EU VAT Changes Are Doing My Head In – Chris Longmuir




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 always be taxed in the country where the customer belongs  – 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).Example 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:- 
UK 20%, 
Ireland 23%, 
Hungary 27%, 
Sweden 25%. 

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.
You can see why many micro-businesses are worried, and why there is such a media outcry. The prospect of complying with the EU VAT rules on electronically supplied services is having an adverse reaction on many individuals and small traders to trading with the EU. Hundreds of them have already stopped trading completely rather than face the prospect. And many more have put a block on selling electronically to the EU. Not what I would imagine the EU had intended, and all because they wanted to hit the mega businesses who registered their companies in lower rated VAT countries such as Luxembourg.


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.


Chris Longmuir


Amazon




Apple iBooks








Comments

Mari Biella said…
I couldn't agree more, Chris. It's ironic that the new regulations will a)reinforce Amazon's primacy, despite the fact that they were supposedly designed to hit companies like Amazon the hardest, and b) put immense restraints on free trade in the EU, precisely the opposite of the EU's original aims. Mad indeed!
An excellent and informative post, Chris. The extent of the craziness is mindboggling. A few further thoughts: I've seen a number of US sellers, when asked if they would be collecting VAT and paying it to a foreign country, saying 'good luck with that one,' and I'm inclined to agree with them. Who would have the resources to pursue them for a handful of dollars? But some US writers are definitely stopping selling eBooks to the EU. Also, I've heard that this has been 'sold' to HMRC on the anticipation that all these other EU countries are going to be handing over large sums of money to them - but since every country seems to be interpreting the law differently - well - good luck with that one as well.

One interesting thing - I know there has been a lot of fairly alarmist discussion along the lines that we are not 'allowed' to refuse to sell to the rest of the EU because it is 'discriminatory' - but I asked a corporate lawyer friend about this - she has some experience of cross border cases as well - and her very robust advice was that if there is an 'objective' reason why you won't trade with another country, even within the EU, you can't be accused of discrimination. As she said, 'what more objective than finding it complicated, expensive and a threat to your business?' So if you are selling from your own website, you're within your rights to restrict your sales to the UK where, so HMRC says, the normal threshold applies. The physical goods thing is very alarming though. God knows what would happen to all those small traders on eBay - but once again, the effect would be that everyone, EU wide, would flatly refuse to sell outside their own country. So what is the point of the EU? (And I've always pretty much been a supporter!)
Chris Longmuir said…
Good points, Catherine. One of the problems in getting the viewpoint of the micro businesses and sole traders across is the understanding a lot of people have that this is a tax on Amazon and their ilk. It's not, they're simply the collectors of the tax, and they won't even have the added expense of installing software systems to take the new EU VAT rules into account. All they have to do is tweak the 3% VAT already in their system to 20% for the UK, and do a similar exercise with each country they trade in because they have individual websites for each country.
Lydia Bennet said…
thank you Chris for this very useful post. I've not tackled this yet myself but will do at some point.
You're absolutely right, Chris. Amazon and the rest were on top of it right away - they're set up to do it. It's the consumer who has to pay yet again. But people don't seem to take that on board!
Bill Kirton said…
Thanks Chris, written in words even I can understand.
Susan Price said…
Chris, I thought this was a terrific post. We should spread it around as widely as possible. I tweeted it to David Cameron. Everybody tweet it at him again!

Nobody, after reading this, could claim that it is 'a tax on Amazon.'

What amazes me is that no one, while these laws were trundling towards acceptance, raised a hand and said, "Er - " And pointed out the obvious - that it would have no effect on Amazon whatsoever, while punishing EU consumers and traders.

If someone did, they were ignored or shouted down.

Doesn't say a lot for our officer class, does it? We may be pussy-cats rather than lions, but we're certainly being led by internet-ignorant donkeys. (I feel I should apologise to donkeys.)
Lydia Bennet said…
unless they are deliberately destroying micro business to help out their big business funder pals.
I've seen that put forward as a possibility - and it's possible. But I'm not so sure. I reckon the simplest explanation is probably the true one. They had no idea ...
Kathleen Jones said…
Thanks for tackling this Chris. Very depressing. Like you, I won't be selling direct any time soon.
JO said…
I haven't made myself think about this - looks like I'm going to have to? With masses of coffee and swearing, no doubt.
Wendy H. Jones said…
Great post Chris. Like you I have resolved not to sell ebooks other than through the big companies. It is a shame that it is either the reader,more the author who has to pay the price for this legislation
Jenny Alexander said…
What a clear and useful post - thank you so much! I've had my head firmly in the sand when it comes to these VAT changes, so there was a mild anxiety in case my ignorance might cost me down the line, but as I don't sell directly from my site it looks like I can go on happily ignoring it and letting amazon set my prices to take the variable VAT into account.
Chris Longmuir said…
Great comments everyone, thanks for your input.