I first noticed the changes to EU VAT when they started being shared all over my social meejas around about December last year. Everyone was all doomy about it. It didn’t seem that relevant to me at the time, partly because I don’t sell digital stuff on the internet, and I suppose mostly because I assumed it would blow over.
It hasn’t blown over, and now I’m contemplating selling digital stuff on the internet. So I’ve been doing some research into this. For the uninitiated, it basically means that anyone, anywhere in the world who sells digital products or services to customers in the EU is liable to pay VAT at the local rate to the member state where the customer lives. Phew! That’s a lot of people. And in due course – scheduled for 2016 – it will apply to physical goods too, though one might hope they’ll make some improvements to this confusing and opaque law in the interim.
I have seen some people, mostly Americans I think, rolling their eyes and saying “how do you plan to enforce that”. Well, I wouldn’t want to put my business in the position of breaking the law in the EU, even if I was in America; but as it happens I am also in the EU, so that makes it… pretty easy to enforce, actually.
Anyway: my research is, essentially, a bit of googling, a fair bit of looking at the website of Her Majesty’s Revenue and Customs (HMRC), and an email conversation with same. HMRC’s answers can probably be considered as definitive as it gets at this point, for UK businesses at least, and probably for everyone.
And before I go any further: I’m not a lawyer. This is not legal advice. I am not responsible if you mess this up.
Why is this so hard?
Well for one, it’s not that easy to determine where your customer is. You’re selling them digital goods, so it isn’t like you can easily tell by looking at them. And the VAT rate is different in different EU Member States, so it’s pretty much easy to mess this up.
The HMRC online guide to the new rules says that except in some weirdly specific circumstances (it’s along the lines of, if the customer is buying through their mobile bought from country A while flying in a plane from country B to country C but is in the airspace of country D when the sale is made…) then you have to “obtain and keep 2 pieces of non-contradictory information to support and evidence the member state where the customer is normally located.”
And, “Examples of the type of supporting evidence that tax authorities will accept include:
- the billing address of the customer
- the Internet Protocol (IP) address of the device used by the customer
- customer’s bank details
- the country code of SIM card used by the customer
- the location of the customer’s fixed land line through which the service is supplied
- other commercially relevant information (for example, product coding information which electronically links the sale to a particular jurisdiction)”
So, that might be easy or difficult, depending on how you handle your payments and so forth. Administratively, it’s definitely not going to be easy for anyone who has an appreciable number of EU sales.
Oh, and you’re required by law to include the correct rate of VAT in your prices, too. In theory that means you need to get the above bits of information in advance of sale and then work out the correct VAT and include it in your price which, let’s forget about that. I can’t see any reason why you can’t just quote a blanket price to all customers and say “if you’re in the EU, we’ll pay the VAT”, but then you have a tricky balancing act to set a price which ensures you can afford to pay the VAT, when you won’t know how many customers you’re going to get from each country; plus you’ll be marking up your prices for non-EU customers to make sure you have the funds to pay VAT for the EU customers.
I don’t like the sound of this! What can I do about it?
There’s a lot of ways you might legally avoid having to worry about all this.
First off, if you’re selling bundled products, and the digital product is only “ancillary” to the main product, then you don’t have to pay, at least as long as the law only applies to digital stuff. But you have to be careful, because the definition of when a component in a bundle is ancillary and when it’s part of the main thing you’re selling, doesn’t seem to exist. My guess is that a hard copy RPG sold with a PDF version counts as primarily a physical product, but I wasn’t able to get a straight answer out of HMRC so I’m not 100% confident.
There’s a sort of loop-hole in the law – I say loop-hole, it seems to have been deliberately designed this way to catch the likes of Amazon but miss smaller operations – which says that if your product isn’t delivered automatically then you don’t have to pay VAT. Emailling an attachment doesn’t count as delivering automatically. Emailling a link to a download site does. I can’t really see the logic, but that seems to be the rule. Still, you probably won’t want to manually email attachments to large numbers of people if you can help it. Also, you may want to check up on your email providers policies, as some email providers (e.g. gmail, or so I’m told) blacklist people as spammers who send too many such emails.
What about selling through a third party? Or crowdfunding?
A third way to get around the tax is if there is an intermediary in your sales process. This is crucial for a lot of roleplaying games, because they are frequently sold through online platforms such as DriveThruRPG, Indie Press Revolution, or through crowdfunding platforms like Kickstarter. I wasn’t clear on whether digital products sold through such a platform would be subject to the EU VAT rules, so I asked HMRC. I am going to quote their reply in full:
“If the platform operator identifies you as the seller but sets the general terms and conditions, or authorises payment, or handles delivery/download of the digital service [my emphasis], the platform is considered to be supplying the consumer. They are therefore responsible for accounting for the VAT payment that is charged to the consumer.”
I think that’s pretty clear. In the case of sites like DrivethruRPG and Indie Press Revolution, they will handle the payment and delivery of the digital service, so they are liable to pay the correct rate of VAT. In the case of sites like Kickstarter, they set the general terms and conditions and authorise payment, so they are liable to pay the correct rate of VAT.
[edited to add:] The HMRC website also has this to say ”
If you operate a digital platform through which third parties sell e-services you are liable to account for the VAT on those sales unless every one of the following conditions are met:
- the digital platform and everyone else involved in the supply must identify who the supplier is in their contractual arrangements
- the invoice, bill or sales receipt must identify that supplier and the service supplied
- the digital platform must not authorise the charge to the consumer
- the digital platform must not authorise the delivery
- the digital platform must not set the general terms and conditions of the sale”
Again, this seems pretty clear to me. [/edit]
Kickstarter have specifically said that they will not do this, and that the campaign promoters are responsible for dealing with EU VAT. However, I think HMRC’s advice makes it pretty clear that they are wrong about that. This may not be particularly good news: after all Kickstarter is a big enough target that at some point someone may go after them for the VAT they have said they won’t pay. VAT is generally paid at around 20-25%, so the bill could be pretty big. If I were Kickstarter I think I’d be thinking pretty hard about this. But HMRC’s advice strongly suggests to me that you, as the campaign promoter, do not need to think about this.
Finally, it’s worth noting that there are payment platforms out there like Payhip, who as well as being legally bound to deal with EU VAT, have said that they will do so. Where possible, you should consider using such providers, simply because those who are still in denial may be on a rocky road, and if you use them you may take some bumps along the way.