I want to start by emphasising that this is my personal take on a very complicated set of legislation. There is every chance that I have totally misunderstood something crucial because I’m not a lawyer or an accountant. I am a single person trying to earn some money to pay my bills and trying to do this in the beading world where I sell beading tutorials, kits and books.
Secondly, I’m going to save us both some time by pointing you to a couple of other blogs that explain some of the background to this blog, rather than writing it all again here. If you’re wondering what Etsy is, then you can find a blog about it here (or you could go to their website!). If you’re curious about EU VAT, or perhaps more precisely, the VAT MOSS (aka VAT MESS) legislation that came into force on 1st January 2015, then you can find my original posts on the topic here and here. I should point out, that the campaign to modify this legislation is still ongoing, so I am talking about a situation that is in flux and if you want up-to-date and accurate information, then please do take advice from your accountant or your local tax authority, not just from me. Remember, I may not know what I’m talking about, so I’m not going to be held responsible if you find yourself in some kind of financial or legal mess after reading my blog!
EU VAT Complications
Having got through all those caveats, let’s get on to the bit you want to know about: EU VAT and Etsy. Firstly, this has always been complicated. Secondly, it seems to have just become more complicated. So, let’s deal with the fir
st bit. In a nutshell, the new EU VAT rules stated that if you are a business who sells a digital service (ie something that is automated online and doesn’t require any specific human intervention) to a consumer, then you must pay VAT at the consumer’s local (country) rate, to the tax authority of the country in which the consumer resides (it’s up to you whether you collect that VAT from the consumer by increasing your prices, or just swallow the hit on your profits). If you are a business selling to a business, or an individual selling to another individual, then different rules apply. In the UK, all VAT rules have a threshold to help protect small businesses and individual traders because VAT is a hugely complex and expensive thing to put in place and administer, so forcing tiny businesses to join the system is frankly more trouble than it’s worth for everyone concerned. When the EU brought in the new VAT rules on digital selling in 2015, they didn’t bring in a threshold, so that meant that every individual selling craft patterns, software, music, books, online courses, or anything else digitally from their back bedroom would now have to sort out VAT. You can read about the finer details in the blogs to which I linked above. All you need to know is, if you sell craft patterns, this affects you, even if you only sell ten patterns a year. Crazy huh? Well, when the craziness of this situation was pointed out to the EU, their response was that all those individuals only sell through third-party sites, ie the online marketplaces like Etsy. So it would be those online marketplaces that would have to sort out the VAT.
Firstly, this isn’t true: lots of individuals sell through their own websites – it’s not difficult or
expensive to do and it cuts out the fees for listing through the online marketplaces. Secondly, many of those online marketplaces held their hands up to say ‘not my problem’. In other words, they proposed to take no responsibility for the EU VAT scheme. Etsy was one of those who initially stalled and whose EU VAT policy was as clear as mud. Over the course of last year, they did come round to the point of view that EU VAT was their problem and, as I understand it, they started adding VAT onto the affected products and sorting out the VAT returns for the EU. This seemed, as the EU intended, to have limited or no effects on the individuals selling on Etsy.
However, a few weeks ago, I started getting emails from Etsy to say that, unless I could provide them with a VAT number, from April 2016, I would start being charged VAT on top of my listing, advertising and sales fees. A few people started reacting to this on social media and in the EU VAT groups on Facebook…what was all this about?
Firstly, as someone pointed out, surely if I don’t have a VAT number then, it means I’m not in the VAT system, so I shouldn’t be paying VAT? Whereas, if I can provide Etsy with my VAT registration, then of course I should be in the VAT system and this all makes sense doesn’t it? Well, no, it seems that a lot of people are finding this confusing.
EU VAT: my take on the Etsy developments
Well, actually, if you go back to look at the EU VAT rules, you will notice that they apply to a business (Etsy) providing a digital service (your Etsy product listing, or Etsy advertising, or Etsy 
facilitating your product sale), to a consumer (you), then yes, Etsy should be charging VAT on those services that it provides to EU residents. Where does the VAT number come in? Well, it looks to me as though Etsy is using this to differentiate between individuals and businesses. I’m guessing that Etsy is working on the assumption that if you have a VAT number, then you are registered somewhere as a business, so therefore the service that Etsy is providing you is a Business to Business service and doesn’t fall under the EU VAT rules. Whereas if you have no VAT number, then Etsy is going to assume that you are a ‘consumer’, that is, an individual, so in buying Etsy’s services (product listing, advertising, facilitating sales), you are a consumer paying for a digital product and you should be paying EU VAT.
So, this really sucks: it suddenly means that all EU sellers are looking at higher costs (the percentage depends on the local VAT rate in the country in which you reside), so that either makes them less competitive, if they pass those costs onto their customers (and if their customers happen to be other EU residents, then they’ve already taken a hit when Etsy started implementing the VAT on sales), or those sellers just take a hit on their profits.
The huge irony of this situation is that the EU powers-that-be thought they were going to protect individuals selling through marketplaces, so those individuals would still be able to pursue the entrepreneurial goals that are good for all economies. (We’ll ignore the fact here that the EU VAT laws were brought in to try and take away the competitive advantage enjoyed by large corporations…I’ll refer you back to the blog above if you want more on that argument). The irony is that those individuals are now being taxed by the large groups that the EU wanted to challenge. So, once again, look who wins here: large corporations and government.
Personally, I’m about to close my Etsy store because it’s simply not financially viable now. So if you do want to buy anything that I sell there, then just follow the link in the links menu to the right – I’ll be removing the link when my store closes.
And finally, in case you think I’m trying to wage some kind of vendetta against Etsy, I’m not. I imagine that other online marketplaces are either already doing something similar, or will be forced to do so in the future. It just so happens that my personal experience has been with Etsy. I happen to know that Amazon are already charging me tax on sales, but at least that only applies to sales as there are no listing or advertising fees with Amazon, so I’m not so much ‘losing money’ as ‘making less money’. I’m about to go and investigate my ebay account…I hardly ever use it, but I should probably get up to speed in case I do want to list the odd item in the future. I suggest that you also look into the policies of any online marketplaces you already use, or may want to use in future. I’m hoping that this blog just helps you to understand the theory behind this convoluted mess. I continue to follow the EU VAT campaign, so if the EU does see sense one day, I’ll let you know. On the other hand, here in the UK in June we’ll all be voting to determine whether or not we want to remain in the EU. I don’t know which way I’ll vote and I don’t know which is the sensible path to follow, but I do know that the EU VAT mess has a direct, negative, impact on me and it could be a compelling argument to feed into the decision I eventually make.
If you have experience of other online marketplaces that you wish to share, then please contribute to the comments so this can be a helpful resource for all of us trying to earn a little bit of income from our crafts.
