Digital Downloads and the EU VAT MOSS Debacle

So there I was on a rainy Sunday afternoon, contemplating finding an alternative to Patreon for certain online services. Patreon is great but I’ve never been comfortable with my supporters on the platform having to pay VAT (Value Added Tax) since I’m personally not VAT registered and don’t need to charge VAT… so my supporters shouldn’t have to pay it. I then stumbled down a rabbit hole of EU VAT regulation, MOSS and a bunch of other stuff that left me wondering whether folk in the EU are going to end up completely excluded from global digital downloads from smaller independent creators?

Here’s my very limited understanding in a nutshell:

  • Before 1 January 2015 everything was fine.
  • On 1 January 2015 the EU decided to change things and force the charging of VAT on the sales of digital goods & services to any customer in the EU… from anywhere in the world. Everything was no longer fine.
  • On 1 January 2019 the UK brought in an exemption threshold of £8,818 (€10,000) for sales of digital services from the UK to the EU. Everything was marginally better for the UK, but still not fine for the rest of the world.
  • On 29 March 2019 the new exemption threshold will no longer apply due to Brexit. Everything will be not fine again.

Everything in this article is based on my dubious knowledge of VAT. I’m not an expert on VAT. I don’t charge VAT. I don’t claim VAT back. I have no need to be involved with VAT. VAT is not a thing I do. And I know even less about VAT outside the UK. Here goes…

A brief overview of VAT in Europe

So, if you’re not aware, in the UK it’s mandatory to start charging VAT on your sales (normally at 20%) when your business turnover exceeds £85,000. VAT rules are generally always assessed based on the location of the seller, not the location of the buyer. Different European countries have different thresholds before you have to start collecting this tax – as low as €10,000 in Greece for example. I think France, Switzerland and the UK have the highest thresholds before this extra sales tax kicks in. The threshold is there for a very good reason. It’s to help smaller businesses get established and without it a lot of things you buy (as a consumer) would instantly become 20% more expensive.

Think everything you buy from independent sole traders – hairdressers, plumbers, electricians, book keepers, violin teachers and the millions of other hard workers who oil the wheels of industry. So this is massively relevant to small independent retailers and the self employed in general. Remember VAT is simply a vehicle to turn businesses in to tax collectors. It doesn’t benefit the business in any way. It’s a consumer tax paid to the government via the business you bought something from. If you buy something for £120 from a VAT registered business, that business gives £20 of it to our lovely government. As well as the additional cost for the customer, it’s a massive administrative burden for the seller. That’s why it doesn’t kick in until the business is established. VAT in itself is a massively complex subject but for most businesses, once you pass the £85,000 threshold it’s very simple. You sell stuff, charge an extra 20% and give that extra 20% to the government via quarterly VAT returns. We’ll brush over the government’s latest attempt at ‘Making Tax Digital for VAT‘ where they appear to banned the use of spreadsheets (not quite true, if you use spreadsheets for VAT read this).

Do you sell digital downloads?

So why are digital downloads different? Well, did you know that if you sell digital downloads to customers in the EU, such as downloadable PDF files, e-books, digital music, pictures, whatever… you should be collecting VAT on behalf of the government of the person who you sold it to? No? Neither do most businesses by the looks of it. The implications of this? Well I really have no idea. Does the Spanish government have jurisdiction to carry out a VAT audit on a supplier in California? In which case how could Spain or the EU ever know how much VAT is due? And even if they knew how much VAT is due what happens when it was never collected from the customer in the first place? It’s all insanely confusing.

So is anyone actually charging VAT on digital downloads? Well, as a woodworker I regularly buy woodworking plans off the internet. In fact I’ve bought loads of PDF e-book type downloads – they’re awesome and a great way to learn new information. I love the fact that I can buy these from small sole-trader businesses making a few extra pennies to support their families. They pay their taxes – they’re not doing anything underhand. But I don’t remember EVER paying VAT on them? I visited the web sites of 10 different small businesses around the world, all of which sell digital downloads to EU countries, and not a single one of them are charging VAT. I tried various test transactions pretending to be a customer in various EU countries and nada… squat… no VAT. So what on earth is going on?

Thanks Amazon!

So it looks like all of this kicked off as a result of tax dodging from global behemoths such as, you guessed it, Amazon. Obviously they make well in excess of £85,000 a year so have to charge VAT, as does any business making more than the threshold. They can afford to pay it since they have warehouses staffed by robots. But, much to the EU’s frustration, everywhere in the EU has different VAT rates and thresholds. For example, Luxembourg has a rate of just 3% for digital downloads. Weird in itself since I thought the EU had imposed a minimum reduced VAT rate of 5%? I need to do some digging on that one. Anyway, so what do those sneaky folk at Amazon do? They open an office in Luxembourg and sell all their digital downloads, Kindle e-books and the like, from there, completely by-passing the usual VAT rates that everyone else has to pay. I mean, theoretically anyone could do it… but…

What happened on 1st January 2015?

Well, the EU didn’t like what Amazon were doing. So they put a new law in place changing how VAT was assessed. Instead of basing things on where the seller is located (think Amazon in their shiny new Luxembourg offices) they turned everything upside down and based things on where the customer is located. Gotcha Amazon! Cough up! Oh, what about the millions of small independent online retailers who sell digital goods around the world? Yeah… they’ll need to follow the new rules too. That means if a UK company sells a single downloadable e-book for £1 to someone in France, they’ll need to register for French VAT… and complete French VAT returns… in French… and collect tax on behalf of the French government. Sounds insane? Well, er… yes. So, the EU brought in the MOSS system. It stands for Mini One Stop Shop. Yes, that’s really what it’s called. I thought they were joking too. The EU’s solution to global scale VAT for our digital future is called ‘mini one stop shop’.

Mini One Stop Shop
Mini One Stop Shop – for all your VAT needs!

 

Don’t get me wrong, it’s better than having to learn 28 languages and register for VAT in 28 separate countries… but it’s hardly a solution. Essentially MOSS means you register once and submit your reports and tax via a single EU member state. But here’s the snag, there’s no minimum threshold… and you can only use MOSS if you’re in the EU. If you’re elsewhere in the world selling digital products to the EU I think you have to register for VAT in each country you sell to! Here’s a great article by Quaderno that explains it in more detail. And here’s another one by Tax Free Today.

A fix if you’re in the UK? Sort of…

So it’s not quite the £85,000 threshold we’re used to, but on 1 January 2019 the UK government brought in new legislation giving an exemption to UK digital businesses bringing in less than €10,000. Coincidentally the same as the VAT threshold of Greece. It’s really unclear whether this is actual law… or just a suggested ‘thing that should happen’. There’s very little information about it online and even less (take that as zero) on the likes of YouTube. Here’s the HMRC article, screen grab below:

VAT Changes 2019
New threshold for VAT on digital downloads in the UK

 

So I think this means any EU business selling digital goods don’t have to worry about VAT until they pass €10,000 in sales. I mean, it’s a start… but it’s not even minimum wage. What’s really weird though is the ‘impact on businesses’ statement further down the article. It states that only 1,200 businesses in the UK fall below the threshold:

HMRC EU VAT
Surely there’s more than 1,200 businesses impacted??

 

Now this is an incredibly difficult thing to calculate but it just seems low by an order of magnitude. There MUST be more than 1,200 businesses in the UK selling less than €10,000 in digital products per year? Surely??

I mean, just look at WordPress downloads for a tiny selection of plugins used for digital downloads. GiveWP is a donation plugin. That plugin alone has had 50,000 installations:

GiveWP Plugin
This single donation plugin has had 50,000+ installs

 

What about WordPress membership plugins? Again, here’s a tiny sample of what’s available, and these aren’t the most popular:

  • Ultimate Member – 100,000 installations
  • WP-Members – 80,000 installations
  • Paid Memberships Pro – 80,000 installations
  • Simple Membership – 30,000 installations
Wordpress Member Plugins
A tiny representation of how many digital web sites exist…

So there’s at least 290,000 installations of plugins that control access to ‘member only’ web sites and that’s just scratching the surface. Yes, I know – most of these probably aren’t in the UK and a lot of them might not have ‘digital downloads’ per se. But we haven’t even touched on the 4,000,000+ installations of WooCommerce and the millions of other plug-in installations that can control the sale of digital goods. And that’s just WordPress! What about Squarespace? Wix? Joomla? Shopify? There must be millions of web sites in the UK alone selling digital products. Surely there’s more than 1,200 making less than €10,000 per year? Mine certainly make less than that… and nobody asked me.

Oh… and… erm… Brexit

So, we finally got our exemption threshold, in the UK at least… even if it is pitiful and will do little to stimulate the growth of digital business. BUT as things currently stand we lose it on 29th March 2019. Again, from the HMRC web site, screen grab below…

Well, we did have a solution…

 

So, since the UK will no longer be an EU member state, in order to comply with this I’d need to register for the VAT MOSS non-Union scheme and file quarterly VAT returns. Presumably through Ireland… where I think the VAT rate is 23%… so it doesn’t even match the UK VAT rate. I think I’d also need to register for UK VAT and file nil returns (since I’m under the threshold for VAT), probably also quarterly… although that isn’t clear. And if I did have to file nil returns presumably I’d still have to meet the criteria for the digital tax stuff mentioned at the start of this article. In other words I’d need to invest in special accounting software approved by HMRC that can handle the API calls from their systems. All for nil value returns. I seriously hope that wouldn’t be the case ’cause this is starting to get silly, but I would also need to keep records of (data from HMRC):

  • The EU member state where I made the sales – known as the EU member state of consumption
  • The date I supplied a service
  • The taxable amount, including the currency used
  • Any increase or decrease of the taxable amount
  • The VAT rate I applied
  • The amount of VAT due and the currency used
  • Payments my business received – the dates and amounts
  • Any payments on account my business received for services before I supplied them
  • The information shown on any invoices I issued
  • My customers’ names – where known
  • The information I used to work out where a customer is based

I need to keep this information for 10 years and be able to send it to HMRC electronically if asked.

Drastic solution?

This is really sad but from 29th March there’s a very real chance I’ll need to block all EU member states from purchasing digital products or services from me. It’s kind of insane. I can sell a tape measure to someone in Germany. But I can’t sell them a woodworking plan to use with the tape measure. I can print out the plan and post it to them. I think I can even e-mail it to them if I do it manually. But I can’t do it via my website using normal e-commerce tools since that’s regarded as an automated solution and subject to EU VAT rules.

With everything else going on I imagine sorting this mess will be very low down on both the UK government and EU’s priority list. The reality is though that I simply cannot justify the administrative nightmare of VAT registration for such a small business. Thankfully most sales for me are to and from the US so hopefully it won’t impact me too much. If anyone has any creative ideas for all my EU friends out there please get in touch!

As always, everything in here is just based on my humble opinion and may or may not be correct. Please do your own fact checking and I’d LOVE to be proven wrong. What do you think? Chat about it more over on Twitter @smallbusinesstb

Photo credits: Seb Cumberbirch and Markus Spiske

Andy Mac

Andy MacLellan has been self employed for over 20 years. In that time he's established a number of successful businesses and worked alongside some of the biggest corporate blue-chips on the planet. Now his life mostly revolves around YouTube and Podcasts.
Andy Mac