VATMoss…or VATMess as it’s becoming known…relates to the new VAT regulations coming into force in the EU on 1st January 2015. The VAT rules on downloaded products are being changed in an effort to close some loopholes that have allowed companies to trade with lower VAT rates. Currently the VAT that must be charged on downloaded products is the ‘place of supply’ VAT, where the ‘place of supply’ is deemed to be the country where the supplier of the download resides. So, if you’re a big business and you’re looking to reduce your VAT bill, you set up your download business in the country with the lowest VAT rates, never mind where the majority of your customers live. Naming no names here, but I think we all know which companies the government had in mind when they decided to make these changes…
On 1st January 2015 the rules will change so that the ‘place of supply’ is being defined as the country where the consumer resides, instead of the country where the business resides. VAT rate on downloads must be charged at the rate applicable in the country where the customer resides. This means that the business selling the download must register for VAT in every country to which that business sells downloadable products. Three important points to note: these rules only apply to EU member states, they only apply on ‘Business to Consumer’ transactions and they only apply on downloaded products. So if you’re a business selling to other businesses, different rules apply. If you sell only physical products or you trade outside the EU, then nothing changes. One other important point to mention – this will not affect UK to UK sales or Germany to Germany sales etc as the change in rules will have no impact since the ‘place of supply’ remains the same despite the change in the term’s definition.
The immediate point that springs to mind is that registering for VAT in potentially 27 different countries (each of the 27 EU member states) and then completing the necessary paperwork every year to pay the VAT you owe to each of those governments is going to be something of a chore, to say the least! So, that’s where VATMoss comes in. The government has set up VATMoss so that your business can register in just one place, fill in just one VAT return and then somewhere behind the scenes the VAT income is divided up between the relevant countries. This sounds like a great idea until you realise that in order to register through VATMoss, you must also be VAT registered in your own country. Currently in the UK there is no obligation to register for VAT if your annual turnover (the amount of money coming into your business, not the profit) is below £81,000.
So, all of this is presenting something of a dilemma for me and for a lot of other beaders like me. It isn’t just affecting the beading world, but also other crafts where patterns are shared via download, and probably a whole lot of other individuals in other industries. For me personally, I am faced with the following choices:
1. Leave this website as it is so that patterns are available for automatic download to any customer anywhere in the world, then if I sell a pattern to someone in Germany, I register for VAT in Germany, then in France, Sweden, Italy etc etc. The downside: a LOT of paperwork and hassle trying to make sure I am complying by the correct rules. Plus I will have to separate my EU business from the rest of the business as, once VAT registered in, say Germany, I have to charge VAT on all products I sell there, not just the downloads, I believe. It doesn’t bear thinking about really.
2. Save myself some paperwork by registering with VATMoss. The downside: I then have to become VAT registered in the UK, which means charging VAT on every product that I sell, leading to a 20% increase in all my prices. I wonder how many customers are going to like that? Not to mention, I still have the large amount of paperwork that a VAT return involves and which, as a micro-business the VAT threshold is designed to help me avoid.
3. Stop selling downloads to EU countries outside of the UK. I can still sell patterns to these countries, but I will need to print the pattern out and post it to the customer. The downside: I don’t want to have to run a business that discriminates between the people who have been kind enough to support my work. I also don’t want to put more pressure on the environment by unnecessary printing and shipping.
For me and a lot of people like me, there is no ‘good’ outcome on 1st January 2015 as far as I can work out. There is currently an online petition that has been set up to try and persuade Vince Cable to look at these new rules and make some changes for small businesses. This issue received coverage in the Guardian and Telegraph newspapers and it has been trending on Facebook and Twitter. When asked for comment, the official government’s line is that ‘we don’t think this will impact on small businesses because they all sell through online marketplaces and in
this case, the marketplace will be responsible for the VAT’. Firstly, this view, in my opinion, suggests a total lack of understanding of the micro business economy. It is not true that all individuals in the beading world sell their patterns through marketplace sites (eg Craftsy or Etsy) – plenty, like me, sell through their own websites. Secondly, the legislation is rather ‘woolly’ when it comes to marketplace sales. The UK Government website states that “If you supply digital services to consumers through an online portal, gateway or marketplace then it’s important to determine whether you’re making the supply to the customer or to the platform operator. Where the platform operator sets the general terms and conditions, authorises payment or delivery, or doesn’t clearly state the name of the supplier on the receipt or invoice issued to the consumer, then they’ll be seen as making the B2C supply even if they’re contractually only an agent.” This says to me that the platform operator can easily duck out of being responsible for the VAT element by simply making the link tighter between the individual selling and the individual buying. Thinking about my own experience on Etsy, I’m not sure how this applies – payment comes direct to me and I talk directly to the customer, yet Etsy houses my pattern and facilitates the download. Does this mean I need to sort out the VAT element, or will Etsy be responsible? Basically we are waiting to hear what the official line will be from Etsy itself. The same applies to other marketplace sites.
So, do I think that it is right to close these loopholes?…absolutely. Do I think VATMoss is the right way of going about it?…absolutely not! To me, it looks as thought VATMoss has been ill-thought-through and goes against the grain of government pledges to help and protect small businesses. I believe this reflects a lack of proper thought and research into the market, in their anxiety to be seen to be doing something to stop huge companies taking advantage of tax loopholes. I have a suspicion that the large companies this is designed to impact will still find a way around the rules, meanwhile a huge number of small businesses will be damaged, perhaps to the point of bankruptcy. Not to mention I have no idea how they think they will enforce the rules – how does HMRC propose to monitor whether or not I’m selling half a dozen patterns to EU nations outside of the UK and paying the correct VAT?
I don’t often get involved in ‘politics’, but VATMoss has the potential to cause serious damage to me and to a lot of my friends. If you are reading this and think you might be affected, then I hope this has enlightened you as to what VATMoss means. Do take some advice from HMRC or an accountant. I will post an update when I have worked out how I am going to be dealing with the new legislation and, for once in my life, I will be paying close attention to VAT rules in the hope that the government sees sense and makes provision for small businesses!
