Do you sell digital products such as downloadable software or electronic training courses? Welcome to a whole new world of EU VAT regulation that I can almost guarantee you didn’t know about. That’s right folks – forget about your £85,000 VAT registration threshold. For digital products and services the EU have reduced this… by a factor of 10! Welcome to the VAT MOSS mess.
To start with, here’s my very limited understanding of how we got here:
- Before 1 January 2015 everything was fine.
- On 1 January 2015 the EU decided to change things and turn everything we know about UK VAT registration on its head.
- For digital products, no longer would we base VAT on where your business is located. Instead the EU want it to be based on where the customer is located.
- 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. A nominal improvement but still 10 time lower than the normal VAT threshold for non-digital services.
- Lord only knows how this will change as a result of Brexit. I can only hope for the better!
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 need to 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 – as low as €10,000 in Greece for example. I think France, Switzerland and the UK have the highest thresholds before this extra consumer 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 of 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 into unpaid 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 at least partially established. VAT in itself is a massively complex subject but for most businesses, once you pass the £85,000 threshold it’s manageable. 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? That’s a very good question. They shouldn’t be. But I’ll attempt to explain why the EU have thrown a massive spanner in the works for small businesses selling digital products.
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 where the customer resides? No? Neither do most businesses by the looks of it.
The implications of this? Well I really have no idea how this can possibly work. Does the Spanish government have jurisdiction to carry out a VAT audit on a supplier in the States? In which case how could Spain or the EU ever know how much VAT is due? And even if they knew how much VAT was due what happens when it was never collected from the customer in the first place? It’s all insanely and unnecessarily 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?
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.
However, 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%? We’ll just brush over that one.
Anyway, so what do those sneaky folk at Amazon do? They open an office in Luxembourg and sell all their digital downloads from there. That’s why your Kindle e-books come from Luxembourg.
It completely by-passed the usual VAT rates that everyone else has to pay. I mean, theoretically anyone could do it… but most small businesses can’t afford to open an office in a different country solely to reduce their tax liability. I have to add that all of this is just my understanding – the whole thing is immensely complicated.
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 for digital downloads. Instead of basing things on where the seller is located (think of 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 wait what…
So what about the millions of small independent online retailers who sell digital goods around the world? Yeah… about that. 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 rather than fix the Amazon problem, 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 VAT for our digital products & services is called ‘mini one stop shop’.
Don’t get me wrong, it’s better than having to learn 28 languages and register for VAT in 28 separate countries… but by no means is this a solution for micro-entities under the normal £85,000 threshold.
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 and sell 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:
So I think this means any EU business selling digital goods doesn’t have to worry about VAT until they pass €10,000 in sales. This is terrible… 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:
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 for a tiny selection of plugins used for digital downloads. GiveWP is a donation plugin. That plugin alone, at the time of writing, has had 50,000 installations:
What about WordPress membership plugins? Again, here’s a tiny sample of what’s available, and these aren’t even the most popular ones:
- Ultimate Member – 100,000 installations
- WP-Members – 80,000 installations
- Paid Memberships Pro – 80,000 installations
- Simple Membership – 30,000 installations
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?
Oh… and… erm… Brexit
OK, so we have the (incredibly low) exemption threshold in the UK at least… even if it is pitifully low and will do little to stimulate the growth of any digital business. BUT according to guidance published on 4 February 2019 that was getting withdrawn from
29th March 2019… 31st October 2019… 31st December 2019… 31st December 2020… OK, I have literally no idea…
So the above guidance was withdrawn on 18th September 2019 and replaced with this. In a nutshell, from 1st January 2021 the digital services threshold is gone.
So let’s say you’re a UK business and sell a single PDF for £1 to a person in France. Since the UK will no longer be an EU member state, in order to comply with this you’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 you’d also need to register for UK VAT and file nil returns (since you’d be under the threshold for VAT), probably also quarterly… although that isn’t clear. And if you did have to file nil returns presumably you’d still have to meet the criteria for the digital tax stuff mentioned at the start of this article.
In other words you’d need to invest in special accounting software approved by HMRC that can handle MTD. 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 sale – 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 customer’s name
- The information used to work out where my customer is based
I need to keep this information for 10 years and be able to send it to HMRC electronically if asked.
Reading tax scrapped
To complicate matters further, if that’s even possible, Covid reared its ugly head. Global economies are in turmoil and at the time of writing the mother of all recessions is on the horizon.
As a boost to the publishing industry during these hard times, on 1st May 2020 Rishi Sunak scrapped VAT completely on e-publications.
We want to make it as easy as possible for people across the UK to get hold of the books they want whilst they are staying at home and saving lives.Rishi Sunak, April 2020
Axing the Reading Tax with immediate effect is exactly the right response from the Chancellor in these difficult times. With people doing the right thing and staying at home it is great that they will no longer have to pay tax on e-books to keep them and their kids entertained.Axe the Reading Tax Campaign, April 2020
So this is potentially awesome news and fixes everything. Or at least a lot of things. It doesn’t really help if you’re a small business selling downloadable software. However it may be good news if you have subscription-based digital services that fall under the banner of ‘e-publication’. What that banner looks like and how it interacts with EU-based sales is, as yet, unknown. I asked HMRC the question on 2nd August 2020. I’ve yet to receive a reply.
As it currently stands it’s very unclear where we stand. For smaller businesses the only option may be to block all EU-based customers from purchasing digital products or services from your business. It’s kind of insane.
You can sell wool and knitting needles to someone in Germany. But you can’t sell them the knitting pattern to go with it. You could print out the pattern and post it to them. But you can’t send it by e-mail in any sort of automated way. Utter insanity.
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 most small businesses will give up on selling digital products to the EU. 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!
I’ve contacted a number of accountants while doing my research and all of them have been equally in the dark. I’m still awaiting a response from HMRC. 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 hear from you if you have more information. What do you think? Will it impact your business? Let me know!
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Originally published: 10th March 2019
Last updated: 5th October 2020
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