There was a small uproar amongst online businesses a couple of years ago when it became clear that new EU regulations meant that sales of digital products (MP3s, ebooks and the like) to EU consumers would have to include VAT at the rate of the consumer’s (rather than seller’s) home country and that the seller would have to account for that VAT to the authorities of each country that they sold to.
In the UK, this was simplified by VAT MOSS, the Value Added Tax Mini One Stop Shop, which lent its name to the whole kerfuffle. This is actually just the mechanism by which you can itemise your sales to each country in an HMRC (Her Majesty’s Revenue and Customs, i.e. the tax authorities) form so they can handle the payments to each country. But it was complicated by the fact that there was no threshold on digital VAT, meaning that UK businesses earning under Â£83,000, who had so far been exempt from the VAT regulations, would have to register as a VAT business in order to submit the VAT MOSS form.
It’s two years on now and I need to set up some digital sales so I’ve been looking at what’s changed. Actually, very little – so far. Even Brexit isn’t going to make a difference as the EU considers the ruling applies to the whole world. So the requirement to account for VAT on sales to EU countries will still apply, although what effect Brexit will have on HMRC’s enthusiasm for enforcing those regulations remains to be seen. But the EU has announced reforms to VATMOSS that will create a threshold of 10,000 Euros in online sales before a business needs to account to anybody other than their own tax authorities. The bad news is that change won’t take effect for online goods (as opposed to services) until 2021.
So what are your current options as a small business selling digital products?
Option 1 is to host the digital sales on your own website, allow sales to the EU and account for your VAT. If you use WordPress, the Easy Digital Downloads (EDD) plugin is a straightforward way to set up the shop. The base plugin will allow you to manually enter VAT rates for each country you sell to, but you’re probably going to need to install some free or paid-for extensions to make it all work properly, and also to record and extract the information you’ll need for your quarterly VAT MOSS submissions. You’ll need to register for VAT and register with VAT MOSS, submit a nil quarterly VAT return (assuming your UK taxable turnover is below Â£83,000), and submit a quarterly VAT MOSS return. For the latter, HMRC provide a simple spreadsheet template with one line for each country you do business with. You’ll be expected to have two pieces of country identifying information for each transaction – typically these will be derived from the IP address, postal address and bank card of the consumer. If your sales are mostly ‘drive by’ downloads paid for by Paypal, that information could be tricky to gather. Your EDD VAT plugins will hopefully help with that. HMRC have said that microtraders should use their ‘best judgement’ over whether it’s necessary to have more than one piece of location information, such as an address provided by a customer. Nobody seems to know what that means.
Option 2 is to host the digital sales on your own website, but don’t allow sales to the EU. HMRC don’t require you to charge VAT on sales within the UK if you’re under the threshold so this is perfectly legitimate. The Prevent EU Checkout for Easy Digital Downloads plugin will let you accomplish this easily if you’re using EDD (but you really have to upload the GeoIP2 database to your site rather than relying on the fallback web-based check, which often doesn’t work). This is a good way to go if you want to avoid the admin headache for a small number of sales but want to keep control of those sales.
Option 3 is to use a platform which handles the sales but still requires you to account for the EU VAT yourself. Sendowl is a good example of this. You pay a flat monthly fee for the service and they will carry out the VAT calculations, record the required information and give you a quarterly report with the information you need to submit to HMRC. If you don’t mind a bit of admin and your sales justify the monthly cost, this is a good route to go.
Finally, Option 4 is to use a platform which takes the payment itself and passes on an amount less commission. This then makes them liable for the VAT reporting. It may be that your product has a niche site which can do this, such as Amazon for ebooks or Bandcamp for music MP3s. But if you just want the service without the community or storefront aspects, companies like Payhip will do just that and charge about 5% commission – some take considerably more than that so shop around.
So there are ways to cope with digital sales without burying yourself in admin. The right solution for you will depend on the type of product you’re selling, the quantity of EU sales, your level of technical knowledge (or budget for expert help) and your tolerance for paperwork.