Your guide to the VAT bomb

EU tax change is about to hammer small digital service providers

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Starting in January, new EU tax rules will force many businesses offering online services across the Union to take on a load of new administrative responsibilities.

The changes have caused particular consternation among micro-businesses providing such services – for a classic example, think about an individual who’s making a small amount selling knitting patterns — and the outrage seems especially virulent in the U.K. With a couple weeks to go before the changes hit, here’s a run-down on what red tape is being introduced, and why.

What new tax rules?

From January 1st, 2015, the provision of many digital services in the European Union will be taxable in the country where the service is consumed, rather than the country from which it is provided. The point, in theory, is to stop big firms from setting up headquarters in some tiny low-tax country such as Luxembourg and using that location to get out of paying taxes in the rest of Europe.

The problem here is that there are 28 EU member states, each of which has its own value-added tax (VAT) rates, and its own minimum thresholds for having to charge VAT in the first place. For many digital services businesses, this will add a degree of complexity. For those who operate micro-businesses that currently don’t have to charge VAT at all – in the U.K., for example, that’s any business with a taxable annual turnover of under £81,000 ($127,000) – this could be a whole new ballgame.

The kinds of services that aren’t affected include lawyers and accountants emailing clients, the supply of physical goods through electronic ordering processes, car and hotel booking services, and real-time educational services. Business secretary Vince Cable has also said that people can ignore the changes if they sell through a “marketplace like an app store” – an option that of course means losing a cut of the sales revenue.

But those independently selling images or text or music, or paid-for “online magazines” or software, will have to adapt – and fast.

Good grief! And with only two weeks to go?

Yes … about that. These new rules were agreed upon in 2008, so businesses have technically had around six years to wrap their heads around the implications. Of course, it’s really down to the national tax authorities to make sure everyone’s up to speed and, certainly in the U.K., it’s not clear that this happened in any meaningful way.

For example, it was only this month that Her Majesty’s Revenue & Customs (HMRC) finally agreed that people wouldn’t suddenly have to charge VAT on small U.K. revenues if they also sell into other European countries – a key issue that caused panic when people started freaking out about the changes in November.

Crucially, though, the changes do not mean that micro-businesses need to register with the tax authorities in 28 different countries. Instead, each country should be setting up a “Mini One Stop Shop” that provides a single point of contact through which to collect and distribute the VAT on sales to other EU countries.

In the U.K., a business can sign up with the local MOSS if its taxable U.K. turnover is under £81,000. This will simplify matters, but it still means that someone who previously didn’t have to register with the VAT authorities at all, will now need to register for a VAT number and submit quarterly VAT returns (declaring nil VAT on U.K. sales), and register separately with the MOSS, again submitting quarterly returns.

And then there’s all the data collection.

What data?

Get ready for some serious record-keeping (storing everything for a decade, no less.) The changes don’t make much sense if no one knows in which country the buyer is located, so the business’s customers will now need to tell the vendor which country they live in, and what their billing address is.

But there’s more: HMRC has recommended that sellers collect two pieces of information from their payment providers, such as [company]PayPal[/company]. This includes the country code of the customer’s bank, and the customer’s billing address. Unfortunately, PayPal is only willing to provide the country code, so the rest is really is down to the business to establish. So much for the convenience of no-hassle payment mechanisms such as [company]Stripe[/company].

Then there’s the small fact of the business qualifying as a “data controller” under EU data protection legislation, because they’re processing people’s personal data. In the U.K., this means they’ll have to register with the Information Commissioner’s Office (ICO), for a £35 fee.

However, the ICO’s security requirements for small businesses are quite flexible – these knitting-pattern entrepreneurs won’t need to adopt military-grade encryption, but they will need to at least try to keep their customers’ data safe, as any small business should. Whether criminals see a hacking opportunity in all the personal information that will now be stored by individuals with minimal security expertise, is another matter.

Why do you keep mentioning the U.K.?

Partly because the U.K.’s relatively high VAT threshold means this will have more of an effect there – more micro-businesses will be dragged into the VAT-collection game for the first time — and partly because that’s where people have made the most noise about this. So far.

Last month, people in the U.K. first started shouting about the changes using the #VATMOSS hashtag, but as the British campaigners have realized that micro-businesses will be hit across the EU, they have now set up an EU VAT Action pressure group (which provides loads of useful information for those who need details.)

But could the effects hit even further afield? A rather worrying sign can be found in changes that were made earlier this month to the terms and conditions of [company]Google[/company]’s Helpouts platform, which gives people a way to offer expert advice services through the Hangouts facility. As of December 3rd, the site tells users: “Providers from Ireland or the United Kingdom may only offer free Helpouts. Customers in the EU may only take free Helpouts.”

Meanwhile, the T&Cs for U.S. Helpouts providers now state: “You may not provide Helpouts for a fee to customers within the European Union. All Helpouts which are provided to customers within the European Union must be provided free of charge.” It seems Google thinks these changes are a reason to steer clear of paid-for person-to-person services in the EU altogether.

Woah. Is that justified?

Arguably not, because – in one of the weirder specificities of these rules that were designed over six years ago – live webinars aren’t covered by the changes (but recorded webinars are.) The new rules are also only supposed to affect companies based in the EU, but then again Google and other big U.S. firms tend to run their international operations out of EU subsidiaries. I asked Google to explain why it made the changes, but it has refused to do so.

The one thing that is clear is that there’s still a lot of confusion, despite the long run-up to the changes. Unfortunately, this has led to a lot of people fearing for the future of their small businesses, as they contemplate questions like: “If you decide to comply with ?#?VATMOSS???? and you sell a bundle which includes a digital download and a physical product, will you have to report the physical part of that little sale to the U.K. and the digital part to another country?” (Answer: Probably.)

Some experts have even advised no longer selling services into other European countries – a suggestion that at the very least flies in the face of the EU’s precious Digital Single Market project, and that may even contravene EU anti-discrimination rules.

So what’s a poor micro-business or seed-stage startup to do? Read the extremely lengthy guidelines about what’s affected and what’s not, and go shout at some politicians and tax authorities.

As it happens, the EU VAT Action group began a Twitterstorm on Tuesday using the #EUVAT hashtag, calling on the European Commission to suspend the introduction of the new rules for micro-businesses and sole traders. Given the fact that the rules could kill off swathes of the small entrepreneurial digital sector — which the Commission is supposedly trying to stimulate — that may be a good idea.

UPDATE (3am PT): Just thought it might be worth throwing in a few of the tweets people have been publishing today, demonstrating the urgency of the situation:

UPDATE (3.05am PT): The Commission has responded … by saying there’s no problem. Financial Affairs, Taxation and Customs spokesperson Vanessa Mock just emailed this statement:

The Commission believes the administrative burden is bearable also for the smallest online businesses. The changes imply that each business including micro businesses need to know the country of their customer: this could be established eg. by IP address, invoicing address, bank card issuing country, (the possible sources are listed in an EU VAT implementing regulation). Then based on the country of the customer the VAT rate needs to be selected for that country. The list of VAT applicable rates is provided by the Commission on its website. Finally they have to declare sales per country to their [local] tax authority.

UPDATE (3.25am PT): And now Andrus Ansip, the Commission vice president for the digital single market, has published a blog post on the matter. In it, he said that “even if the concerns come late, they should be listened to,” and that he trusts that payments processors will start giving businesses the information they need for compliance.

“Small innovative online companies matter to me,” he wrote. “I want you to have the necessary space to grow into successful businesses and to trade across borders. But I also see the merits in the upcoming VAT change. Support for e-commerce will be at the heart of our strategy for the #DigitalSingleMarket that is planned next spring.”

6 Responses to “EU tax change is about to hammer small digital service providers”

  1. Fabio Virgi

    (Hopefully the Gigaom moderators won’t mind me posting this, but to virginiacreeper, Clare Josa, and any other sellers struggling with the VAT changes:)

    Our company,, actually handles VAT on behalf of its sellers. We provide you with a checkout for your website, analytics dashboard, file hosting & delivery, and best of all we handle your VAT too.

    We’re already fully compliant with the changes and are prepared for 1st January 2015. If you’re looking for a platform to sell digital products, we’d love to help you overcome the VAT changes.

  2. Exactly. And then there’s the fact the this is intended to roll out to physical products and services in the very near future. It’s not just the digital community that this is affecting.

    I have chronic, disabling illness that forces me to work flexibly from home. As I am finding it increasingly difficult to carry out my physical work (dressmaking), I have been developing digital products (pdf sewing patterns) to replace some of the physical work that I do. The patterns would sell automatically, whether I was well enough to sit at the computer or not, and reducing the amount of administration time I would spend selling the product. I cannot afford to invest in print runs, so going digital was the obvious choice. That is now on indefinite hold and the time, energy and money I invested in it is lost. What happens later on, when the EU VAT legislation applies to physical products as well? Just as it would have been for the sewing patterns, many in my target market are European. I sell garments to anywhere in the world via my Etsy shop. Will I have to stop doing that, too? That’s incredibly limiting for my business, my target market, and my income. How will I survive? How will I pay my bills?

    To those who say ‘well, Etsy are handling VATMOSS so what are you worried about? Just put your prices up’, I say ask Etsy yourselves – see if YOU can get any sense out of them, because I certainly can’t! With only a matter of days to go, Etsy have not told their sellers what they are going to do. And they are one HUGE platform, who have been aware of this for a heck of a lot longer than I have. (By the way – I’ve been tax registered self employed in the UK for around a decade and even though I receive several letters from them each year, tax return reminders etc., I have not received a single piece of information about the changes to EU VAT or the VAT MOSS system. I found out two weeks ago, by chance, on Facebook.) So change platforms; sell through someone else? The other platforms are pretty much floundering. Several have refused to take the VAT MOSS responsibility on behalf of their sellers – and it doesn’t matter if we read the rules and believe they ought to comply, they’re doing whatever they want anyway. Some are still ‘in talks’ with their accountants and HMRC. No hope of them being ready for January 1st.

    Besides, certain platforms suit certain products, and attract certain customers. Businesses have to go to where their customers are, and changing from one arena to another can lose you your clientèle. It’s not a click of the fingers.

    The data collection aspect is a nightmare. I didn’t go into business for this! To do somebody else’s paperwork for them! If they want me to take precious (BILLABLE) time, energy and attention away from my business to become a data collector then they can blooming well pay me for it! Otherwise it is a loss I cannot pass directly onto my customers because the price increase necessary would create unfair competition with larger companies who will always be in a better position to keep their prices down. i would be pushing away custom. All the potential extra costs – admin time, fees to register as a data collector, paying to store the data, paying third parties to gather the data for me, investing in software, hiring an accountant – all that would become unbillable. EU VAT is putting me out of business.

  3. Andrew Newby

    Once again, a load of dumb arse politicians, who don’t know the first thing about how the internet works. As someone has already said, using an IP to get someones country is stupid – its not possible to get 100% accuracy. Granted, you can get a rough idea – but anyone using proxies will get around that. Also, I know for a fact people will not bother buying if you ask too many questions – especially if you have to tell them its gotta be saved for big brother!

    Also, I thought this was meant to be targeting the big boys tax dodging? So why not have a cap of say £50k worth of earnings, before you need to start doing this rubbish? Yet another reason to vote UKIP and get out of this mess that is the EU!

    Blood = boiling right now!

  4. Clare Josa ૐ

    Thank you so much for covering this.

    Vanessa Mock’s statement is typical of what we’re hearing from the EU Commission – and even the UK’s HMRC (the government body implementing this). They keep telling us that we can collect and process the required THREE pieces of information (you need 3 in case the first two contradict each other) and analyse them DURING the transaction, so you know which rate of VAT to apply. And all of this is supposed to happen before the customer lands on your sales page so you can comply with the requirement to display prices inclusive of VAT for consumers.

    The more we show them that all we can get is the country code, after the sale, the more deaf they become.

    Our research survey indicates that only 4% of micro businesses and sole traders will be able to comply by January 1st. A shocking 10% are closing their doors completely.

    Imagine your Grannie having to register for #EUVAT for selling a £2.99 knitting pattern. Well, from January 1st 2015, she will.

    The time has passed for the EU teams to keep pretending that there’s no problem.

    We are requesting a meeting with Andrus Ansip and his Cabinet this week to show them the evidence and ask them for an emergency exception to allow businesses, worldwide, to continue trading.
    Thank you so much for your support, everyone.
    This impacts your biz – wherever you are in the world.
    Together, we can make a difference.
    Clare Josa
    on behalf of EU VAT Action Team

  5. The biggesting issue here is that the thresholds are gone. If you’re earning enough online to register for the standard VAT thresholds then the admin burden can be absorbed as you’ve got the money to pay for it to be done. Without the thresholds in place whether you earn €100, €1,000, €10,000, €100k you still have to register for VAT and a data controller which costs money and time to process.

  6. Ralph Tegtmeier

    Determing clients’ location by IP? What a LOL – should push proxy service providers’ business through the roof once this is neatly established. In any case, “bureaucratic nightmare” is right!