (See here, for example, or Suw Charman-Anderson writing for Forbes). Kickstarter even explicitly warns users that some rewards will be subject to VAT.

However, crowdfunding platforms do not view themselves as marketplaces. Even the UK-based ones I have looked at explicitly state that they exist only as a means to help users run campaigns. They do not collect VAT for you.

Now HMRC says that it is the responsibility of the marketplace to undertake VAT collection, so what they are going to make of this remains to be seen. Until something happens, however, it seems pretty likely that anyone in the EU offering digital goods as rewards in a crowdfunding campaign will be selling services directly to the customer and must register for VATMOSS, with all of the vast burdens that entails.

Patreon is rather different, in that you are generally not explicitly paying for something. For example, I can listen to Galactic Suburbia whether I back them on Patreon or not. And the various rewards on offer, in the form of more and better podcasts, are also available to everyone, regardless of patronage. (Update: at the highest backer level there’s an actual gift, but it is a paper fanzine so that’s goods not services.) So, could I put the Salon Futura podcasts up on Patreon and get money that way?

Sadly, I don’t think so. You see, podcasts are digital services, and thus if I get money for them they are liable for VAT. There are some tax rules about being allowed to receive small gifts tax free (up to £2500 a year), but those appear to apply only to charities, not businesses. HMRC would class the money received as a benefit, and benefits are taxable. I would certainly pay income tax on Patreon money if I got any.

The annoying thing is that none of this would matter if ebooks were classed as goods, or if there were a VAT threshold for cross-border digital services sales the way there is for cross-border sales of goods. As I explained yesterday, I can’t see any way that HMRC and the EU will change the classification of digital products, because the large media companies want them classifies as services. But I have yet to hear any sort of rational explanation as to why the thresholds are zero. If all EU countries have high thresholds for cross-border goods trade, why can they not do so for digital services? Why is there this specific attack on the digital economy?

Another day, another set of confusing and contradictory messages about what will and will not be allowed from January 1st. There is, for example, this article in the Telegraph, which claims a victory for campaigners but is actually nothing but HMRC spin, presumably fed to the Telegraph by them. Firstly, any solution that requires micro businesses to register for VAT is a disaster. Only having to do so for sales into the rest of the EU is no help. Also, when we had the Twitter seminar on Monday, HMRC insisted that, in order to split reporting in the way that the Telegraph article suggests, the two parts of the company would have to be legally separate entities. You can’t do that if you are a sole trader, so at least one part of the company would have to be separately registered as a company. Yet more expensive red tape that people won’t have the time to deal with before January 1st.

What I want to talk about here, however, is a fundamental question that lies at the heart of the whole debate: whether digital products are “goods” or “services”. It is important because the EU has very generous revenue thresholds for selling “goods”, below which registration for VAT is not necessary. In contrast the revenue thresholds for selling “services” are zero, so everyone who sells them has to register.

At first sight it would seem crazy to suggest that an ebook, and MP3 of a song, or a jpeg of a photo, is a “service”. The physical products are very clearly goods. How does digitizing the product transform something from a “good” to a “service”? HMRC is getting itself tied in knots trying to establish how an ebook becomes a “service”. If you put it on a CD and mail it then is definitely isn’t a “service”. If you manually attach it to an email and send it then it may or may not be (HMRC people seemingly can’t agree amongst themselves on that one). But if you download it from a website then it is definitely a “service”.

Then again, for some time now, large corporations have been intent on establishing that digital products are indeed “services”. That’s because they are desperate to move us from a world in which we are able to own products — books, record, and so on — to a world in which we only ever rent a license to use products. They have been moving us from buying “goods” to buying “services”.

The way in which publishing companies distinguish between a “good” and a “service” is party with DRM (and partly by the terms and conditions under which the product is sold). By applying DRM to a book a publisher is saying, “this is not something you own and can copy or give away, it is something we own, and are renting to you”.

That’s not the way I publish my books. When I sell you a book I am still selling you a product. When you buy that file from me, you own it (though you don’t own the creative content as that’s covered by copyright). I am by no means the only publisher to operate in this way.

Logically, DRM free books ought to be goods. But can you imagine the chaos it would cause if a book with DRM was subject to VAT, but a DRM-free book was not? Not only would the DRM-free book be better value, but it would be cheaper too. It would be political dynamite for any country to make that distinction. So instead they have settled for the simple option of classing all ebooks as “services”. And now that they want to apply Place of Supply rules to VAT charged for those “services” they have got themselves into this ridiculous mess.

It is possible that this is a way out for me, in that I can argue a case whereby my books don’t become “services” until they are sold to the consumer. Therefore, if I only sell through VAT-compliant marketplaces such as Amazon, I don’t have to register for VAT. But I have no idea whether HMRC will accept such an argument, nor do I have any faith in their willingness to even consider the question. And without any assurance that I’m operating legally, I’ll need to take steps to move the business outside of that law.

Furthermore, there are all sorts of good reasons why digital microbusinesses might not want to sell solely through Amazon and its ilk. They might have products that such platforms aren’t set up to sell. They might not want huge corporations to have control over what they sell and how they sell it. In practice what HMRC is doing is the equivalent of saying to a small farmer that she can’t sell her crops at a market stall, she has to sell them through Tesco or a similar supermarket. What we need is a revenue threshold below which microbusinesses don’t have to register for VAT, regardless of what they are selling. Anything less (Telegraph please note) is a defeat.

I have updated yesterday’s post to explain the Byzantine reasoning why digital products are apparently not eligible for the VAT thresholds. In the meantime, Juliet has set up a protest group to try to force HMRC to take notice of the very many businesses that it will destroy. If you are affected in any way by VATMOSS, please sign up here.

There are also some guidelines as to how to best go about writing to your MP or MEP about this. This will affect all of you in the UK, because one of the effects of this will be that Amazon has to charge 20% VAT on ebooks rather than 3%. They’ll try to do that by squeezing authors and publishers, which will hurt your favorite writers, but inevitably prices will rise too. If small presses were allowed to claim VAT exemption we’d be allowed to sell you ebooks VAT-free. Having no exemption threshold means that we can’t do that.

The biggest problem that all of us struggling with this issue have is that we simply can’t rely on information we are given. I’ve mostly given up researching it and am instead looking at the issues involved in selling Wizard’s Tower to someone outside of the EU. Juliet McKenna, however, has been beavering away. And the more she finds out the more like Looking Glass Land the whole thing becomes. Take this, for example:

https://twitter.com/JulietEMcKenna/status/538993571740020736

Yes, that’s right. On the one had we are being told that we should prevent people in other EU countries from buying our products if we can’t charge the correct VAT rate, and on the other hand we are being told that such discrimination may be illegal.

Meanwhile folks in other countries are getting worried about having to register. Here’s Howard Tayler:

The best we can do re #VATMOSS is post a message saying "EU friends, it's illegal for you to shop here because we can't track you."

— Howard Tayler (@howardtayler) November 30, 2014

So, no Shlock Mercenary for you, EU readers. And HMRC is quite adamant that non-EU suppliers MUST register, no matter how small their business.

.@Iammo_25 Yes, if a digital service. Consider non-union MOSS scheme

— HMRC Customer Support (@HMRCcustomers) November 27, 2014

Does that seem crazy to you? Well actually it is. No sane European government would do that. It just isn’t practical for a government to worry about collecting VAT on the sale of 40 knitting patterns a year, let alone take legal action in Canada to enforce it. So I don’t think that Howard, or anyone else outside the EU, has anything to worry about unless they have an EU-based subsidiary, or they sell huge amounts of product. The obvious proof of this is that non-EU countries have been liable to charge VAT under the Place of Supply rules since 2003. To my knowledge, no non-EU small business owner has been arrested over this.

What’s different now is that the same rules are being applied to EU-based businesses, and that HMRC insists that every business has to register, no matter how small. Their rationale for this is that they cannot control laws in other EU countries. While the UK might have a threshold of £81k turnover, below which a business need not register for VAT, other countries might not be so friendly to small business. I quote from their recent FAQ on the subject:

B2 Why can’t there be a minimum VAT threshold like in UK? #VATMOSS

Within limits, each Member State decides on its own VAT threshold, and we cannot impose our threshold on them. #VATMOSS

And they are right. Hang your heads in shame, Spain and Sweden, both of whom have zero thresholds.

But wait, did you click through on that link? Did you read what it said at the top of the page? OK, for those of you who didn’t, here are the important words:

Generally, non-resident businesses that must register for VAT in another EU state face a nil registration threshold. A major exception to this rule is e-commerce to consumers, where foreign EU retailers have special EU distance selling VAT thresholds.

I’ll repeat that. Special EU distance selling VAT thresholds, which apply solely to digital transactions. Here they are. And guess what? None of them are anywhere close to zero. All of them would easily allow a micro-business such as Wizard’s Tower to keep trading.

Now that site I have been linking to is not an official government site. It is, however, very comprehensive and seemingly well informed. For example, just last week they reported that Google would be changing their terms of business to be properly VAT-compliant under the new rules. That’s a big relief.

So what exactly is going on here? It is, of course, entirely possible that HMRC is far better informed than most, and they know that the distance-selling VAT thresholds will be lowered as of January 1st. On the other hand, we could be dealing with a dishonest government seeking to put the squeeze on small businesses and sow distrust of the EU by pretending that EU regulations are much more draconian than they really are.

Update: I see that the page linked to above now notes that thresholds are zero for “electronic services”. Believe it or not, that means all digital sales. As Juliet notes here, that makes a certain amount of sense for a book or movie that has DRM, because you are buying a license to view it, not the object itself. It makes no sense whatsoever if you are simply selling a file. And indeed HMRC says that such things are not “services” if they are manually emailed to the customer rather than directly downloaded. Honestly, it makes quantum physics seem easy.

Just to re-iterate what I said at the beginning of this post, the main issue here is that it is impossible to tell what it is safe to do and what it isn’t safe to do. HMRC will not issue guidance, but they will prosecute if you get it wrong. No one has any idea how governments will cope with tens of thousands of very small companies trying to register to charge VAT, and HMRC seems perfectly happy with the idea that all of those companies will be forced out of business.

Yesterday HMRC hosted a Twitter chat to answer questions about the new VAT rules that I blogged about the other day. A little clarity has been obtained, but far more confusion has been sown. Juliet has a blow-by-blow summary of some of the answers. I’m going to try to give a more high level view.

First up, as I suspected, the petition that is being passed around is largely a waste of time. HMRC cannot unilaterally decide to have a VAT liability threshold for the whole of Europe. We are bound by the laws of the countries that we sell into, and that’s that.

HMRC also confirmed that companies outside of the EU are liable and must also charge VAT on all sales into the EU. (Yes, this does mean you, Alisa). However, the chances of them actually enforcing this are pretty low, especially as most of the sales will come via third party platforms and so will be covered.

The good news for many people is that if you sell only via third party platforms such as Amazon then you should be OK, because they will charge the correct VAT rate for you, and you don’t have to worry. Except that by no means all of these platforms do this, and if they do they may not do it correctly. HMRC avoids questions about having an approved list of platforms, and instead says it is our responsibility to read the Terms & Conditions to make sure that the platform complies. Many of these platforms are US-based and may not care too much about getting it right. Google Play is apparently not compliant, and if they don’t play ball, what chance is there that others will?

There is another wrinkle too. In theory VAT applies at all stages in the supply chain. If there are business-to-business transactions, the selling business charges VAT, and the buying business claims that VAT back from the VAT their charge their customers. It isn’t clear to me why someone selling through Amazon doesn’t have to charge them VAT, but presumably some sort of ruling exists. My guess is that any such ruling will be dependent on the person selling through Amazon being the originator of the product. That is, Amazon is not buying an ebook from you, it is buying the right to publish your words. But that isn’t the case for me. I’m publishing house, not an author.

I am pretty sure that once HMRC gets their heads around that concept they will decide that I have to charge Amazon VAT on the books I sell them. Amazon, however, persists in assuming that everyone who uses their online publishing service is a sole author. That’s the way they want the world to be: just them and authors. So I’ll have to charge them VAT on the books they sell, but they won’t acknowledge that they have paid it and they’ll add yet more VAT onto the price before selling it. Which means customers will be taxed twice.

There are problems with registering for VAT too. I could be a good girl and sign up to do this. Except that if I want to carry on doing direct sales I have to provide two independent sources of proof of the location of each customer (and keep this information on file for 10 years). One such item should be the IP address from which the product was purchased. PayPal does not provide this information, so I’d have to work out how to get it myself, or pay for a more sophisticated ecommerce system that will do it. Of course I closed the original bookstore because I wasn’t doing enough business to afford the fees from Shopify.

HMRC hasn’t begun to think about the Data Protection Act implications of this.

So yes, direct sales are definitely a non-starter from January 1st. Amazon will be laughing all the way to the bank.

HMRC did try to be helpful. There are ways around the regulations. It is OK if you just take orders on your website, and then send the product to the customer via an email that you type yourself. Quite apart from the dragging us back into the 20th Century involved, there’s the small matter that the convenience of direct downloads is one of the main reasons why people shop at Amazon. An online bookstore that doesn’t offer direct downloads is dead in the water.

It gets worse. I tried to ask HMRC about crowdfunding and Patreon. They didn’t reply, probably because they had no idea what I was talking about.

Again, once they get their heads around all of this, they will almost certainly decide that such sites do have to charge VAT on all sales into the EU. They are not going to be impressed by claims that these are “donations” with free gifts attached. Currently Kickstarter is the only platform I know of that tries to do VAT correctly. I have been nervous about using them in the past because they insist on charging VAT on sales into Europe even if the seller is not VAT-registered. I can see now why they do that, and from Jan 1st it will be mandatory. But there are other complications with using Kickstarter from the UK that mean I really don’t want to use it.

Obviously I’ll be discussing this with all of the authors whose work I publish, but it certainly seems like something will have to give. The more I think about it, the more I come to the conclusion that the only viable option is to sell Wizard’s Tower to someone outside of the EU.

I’m a bit behind on this due to having been focusing on other things for the past few months, but I have just caught up on a change to VAT legislation that looks like being an absolute nightmare for anyone running a small press (and indeed anyone who sells digital products).

As you may know, the whole situation with VAT on ebooks is crazy. Although the rate for paper books is zero in the UK, the rate for ebooks is 20%. The avoid this, Amazon Europe has incorporated in Luxembourg, where the rate is only 3%. This gives them a significant advantage over UK-based rivals. Other large ebook platforms do the same thing.

The powers that be in Europe have, for some time, been trying to find a way to close this loophole. The obvious thing to do would be to have a common VAT rate across the EU, but of course there’s no way that individual countries will ever agree on what it should be. So instead they have created a bureaucratic nightmare.

From January 1st, the way that VAT is levied in Europe will change. Instead of companies having to charge VAT at their local rate, they have to charge VAT at the customer’s local rate. This is called the Place of Supply rule. This means that anyone selling digital products in Europe has to register for VAT in every country, charge VAT on each sale according to the local rate, and account for all of this on a quarterly basis.

Normally this would not matter too much, because it would only affect big companies. The UK has a healthy and very sensible turnover threshold below which you do not have to register for VAT. I have never bothered for my consultancy business. I’d probably save money doing it, as I’d be able to claim VAT back on purchases, but the time involved in filing VAT returns, and the near certainty of being investigated by VAT officers who won’t believe that my clients are primarily in the USA, make it not worth my while.

Except that the new rules coming in next year have a turnover threshold of zero for digital products. Yes, that’s right. If all you do is sell one ebook, or a few knitting patterns on Etsy, or a little app you made for fun, you are required to register for VAT and file VAT returns once a quarter. Even if the tax involved is only pennies.

Because I am coming to this rather late, I don’t have a good handle on all of the implications. For example, if you sell through Amazon, it may be that what you have is a Business-to-Business relationship with a Luxembourg company rather than a Business-to-Customer relationship with each person who buys your book. My little bookstore, however, would have to start charging VAT and accounting for where customers lived. I’m also pretty sure that a crowd-funding campaign would count as Business-to-Customer.

The implications for any small company selling digital products are so horrendous that the Head of Tax at the Institute of Chartered Accountants (England & Wales) has apparently suggested that small businesses stop selling in Europe to avoid all of this mess. Except, how can you? The digital world is global by nature. The better-written platforms, such as Amazon, will at least allow you to block sales via their EU-based sites. However, there’s nothing to stop someone in, say, Finland, buying one of my books via Amazon US, or Amazon UK. If they did, I may be legally obliged to account for that, and Amazon’s systems don’t give me enough information to do that.

Right now I am desperately trying to get some tax advice as to what I can and cannot do. However, because the vast majority of people affected by this are so small that they have never registered for VAT, and probably don’t make enough to afford an accountant, finding someone able to give good advice may be quite hard.

There is a petition on change.org asking the Secretary of State for Business to provide some sort of threshold below which registration will not be required. Please sign. However, from what I have read I’m not convinced that he can do that without withdrawing from the system altogether.

There is also a plan for a Twitter campaign tomorrow morning (UK time) to try to make the government aware just how many small businesses are going to be wrecked by this legislation. Details are here. All support will be gratefully received. If you don’t have time to follow the link, please at least look out for anything containing the hashtags #VATMOSS and #VATMESS, and retweet like crazy.

Somehow I will find a way for Wizard’s Tower to stay in business in some form next year. But right now I have no idea how.