Disclaimer – I am not a VAT specialist, everything contained in this blog post is my interpretation of how the VAT rules coming into effect on 1st January 2015 will affect me. Always get advice from a specialist who is aware of the details of your specific situation.
As people are starting to become aware, on 1st January 2015 how VAT on digital services works within the EU is going to radically change. The current system charges VAT based on the location of the business providing the digital good/service. It is this system that allows Amazon to charge 3% on ebooks as they are sold out of their Luxembourg entity. The EU were unhappy with this practice by Amazon and others and so from 1st January 2015 VAT will be charged based on the location of the customer.
This means that instead of a business having to worry about VAT only in their own country and only if they were required to (or volunteered to) register for VAT, from 1st January 2015 they will now be having to deal with VAT across all EU member states. Not only will a business have to identify the location a customer is buying from (and store that data in line with all of the usual data protection rules), but they will also have to charge them the correct rate of VAT for the digital good/service being supplied for that location. Now I don’t know about you, but it’s not often clear to me what rate of VAT an item should be charged at in the UK when navigating HMRC’s tables, so the thought of doing this across multiple languages and multiple websites doesn’t have me skipping down the lane in joy.
Assuming you manage to work out where your customer is located, have collected the necessary data to confirm this (and your customer hasn’t run a mile at this stage from being asked for their address in order to download a digital file), and have worked out the applicable rate for your particular digital good/service for that country, the fun doesn’t end there. You now have to get this VAT paid over to the relevant country (and issue a VAT invoice to your customer). There are two ways to do this: register in that country for VAT and pay the amount over (doesn’t that sound like fun? I wonder how easy that will be), or register for your country’s equivalent of the UK’s VAT MOSS (mini one-stop shop) service. If you register for MOSS then you tell HMRC on a quarterly basis how much VAT you collected for each country, pay them that amount, and they will distribute it to the correct country for you.
In order to register to use MOSS in the UK you have to register for VAT. Ah. This is an issue. In the UK, you do not have to register for VAT (though you can if you want to) until your VATable turnover reaches a threshold of £81,000. My VATable turnover is nowhere near £81,000. I have no plans for it ever to be near £81,000. My VATable turnover isn’t even £8,100 (I wish it was). In order to register to use MOSS in the UK and be VAT compliant come 1st January 2015 when selling pdfs of knitting patterns within the EU then I would need to register my entire business for VAT. I would need to file quarterly VAT returns for my entire business. I would need to charge all of my customers VAT as I would be VAT registered.
I, like many self-employed micro-businesses, have many parts to my business. I sell digital copies of knitting patterns I have designed (which will be caught by the new rules), I undertake knitting commissions (which is a physical service rather than a digital one), and I will be re-launching my yarn dyeing business soon (after I finish my OU studies in October 2015). The money I make from knitting commissions far exceeds the money I make from selling knitting patterns. In order to use MOSS and avoid having to register in each country to which I sell digital copies of knitting patterns individually, my entire business would have to be VAT registered. There is a possibility that each part of my business could be split-off leaving only the digital pattern part to be registered, but HMRC have yet to issue guidelines on how to do that and I can’t imagine it will reduce the paperwork associated with running my current set-up.
I really don’t want to be registered for VAT. I am significantly beneath the registration threshold, I don’t make sufficient VATable purchases that I would benefit from reclaiming the VAT on, I don’t want to have to increase prices to customers to account for the VAT, I don’t want to have to file quarterly returns and I don’t want to have to face VAT audits. I also don’t want to have to follow all of the rules regarding storing personal data (at the moment all I can see from customers is their email address).
This leaves me with a few options:
- Register for VAT (not going to happen) and continue selling my knitting patterns on my own website via Easy Digital Downloads using the VAT extension from Lyquidity Solutions.
- Not register for VAT and continue selling my knitting patterns on my own website but only to countries outside the EU (but still selling to the UK since the £81,000 threshold still applies).
- Not register for VAT and sell my knitting patterns via a third party who will take on the responsibility of collecting and paying the relevant VAT based on the customer’s location (for a fee).
- Not register for VAT and stop selling my knitting patterns.
- Not register for VAT, do nothing, and hope I don’t get caught.
So, the new rules on VAT are going to force me to either register for VAT when I would otherwise not be required to (it is only because my knitting patterns are available digitally that the new rules apply, if they were hardcopy life would continue as usual), to stop selling digital files within the EU myself, to stop selling digital files myself and instead hand control over to a third party (for a fee), to stop selling digital files entirely, or to become a VAT evader.
At this time (26th November 2014), I want to continue selling my knitting patterns in a digital format and don’t want to restrict their availability to only those outside the EU or within the UK. I don’t plan on becoming a tax evader, and don’t want to register for VAT. This leaves me having to outsource the sale of my digital files to a third party who will take on that VAT compliance role.
There are currently three platforms that I am considering moving my pattern sales to:
LoveKnitting are partnering with ravelry to allow sales to be stored in member’s ravelry libraries. Their fees for designers will be 20% +25p. So on a £2.50 pattern, I would be charged a commission of £0.75. I can’t find any details of payment fees on their site except that they use paypal to pay the designers, but they only pay out once you sell £20.00. I am currently charged a maximum of £0.20 by paypal on a sale of a £2.50 pattern. Loveknitting customers can pay via credit card, debit card, or paypal.
Patternfish also pay designers via paypal, but cover the transaction fees . Payments are not made until a balance of $20 has accrued. They have a minimum pattern value of $4.00 (about £2.55) and the designer gets between 60% to 80% of the pattern value. On my standard pattern value of £2.50 (let’s call it $4), the worst case scenario would be that the fee would be 40% or £1, the best case 20% or £0.50. Patterns bought on Patternfish cannot be stored in ravelry members’ libraries. Patternfish customers can pay via paypal with either an account or credit card.
Fastspring can pay vendors by paypal, ACH, wire transfer or cheque (with various fees applicable dependent on which is chosen). Payments are not made until a balance of $25 has accrued. Their fees are either a flat 8.9% or 5.9%+$0.95.On a £2.50 pattern that would be a fee of £0.22 (since 5.9% plus $0.95 would be more than this). This is comparable to my current fees, but I would need to factor in any charges for receiving the money from Fastspring. Patterns bought on Fastspring cannot be stored in ravelry members’ libraries. Fastspring customers can pay via Visa®, MasterCard®, American Express®, Discover®, JCB®, PayPal™, Amazon Payments, Alipay, eCard Poland, Giropay, iDEAL, Sofort, WebMoney, check, money order, and purchase order.
So, comparing the three main contenders for selling my patterns: Patternfish has the highest fees and a minimum pattern value (which is in excess of some of my current pattern prices), and patterns cannot be stored in ravelry members’ libraries; LoveKnitting charges 3 times as much as my current fees, but allows patterns to be stored in ravelry members’ libraries; Fastspring does not allow patterns to be stored in ravelry member’s libraries but is very close to my current fees and so would not require price increases to be made and offers the widest range of payment options to customers.
I am most likely to move my patterns over to Fastspring as this is most similar to my current set-up and the only difference customers would see would be that the page they buy from is hosted by Fastspring instead of by me. Patternfish’s minimum pricing rules them out at my price points, and if I moved to LoveKnitting I would also have to increase prices to cover the additional fees which I am reluctant to do.
If there were only a small threshold to the new VAT rules I wouldn’t have to do anything at all. Shame, that.