Apologies for taking a UK perspective, although the EU VAT rules apply to everyone who sells electronic downloads to the EU, irrespective of where the seller lives, and I’m not too sure that sellers in the US, Australia, or anywhere else in the world have woken up to these changes yet.
Let’s get one thing clear from the start. I’m a writer, I’m not an accountant, and I’m not a tax expert, plus it takes a major effort to supply accounts to my accountant when that time of year rolls round again. As for doing a self-assessment tax form, that is beyond me. But my accountant is a lovely man and he does all that for me, after I’ve supplied the accounts, that is. So, why on earth would I want to do a post on the new EU VAT rules on electronic downloads?
Well, I think I’m reasonably aware of what is happening in the writerly world of writing, publishing, and selling ebooks and paperbacks. So, when the first rumbles of this new VAT system reared its head as recently as November 2014, I sat up and took notice. Big business may have been alerted to what was going on in respect of these changes, but it was glaringly obvious that all the micro-businesses and individual sellers didn’t have a clue.
I had assumed that other writers as well as those involved with electronic downloads in any shape or form, would have noticed as well, but over the past few days I’ve seen comments on social media from writers who are mystified because the prices of their ebooks have increased. And, of course, big bad Amazon is getting the blame! But irrespective of how you view Amazon, this time it isn’t their fault. It’s the EU to blame for implementing VAT changes on all electronic downloads. This includes ebooks, software, music, apps, etc. Here is a list provided by HM Customs & Excise:-
“The rule change applies to ‘e-services’ that are ‘electronically supplied’ and includes things like:
- supplies of images or text, such as photos, screensavers, e-books and other digitised documents eg, pdf files
- supplies of music, films and games, including games of chance and gambling games, and of programmes on demand
- online magazines
- website supply or web hosting services
- distance maintenance of programmes and equipment
- supplies of software and software updates
- advertising space on a website”
However, because I’m a writer, I’m mainly concerned with ebooks, although anything I say can be equally applied to anything else on that list. But, a note of caution, I’m no expert, I’m just giving you my interpretation and understanding of the situation. By all means check things out for yourself.
One thing I do know is that the new EU VAT regulations have caused a storm on social media. Do a Google search for EU VAT and it should pull up loads of information.
The changes in force are that the VAT rate is now dependent on the buyer's country instead of the seller's, and there are 28 different VAT rates, maybe more, in the EU. So you have to pay VAT according to where your buyer lives. It is now 20% in the UK instead of the 3% (Luxembourg rate), but the EU countries vary between 4% and 27%. This is something to be aware of if you sell directly to the buyer through your website etc. You will be liable for the VAT due and you are responsible for charging the customer the relevant VAT, and you are also responsible for paying the VAT charged to the appropriate Government, and the rules state you have to keep all records of these purchases for 10 years.
However, these changes only apply if you sell to the buyer direct, you're OK as long as you sell through Amazon, Smashwords, Apple, or any similar platform, because they are the sellers and therefore liable for the VAT collection and payments, and as long as you sell through them you aren’t liable. I know one thing. I won't be selling directly to the customer any time soon. Too much hassle.
I found this information from a European Commission document provided by the Taxation and Customs Union and I thought it might interest you as well.
“From 1 January 2015, telecommunications, broadcasting and electronic services will – regardless of whether the customer is a business or consumer – regardless of whether the supplier is based in the EU or outside”Example provided:
“Must charge VAT in the EU country where the customer belongs (not where the business is based).A Polish customer downloading an App on his mobile phone from a Finnish supplier. The Finnish company must charge the customer Polish VAT.”
The same example could apply to a US trader selling to a customer in the EU, all you have to do is change the wording from Finnish supplier to US supplier.
Not only that, but I understand that the EU VAT rules will extend to physical goods in 2016 and will therefore affect paper books in the countries that apply VAT to them. So far paper books are zero rated for VAT in the UK, but that is not the case in all of the EU countries, although I haven’t yet had time to identify a list of the countries that do charge VAT. I’ll think about that later.
Coming back to the differing VAT rates. They range from 4% to 27% depending on which country your buyer resides in. Here are a few examples:-
To make matters worse, some countries have different VAT rates for electronic goods or services eg Italy’s VAT rates for ebooks depends on whether or not the ebook has an ISBN. The ebook with the ISBN will require a VAT rate of 4%, but the ebook without the ISBN has a VAT rate of 22%.
However, under EU directives there is scope for some exemptions, for example e-learning, but this does not apply over the board, and if one country decides to provide some exemptions, this will not necessarily apply to other EU countries.
What a confusing mess, no wonder the government’s solution to working the system VATMOSS (VAT Mini One Stop Shop), has been nicknamed VATMESS. As far as I can tell if you sell directly and don’t register with VATMOSS, then you will have to complete VAT returns for every country you trade with. You can avoid this if you register with VATMOSS which provides a centralised system to do this, however, as far as I can tell it evens out the tax rates, although I may be wrong. Oh, and did I forget to mention, that every sale counts, no matter how small, there is no threshold window to give the option not to comply.
Then there’s the little matter of penalties for non-compliance
- failure to register or late registration;
- non-payment or late payment of VAT;
- non-submission or late submission of VAT returns;
- incomplete or incorrect VAT returns; and
- failure to comply with invoicing or accounting obligations.
The Facebook EU VAT Action Campaign Group has proved useful to me in keeping up to date with what is happening as it happens, because there is a lot of lobbying going on to bring the dilemma facing small and individual traders to the notice of the UK government and the EU. As a result of following them I have become aware of some ways round the legislation.
For example, under HMRCs interpretation of the rules, if you sell ebooks or any other download from your website by using a ‘Click to Download’ button, then you have a responsibility to charge your customer VAT, and pass this portion of the sale on to the appropriate government body, or VATMOSS. However, if your customer contacts you by email, and you supply the file as an email attachment (provided this is not automated), or on a CD or DVD and send by post, then it is no longer a digital download, and therefore not liable for VAT. But bear in mind the plan to extend the regulations to cover physical goods in 2016. When this comes into force, this workaround will no longer be legal. However, there is no guarantee that other EU countries will interpret the rules in the same way.
The ultimate aim of the group, as far as I can see, is to continue lobbying for a minimum threshhold which would have to be reached before a small or individual trader comes under the scope of the rules. At the moment there is no minimum threshold, so if you sell a book for £1, VAT is chargeable.
If you find the the new EU VAT rules concerning, I would recommend that you join the EU VAT Action Campaign Group, and also sign the petition calling for the suspension of the rules. This page will take you to a link for the petition http://euvataction.org/take-action-now/sign-the-petition/ You can also check out the EU VAT Action web site. Lots of good information there.
In the meantime, to prevent my head from bursting, I have resolved never to sell digital downloads from my website or anywhere else. I will continue to sell on Amazon, Apple, Kobo, Nook, and Smashwords, and let them take the pain. But I can’t help feeling it’s ironic that legislation intended to prevent the mega companies like Amazon and Apple charging the lowest rate of VAT they could, will have no effect on them apart from pushing prices up. That is because VAT is paid by the consumer, not the company, who only collect it on behalf of the respective governments. Furthermore, it is driving the small companies and individual traders into the arms of these companies instead of building their own businesses in their own countries.
It’s a mad, mad world.