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.
So as I understand it, if you run your own store, then you have to handle the VAT side of things yourself. There are tools – like Venda (part of NetSuite’s ecommerce platform) – that will handle it for you. It makes sense to outsource stores to cloud providers who can handle the accounting side of things for you.
If, however, you’re selling through Amazon or similar, then you’re in a B2B relationship, and the current rules apply.
It’s completely unclear what happens with crowd-funding.
There are certainly ecommerce tools that will do the job for you, but they are too expensive for me, and probably too expensive for many other people caught by this too.
Amazon’s platform is very good at dealing with VAT, and I think you are right that it is a B2B relationship, but I’m not sure that it absolves you of the need to register, because they are based in Luxembourg, not the UK.
Also, of course, other platforms are by no means as good as Amazon at handling this. I’ve seen people in other discussions fingering Etsy as a potential problem site.
It is possible that Kickstarter is OK because they force you to charge VAT whether you are registered or not. Other platforms are potentially suspect.
If I were Amazon (she says, channeling EVIL), I would fix my contracts so that everything was handled for you if you signed up for exclusivity, but you had a whole lot of paperwork to do if you didn’t.
There’s the added annoyance that, if you *are* required to register for VAT, then you are legally required to *charge* VAT, so your prices will either have to increase by 20% (not good for you or your customers) in order for you to retain the same amount, or you swallow the VAT as an additional cost and you therefore make less.
This is a *terrible* idea for small businesses, and I see no sense in introducing a zero-point limit for digital products, when non-digital products still play by the same rules!
Well this looks like an utter mess to say the least.
The key point seems to be the “turnover threshold of zero”. This is obviously crazy but isn’t even mentioned on most web pages I looked at including the one below which lists the thresholds for different countries.
http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/traders/vat_community/vat_in_ec_annexi.pdf
Also http://www.vatlive.com/eu-vat-rules/distance-selling-eu-vat-thresholds/
Someone has put together a set of links that might help, assuming if course you have unlmited time to go through all this.
http://rachelandrew.github.io/eu-vat/
I’d suggest contacting your MEP, unless it is some UKIP idiot.
This link
http://www.vatlive.com/eu-vat-rules/internet-and-ecommerce-vat/
implies to me that that the national thresholds still apply but only because it says nothing about any changes yet specifically mentions the thresholds.
Whatever the case I wish you the best of European luck with it.
Martin
European Court of Justice: ‘Member states can set different VAT for e-books’
http://www.thebookseller.com/news/ecj-member-states-can-set-different-vat-e-books
Recent historical background to the change: EU lines up e-book VAT debate
http://www.thebookseller.com/news/eu-lines-e-book-vat-debate
Echoing Lee above…
E-book prices may rise as VAT law kicks in
http://thebookseller.com/news/e-book-prices-may-rise-vat-law-kicks
UK has a mini-one-stop-shop (MOSS) for small digital retailers
https://www.gov.uk/government/publications/vat-supplying-digital-services-and-the-vat-mini-one-stop-shop/vat-supplying-digital-services-and-the-vat-mini-one-stop-shop
… which still looks a pain to sort out.
If a customer is involved in the loop you _may_ be a b2c (not b2b)???? (Best check with an expert.)
Not to comment on the eBook issue, which I’ve not heard about until this post, but your comment that if you registered for VAT in the UK you’d experience the ‘near certainty’ of being investigated by VAT Officers who wouldn’t believe most of your activity was with the USA.
I can’t say you wouldn’t get a VAT inspection (but I know lots who haven’t in many a year)… but I’d think an intrusive VAT visit for what I’d imagine your level of turnover to be is very unlikely in my experience. The VAT office, like most organisations, are stretched and under pressure and are focusing where they think they can issue substantial assessments for under paid VAT.
Generally, if your record keeping is good then *if* you get an inspection and they realise there will be little prospect of an assessment in their favour, they’ll have little interest in continuing a their visit… they just don’t have the time. Ditto, if your record keeping is good, then there is no reason for them to not accept the territories that you are selling into. Key is, have a system for running your VAT reporting.
That’s a reasonable point, and I’d go with it if I didn’t have decades of experience as an economic consultant and a member of a despised minority group. What my experience tells me is:
1. Regulations are always written so as to ensure that if a regulatory body does want to get you, it can, unless you have more lawyers than they do.
2. As a trans person, I have far less legals rights than most UK citizens. I will be discriminated against, and if any case comes to court I will lose.
So yeah, I’m kind of nervous about this stuff. As to a system for running VAT reporting, it all depends on how expensive and/or time consuming that is.
Well, can only say that’s my current perspective on dealing with VAT and the VAT office (and in my 9 – 5 I’m filing six figure output VAT returns each quarter and have been for many years), and from my experiences working with some smaller businesses – there’s a stigma to HMRC and its VAT officers, but I don’t see that evidenced in the field as it were – they really are focusing on where they think they can file assessments. I can’t say you wouldn’t get on their radar, but can only suggest that intrusive investigating is unlikely, particularly if you make regular, on-time, on-line, returns.
I’ve not looked the eBook issue yet, and need to because I’ve recently republished a music biog of mine in Kindle format via Amazon and Smashwords – and will be doing so in coming months for my books on the free festivals and on Hawkwind, but I’d be amazed beyond belief if, for example, the Finnish VAT authorities are going to have any interest in or time for chasing VAT registrations and payments for independent self-published or small press outlets, so I need to dig around but something doesn’t feel quite right in what’s being interpreted (at least I hope that’s the case – otherwise you’re right, it is a mess waiting to happen).
There’s a very simple solution to their not wanting to be bothered, and that’s to have a turnover threshold below which you are exempt. That’s all people are asking for.
O really, everyone is getting hot under the collar for nothing. As taxation remains the purview of each member state, then the present UK turnover exemptions levels over ride any other consideration and anyone not selling £ 80K worth of books doesn’t need to be worrying.
If you are, then the chances are that you are selling via Amazon, or a packager like D2D in which case you are not the retailer and none of this concerns you at all…
This will hit companies like Amazon, not publishers or the self published. The FCA are getting upset because it will reduce the fees they are charging for all the tax avoidance planning.
Clearly you haven’t got a clue what you are talking about.
Firstly, as you would have seen if you had bothered to read the post above, the exemption threshold for digital sales is not £80k, it is zero.
Secondly, VAT is not a sales tax. It applies throughout the supply chain. There may be reasons why selling through Amazon would exempt you, but it is by no means clear how and to whom they would apply. Nor is it clear how we can tell which other online sales platforms provide such an exemption.
Please stop wasting my time.
VAT is a sales tax, in the sense that it is a tax on the end-user as far as it works through the system of VAT registered businesses as payable and reclaimable until it reaches the end-user (or unfortunately reaches a non-registered business, like you as a consultant or a publisher, or me as a freelance writer), with some exceptions such as restrictions on VAT recovery on car leases…. but it is essentially a sales tax.
A sales tax is what they have in the USA, where the tax is applied solely on Business-to-Customer interactions. You are correct that VAT can be reclaimed, but the way it works is very different to a sales tax. Will was suggesting that VAT applies only on B2C transactions, which is wrong.