In Europe there’s a tax system called VAT. The amount of VAT that’s charged varies depending on the EU country, but it’s about 20% on average.
Previously, businesses had to charge VAT depending on where their business was located. So, for instance, the VAT rate in the UK is 20%, which means UK businesses would charge 20%. But also in the UK, there was a threshold. If you earned less than £81,000 per year then you weren’t required to register for VAT or charge VAT. Since I fell into that category, I never had to deal with charging VAT or filing VAT returns or any of that nonsense (which is how it should be).
But that has changed.
New EU VAT legislation
As of January 1st, 2015 the law has changed all across Europe for all digital products. Instead of charging VAT based on where the business is located, you have to charge VAT based on where the CUSTOMER is located. And there’s no threshold. Even if you only earn £15 per year selling to EU residents, you still have to comply.
Let’s compare the old system to the new system for a self employed sole trader like myself (earning less than £81,000 per year).
Old System
- Customer adds a product to their cart on your website.
- Customer fills in any relevant details on checkout form.
- Customer pays with PayPal (or whatever).
- Business owner fills out a tax self assessment every year.
New System
- Business owner registers for VAT and VAT MOSS.
- Customer adds a product to their cart on your website.
- Customer fills in any relevant details on checkout form. Billing details are now required to help confirm residency (wasn’t really required before for delivering digital products).
- Website must log the customer’s IP address as evidence of their country of residence. Business owner must also log a second piece of evidence that verifies the country of residence (such as country selected on billing address, phone number, or bank details, etc.).
- Website must determine whether or not the customer is living in Europe. If so, the website needs to find the VAT rate for that country and apply it to the purchase.
- Customer pays with PayPal (or whatever) with VAT applied if applicable.
- Business owner must file VAT returns quarterly. Must submit records of purchases made by EU customers and how much VAT is owed.
- VAT must be paid to each individual country that you’ve sold products to.
- Business owner fills out a tax self assessment every year.
The EU is crippling small businesses and sole traders
Some small businesses have a hard time implementing the technical side of this (checking country of residence, logging evidence, applying VAT only to certain countries, etc.). Others just have a huge problem with the MASSIVE amount of paperwork and record keeping that now needs to be done. We have to keep records for a minimum of TEN YEARS!!
The problem is that this law was created to target big companies like Amazon who have highly paid accountants and tax advisers anyway. Many small business and sole traders (like myself) don’t have accountants and tax advisers. We’re doing this all on our own. The insane amount of record keeping and paperwork we now have to go through is insane!
And this isn’t just for European businesses..
Even if you’re a United States resident selling digital products on your website, this law applies to you if any of your customers are European citizens.
What should be done about this?
A minimum threshold should be applied to this new law. We shouldn’t have to go through all this VAT nonsense if we earn a small amount of money per year (like £81,000, which is was for the UK before).
Many businesses are closing up shop because they can’t cope with this new law. Others are just blocking sales to European customers so they don’t have to go through the paperwork. We shouldn’t have to resort to things like this!
How can you help fight this?
There are two petitions on Change.org that you can sign to show your opposition to this law. My hope is that the EU will come to their senses and make changes to accommodate small business and sole traders.
- Petition: Uphold the VAT Exemption Threshold for businesses supplying digital products
- Petition: A unilateral suspension of the introduction of the new EU VAT laws for micro businesses and sole traders
Good grief, that’s absolutely crazy and it does in fact make it a hardship for those of you who are selling digital materials. I am in full support of you and the fact that you and other small businesses shouldn’t have to be made to go through this.
Yeah it’s horrible! Luckily I’ve managed to implement the technical aspects, but it all still sucks. I just feel super horrible for all the business who have closed up shop or blocked selling to the EU because they can’t deal with all this. 🙁
I’m in a web designer group on Facebook and we were talking about it, and EVERYONE except me had to block sales to the EU because they couldn’t handle all this implementation and paperwork. We shouldn’t be forced to do that!
No, you guys really shouldn’t be forced to do that, it’s incredibly ridiculous. Like you said, from the reading that I’ve been doing on this via the links that you shared in your post, there really should be some kind of threshold. There’s no need to make a lot more paperwork and to force you guys to lose customer’s and potential clients, due to all this unnecessary stuff. I hope that it gets better, I did go ahead and sign both of those petitions for you. 🙂
It is awfull for the business person and clients 🙁 that is why theres a world financial crisis…there is no support for some business specially the small ones:( how they expect production to increase if they cut our money in everything?!
Exactly! I think it’s because they want to crack down on Amazon/Apple taking advantage of Luxembourg’s lower VAT rate, but it means ALL other small businesses get screwed over. 🙁
I actually live in Europe and always had to do both the quarterly and yearly VAT stuff, so not sure if anything changes for me. Will have to look that up and double check. My mom knows a lot of the VAT stuff as she deals daily for her work with VAT, so she always helps me that, which is a big help. The whole VAT stuff can be so confusing an unecessarily complicated.
If you’re selling digital goods, then yes there are changes. Previously you would have been charging the VAT rate for your country (21% in the Netherlands, I believe) and then filing returns with the Netherlands.
Now, you no longer do that.
You have to charge VAT based on each individual customer’s location. So here’s an example:
* You sell 5 products to customer’s in Spain. You have to charge them each 21% VAT. Then you have to file quarterly tax returns with Spain.
* You sell 1 product to someone in Italy. You have to charge them 22% VAT. Then you have to file quarterly tax returns with Italy.
* You sell 3 products to someone in Sweden. You have to charge them 25% VAT. Then you have to file quarterly tax returns with Sweden.
See what I mean? So instead of doing it based on YOUR country, you have to change and adapt it based on each customer and their country of residence.
That’s so weird and makes it much more complicated :(. Luckily most of my customers so far were from the US, but I have some EU customers as well. Will have to look into this more. Thanks for adressing this issue!
That really sucks. They really don’t want to make it easy for you, do they? I hope they will rethink this idea.
Yeah it’s horrible for individuals and small businesses. 🙁
I must admit I don’t pay that much attention to commerce laws such as this, really because I don’t do a lot of online shopping, and zero selling. But that really stinks. It’s going to make it that much harder for small business to make any sort of profit. Maybe they’ll modify it?
Yeah everyone is hoping that they’ll modify it. There are numerous petitions and have been several anti-VAT MOSS twitter chats. I love that people are making noise!
That sucks – plain and simple! I only realized that when I was suddenly asked to pay VAT for my GoDaddy hosting account, something I never had to do before. And 20% is no small amount either. And it also seems to be highly complicated especially for small businesses. I have the EU will realize these shortcomings in this new law and adjust it. Still, for me as a customer it means – prizes go up!
Yeah 20% is a ton. 🙁 I actually felt bad for Apple, which I don’t normally do.. There was an article about how they were raising their prices on apps in order to comply with the law (adding the VAT for each person’s country like I now have to do) and the comments were full of people who didn’t read the article. They were just complaining, like:
But if they’d read the article they would know that Apple isn’t exactly WANTING to do this. They have to do it to comply with the law!
Urgs, really? I know politicians are insane per se, but they manage to surprise me again and again with what they come up to torture people. Living in one of (or THE) most bureaucratic country in the world, I know all about keeping records to the latter, both digital and print to be save. And I’m also one of those small businesses that relies on the thresholds woven into those kinds of laws. I really feel you, so I joined the petition — good thing you brought it up!
Yeah I think thresholds are a must-have. Businesses shouldn’t have to fold or block sales to the EU because of too much required tech implementation, paperwork, and storage. 🙁
It’s sad that I’ve even heard tax lawyers recommending that “If you earn less than £500 per year you should just close your business. Otherwise it’s not worth it.” Because all the extra required time would make it not worth the money… It’s so sad that lawyers are actually recommending that! Someone should be able to put up a few ebooks or plugins on their website and make a few hundred pounds A YEAR without jumping through five million hoops and filing tons of paperwork.
The EU is always making it harder for businesses to cope. I have a boyfriend in France who also has a small winery business and he himself have told me how the EU and its laws have made it harder for him. I’ll have to ask him about this one and how badly this affects him :/ They don’t really hire an accountant (his mother manages all those stuff), but you’re right, they should’ve thought more about this and its impact on small businesses. This isn’t fair anymore.
Well, I’ve told you before too that European VAT laws suck. Like each EU country doesn’t already have enough VAT laws to deal with. Btw, I already signed those two petitions. 🙂
I’ve seen a few stories about this recently and as someone who likes to support small businesses, I am so disappointed by this. It’s terribly thought out and is highly impractical. It’s almost like new laws are proposed by people who have no idea what the real world is like for the average person…oh wait.
I’ll be signing both of these petitions.
That sounds so confusing. I’m glad I saw a comment in regards to Spain’s VAT. While 21% sucks hugely to add to my hosting bill, I am very happy to pay it (I mean – what choice do I have?). Here’s hoping they do change the rules, it sounds as if it’s so, so complicated for small businesses. What a sad day for small businesses.
The government will do anything for a bit of extra cash, won’t they?
This sounds so complicated, and this affects people who aren’t even European too. It sounds like it’s already created so much chaos, and I hope it gets changed. It sounds like a nightmare, and I’m so sorry for all the small business that shut down because of it. Laws aren’t supposed to put down businesses, but help them, and this is just such a mess.