(The TL;DR version of this post: I’m going to be withdrawing “digital download” services to EU customers as of 01/12/2014. Patterns will instead be available by post in paper form (i.e. a physical product) )
From January 1st 2015 the way that VAT is charged on digital products within the EU is going to change. A nicely detailed article in plain English is here: https://econsultancy.com/blog/65810-new-eu-vat-regulations-threaten-small-businesses-vatmoss
The EU has decided that instead of being charged at the rate of Country of Origin, and VAT going to the Country of Origin, the VAT must now be paid to the country of destination, at their VAT rates. This affects ALL sellers of digital products globally, not just within the EU.
In the UK, you do not have to VAT register with HMRC until you turn over £81,000 per year – this takes a massive administrative overhead off of UK small businesses.
However, unlike selling physical products, from Jan 1st once the change happens, VAT will due on all digital sales from day one at all times, via a quarterly VAT return (And you have to file a “Nil return” if you have made no sales that quarter) – Unlike with physical products there is no threshold and records have to be kept for 10 years.
Also, to comply with this, once a company UK VAT registers, all the products it sells then become VATable, not just the digital ones.
Consequently, small traders such as myself pretty much have 4 choices:
- Register for VAT in each of the 27 Countries of the EU, and submit quarterly returns for digital sales to each VAT authority.
- Register for VAT in the UK, sign up to the UK VAT MOSS and submit returns for all goods sold.
- Find a large corporate 3rd party that will sell our digital products for us, take care of the VAT headache for us, (charge us commission to) process our digital sales and forward on the money left over to us.
- Stop selling digital products to EU customers.
Unsurprisingly, I’m taking option 4 – I have a tiny turn over, and simply cannot afford the time or money it will take to submit a VAT return every quarter.
Until there is more clarity about how this rule (which was allegedly designed to get more VAT from Amazon – they currently use Luxembourg as the home of their Digital arm, where they charge only 3% VAT on e-books) will be implemented and if there can be an exemption made which is the same as Physical products for Small Business , I cannot afford to trade digital products with the EU.
I’ve re-added the “full” checkout process for Digital as well as Physical products (It has been previously set to just collect an e-mail address) and will be removing the digital download shipping setting for the EU at the weekend.
EU customers will only be able to buy a paper copy of my patterns, as I’m not liable to pay VAT on physical products (yet – apparently, that might well happen too, in which case I’ll have to withdraw entirely from being able to ship to the EU!).
I must ask customers to not lie to me at checkout to get a download – If I contravene the regulations, I’m liable for an unlimited fine if I do not then VAT register and submit the return, even for just the one pattern.