How the New European VAT Rules Effect Your Digital Products

The European VAT Rules for Digital Downloads

This is a post written to report on changes in EU VAT. It does not constitute advice and Blogtacular Events Ltd cannot be held responsible for any action taken or not taken by the reader. For guidance on your own tax situation please contact HMRC or your tax advisor directly.

What is it?

From the 1st of January 2015, the way digital goods are taxed is changing.  Previously, goods were taxed in the EU based on where the selling company was based. This meant that many bigger companies selling digital goods were based in countries with lower sales  or Value Added tax (VAT) so that they could pay the lowest amount of tax possible. To stop this practice, from the 1st of January, the tax a company pays is now based on where the buyer of its goods lives.

This only effects businesses that sell directly to consumers (business to consumer or b2c) and not businesses that sell directly to businesses (business to business or b2b). An additional part of this legislation states that you must retain 2 pieces of location data for the buyer for 10 years after sale.

 

What does it mean to me?

If you sell through a platform such as Amazon, Creative Market, or Etsy (update: Etsy is saying they are not responsible despite HMRC advising that they are), the platform is responsible for implementing the legislation. EU and HMRC guidance has indicated that they view your relationship to these platforms as business to business and their sale of your digital goods on to customers as business to consumer and they must pay the tax and gather and retain the information required by law. However, it is extremely important that you check with the platform you are using as to how they are handling this transition, as everyone is implementing  it slightly differently.

If you sell digital goods directly from your website, you are quite probably responsible for paying tax on the sales you make.

 

Are all digital goods covered by this legislation?

No.  The law is designed to apply to digital goods that have automated delivery with minimal human intervention.  If your digital good is custom made or shipped individually, then you will not be effected by the new legislation. HMRC has issued additional guidance to clarify what is covered:

Taken from HMRC's website:

Taken from HMRC’s website: https://www.gov.uk/government/publications/vat-supplying-digital-services-to-private-consumers/vat-businesses-supplying-digital-services-to-private-consumers

HMRC has admitted that this is a rapidly changing area, so if you are still in doubt it is best to email them directly at Vat2015.contact@hmrc.gsi.gov.uk

 

I don’t live in Europe, surely this doesn’t effect me?

It effects everyone selling digital goods to anyone in Europe. So, even if you are based outside of Europe, you are responsible for paying the sales tax. Countries have agreements across the world that can mean that they seek any tax owed. So, if you sell to the EU, you are effected.

 

*Gulp* it looks like my sales are effected, what do I do now?

As a first point, you need to register for the VAT Mini One Stop Shop (VAT MOSS). The HMRC has issued guidance here all about the process of registering and includes helpful information if you are a business outside of the union as well.

 

How do I register if I am not in the EU?

You can register in any of the EU countries for the MOSS.  To register in the UK as a business in a non-Union country, HMRC has published guidance here.

 

I am in the UK and am not registered for VAT as my turnover is too low, do I still have to register for VAT?

Yes. However, HMRC has clarified that you are able to separate out your UK based sales so you do not have to charge VAT on those and implement the new legislation only on non-domestic EU sales.  They lay out this process here.

 

Do I need to register immediately in advance of the 1st of January?

No. Guidance on registration indicates that you need to register by the 10th day of the month following your first digital services supply across the border. So if you make your first EU sale on the 8th of January, you need to register by the 10th of February.

 

What do I need to do about the data storage part of the legislation?

You need to register with the Information Commissioner’s Office (at a cost of £35) and follow guidance about secure data storage.  You will also need to ensure you are collecting the correct information as outlined in the guidance.  There is no question that this may provide problematic, especially if you use paypal as your checkout system.  They have issued guidance on the matter here.

 

Can I just stop supplying to Europe?

This is one of the possibilities many people have suggested to get around this legislation.  However, if you live in the EU it is not legal to block access to goods to other EU members.

 

Can I change my business model so I am not effected?

Making some changes to your business may make things easier to deal with the change.  You may want to consider moving from your own site to selling through a platform or changing checkout and cart handling services to one that makes collecting the required information easier. However, you need to ensure you aren’t doing anything illegal. Changing your business model with the explicit aim of avoiding tax could be seen as tax evasion. This would constitute something like moving the same pdf sales that are currently handled by an automated download to an email that is sent out manually. It is best to get advice to ensure you aren’t unintentionally evading tax in an illegal manner.

 

I have heard rumours that blog advertising is effected by this legislation, is that true?

We’ve heard that rumour too, but haven’t found guidance on the issue. Blogtacular has written to HMRC to get explicit recommendations for bloggers around advertising, sponsored posts and paid links.  At the time of publishing we are yet to receive a response, we will keep you updated as soon as we can give you a clear answer. HMRC have advised us that adverts and sponsored posts are considered business-to-business, are “not affected by the 2015 change and are outside of the MOSS system”.

 

Where can I go to get more information or support through this transition?

HMRC: VAT: supplying digital services to private consumers

EU Taxation Site

It’s worth joining the Digital VAT Facebook group as it is full of discussions and information on this issue.  It is also worth checking out this post, full of links to lots of helpful information.

 

How can I take action?

Many organisations are lobbying the government to iron out the problems faced by micro-businesses. You can write to your MP, MEP, the Business Secretary or the business leader in your government.

A good place to start is with EU VAT Action who also have a petition, lots of information and a great resources page.