Many small businesses have been left reeling after the announcement and introduction of the new VAT laws for those who sell digital products to countries in the EU.
An estimated 34,000 small businesses are going to be affected but, as with any new regulations, they are notoriously complex. Working out whether your business fits the criteria or is exempt can be a bit of a minefield.
That’s why we’ve created this handy factsheet with a break-down of what these new regulations are and who is applicable for paying them. When you’re done cramming, scroll down to the bottom for our favourite, alternative explanations of how the EU VOES works (banana stand analogy, anyone?).
So… What’s changed?
Previously, suppliers of digital products paid VAT in the country where their products were ‘shipped’ from. Now, sellers will pay VAT for the country where the digital product is bought by the consumer (meaning no crafty companies setting up shop in a country with lower VAT).
VOES is short for ‘VAT On Electronic Services’ – i.e. the new regulations in place that affect how much VAT suppliers of digital products pay.
What’s VAT MOSS?
MOSS stands for ‘Mini One Stop Shop’, a new service provided by the government to help with the VOES changes. You can find it, and register for it, here.
How does the VAT MOSS work?
MOSS acts as a middle party distributer of VAT in the EU. You register for VAT in one EU member country (most likely your own) and then pay any VAT due to MOSS. VAT MOSS then distributes it to the countries relevant to your sales, converting in to the correct currency along the way.
It’s designed to make businesses’ lives easier – the other alternative is registering for VAT in every single EU country that you sell to, and converting the money yourself. Not a fun admin job.
What counts as a digital product?
Any electronic product, or digital service that is not live. For example:
- Any digital images and text (e-books, craft patterns, PDF files)
- Digital films, music, games or apps
- Web-hosting services
- Online advertising space
- And more…
What if I give my products away for free?
These new changes only count for items that are sold – you’re safe.
I sell things online. Will I be affected?
That depends on what you sell. For example, if you sell knitted hats online, you will not be affected as they are not a digital product. If you sell PDF patterns for knitted hats, however, you may be affected.
For those who work as creative or consultants, if you offer a design or consultancy service via the internet for clients, you will not be affected as these are hands-on, ‘live’ services.
If you’re a designer who offers pre-made, digital design templates, however, you may be affected as this is a digital product and not a live, personable service.
I use someone else’s website to sell my goods. Do I have to comply?
No, you do not. If you use a marketplace – for example, you sell an e-book through the Amazon Kindle online marketplace, or an app through the online Google Playstore, or use eBay, this is treated as a B2B transaction (see below for more on B2B transactions). It is the marketplace who must take on the responsibility of sorting out the VAT.
Where is this payable, exactly?
In any EU member state that is not your own.
But how do I know where my customer is based?
As the seller, it is your job to find out where your customer is based so the VAT for their EU member country can be paid correctly. This probably means that you’ll be collecting more information from them in the sales process – at least two of the following:
- Billing address
- IP address of their device
- Location of their bank
- Area code of their SIM card or landline
- Anything else relevant for a commercial transaction that reveals their location
What’s the threshold for paying VOES?
As of January 2015, there is no limit whatsoever. Whether your product costs £5m or 50p, you will be required to pay the relevant VAT to the buyer’s country. This is one of the reasons that VOES has been controversial – although microbusinesses have been protected with some rule tweaks.
Does it make a difference if I sell B2B or B2C?
Yes, it absolutely does. If you sell to a business, with a registered VAT number, you escape these new rules. If you sell to consumers (worked out as anyone without a VAT number) you must pay up.
When does all this start?
Trick question: it’s already started. These rules were officially in place from the 1st January 2015. Don’t worry if you don’t know much about them – they were only announced in December 2014, so many small businesses did not have much time to prepare.
Want to find out more about these regulations with some dynamic resources? Check out our favourite multimedia picks below.