There have been big changes this week to EU VAT regulations which pose a very real threat to small digital businesses.
From January 1st 2015, the place of taxation will be determined by the location of the customer, not the location of the supplier/business, which means that businesses will have to pay VAT to each and every country where sales are made. So if you sell eBooks, downloads or courses online, to customers in Italy, France and Portugal, you will have to pay VAT to each of those countries at their countries VAT rate.
The new regulations are outlined in full on Gov.uk but the main points are outlined below:
VAT was previously charged in the country of the supplier however, the new rules state that it will now be payable in the country where the services are bought.
The new rules applies only to digital services such as ebooks, downloads, courses and other non-physical resources.
It mainly affects small digital businesses that earn less than £81,000 per annum who had been previously exempt from paying VAT.
Once you register to pay VAT in EU countries, you will be forced to pay VAT in the UK as well!
There is an alternative however, to paying VAT to each and every EU country that you sell to, and that is to register for the VAT Mini One Stop Shop (VATMOSS) which will remove the need to register with each country you sell within. But they certainly haven’t made this an easy option either!
In order to use VAT Moss you will have to become Jessica Fletcher or Miss Marple and find evidence to prove where your customers reside. You will have to provide two of the following bits of information:
Billing address of the customer
IP address of the device used by the customer
Location of the bank from which payment was made
Country code of the SIM card used by the customer
Location of the customers land telephone line
Other relevant information i.e. Product coding which could link the sale to a particular part of the world.
And that’s not all. You and I will need to keep hold of this information for 10 YEARS! Which means we will have to register with the Information Commissioner’s Office under The Data Protection Act 1998, which means tests and training on how to keep data safe.
So what does this mean for small businesses?
In a nutshell it means more paper work, more time wasted and more money being paid in taxes.
The choice is to either stop trading in Europe and lose out on those sales (and remain exempt from paying VAT in the UK), or pay an extra 20% on all earnings.
The only way to recoup the VAT would be to put your prices up which will mean being less competitive in price and possibly fewer sales.
It will be extremely challenging for many small businesses who will have to show proof of the location of the sale, especially if they use payment services like PayPal which provides limited information about the customer.
The obligation to store personal data such as addresses and phone numbers means more bureaucracy, red tape and hoops to jump through.
This is a very real threat to small businesses that trade online and one that cannot be ignored.
Please do sign the petition on Change.org and let Vince Cable, the Secretary of State for Business, Innovation and Skills, know how this will affect you and your business.