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Sole traders, digital products and the EU VAT reform

We are a fiercely libertarian lot, we who make the web. Nearly twenty years into our profession’s existence we still resist any sort of formal organisation, central co-ordination, or elevation to a professional guild. Platform-specific conferences are the closest we get to participating in organised professional development, and these gatherings often become an echo chamber. Our status as free agents, either self-employed, contracting, or freelancing on the side of a day job, binds us even tighter to our stubborn sense of individuality. Indeed, our lack of unity is the only thing we enjoy together.

Our rejection of professional organisation is not always a bad thing; being independent keeps us responsive, agile, Responsive, and Agile. We’re free to work who we want to work for when we want to do it. Our skill sets are limited only by our time and resources.

Our proud independence becomes a false economy, however, when issues which affect all of us, regardless of what we do or who we do it for, go uncommunicated and unheeded. Those of us who make the web, who are otherwise very clever people, work in blissful ignorance of impending developments which organised professions address as a function of everyday diligence.

Why does this keep happening? These issues – specifically, changes in business and legal regulation – don’t get communicated to us because there is no central body to communicate with. Lawmakers cannot reach us in the consultation phase because there is no one to reach, and they cannot communicate with us in the information phase because they would not know where to begin. Our knowledge of impending changes becomes a matter of happening to find out because you happen to follow the right person on social media and they happen to share a post about it. The scope of the compliance task ahead of you is somehow less terrifying than the realisation that if not for pure chance, you would never have known about it at all.

It was one of these accidental discoveries, made by checking Twitter between tasks, which brings us to the topic of today’s post.

Are you sitting comfortably? Good, then we’ll begin.

Last month developer and author Rachel Andrew inadvertently ruined my afternoon (sorry Rachel) by thinking through the implications of an upcoming change to the law on the way VAT is calculated and applied in Europe. From 1 January 2015, if you sell digital products within the EU or to EU customers, this affects you.

Many of us have side projects which supplement our project income. I wrote an e-book. Many of you sell premium plugins, themes, or tutorials. Some of you have non-web projects on the side like selling short stories or your band’s music. For some of you, plugins and publishing are your main source of income.

Up until now you have been able to sell your intangible products online without worrying about the implications of selling across national borders. If a designer from Sweden bought your e-book, the purchase was no different than a sale made in your own country. That’s because your VAT payments were calculated based on where you sold the products from – meaning your country of residence.

That’s about to change.

From 1 January 2015 the definition of the “place of supply” of an intangible digital product changes. The place of supply becomes the country where the product is purchased, not the country it was sold from. This means that if a designer in Sweden buys your e-book, you have to charge him Sweden’s VAT rate, and then you have to forward that VAT amount to the Swedish tax authority.

Being outside Europe does not get you off the hook either. If you are a non-EU trader selling intangible digital products to customers in Europe, this law applies to you too. You have to pay the full amount of VAT due on each sale in the country where your product was purchased.

Are you still sitting comfortably? I didn’t think so.

Like most self-employed sole traders, my income is way (way, way, way, waaaaaay) below the UK VAT threshold, so I have never registered for it. If you were like me, this was not a problem on your intangible digital sales; after all, because your earnings are miles below the point where it becomes an issue, no VAT was due. That also changes on 1 January. Even if you are not VAT registered in the UK, you still have to pay VAT in the European countries where your digital products are sold. This would leave me having to register with the Slovak tax authority and file a tax return with them over the €3.04 in VAT due to them from the sale of one copy of my book in Slovakia…and then repeat that process for every other country in Europe where my book sold this year. I would frankly rather run away and hide in a seaside cave.

Fortunately there are two pieces of good news. The first – writing from my perspective here in the UK – is that help is at hand through a new HMRC service called MOSS, or Mini One Stop Shop. If you register for this service, you simply forward your quarterly VAT return to them along with the aggregate amount of VAT collected and they take care of the process of divvying it up across Europe for you. The downside of this, of course, is having to register for VAT and produce regular returns, a process which most self-employed people have done their best to avoid up until now.

The second piece of good news is the VAT changes only take effect on 1 January. European sales you make up until that day – in other words, 2014’s sales – do not need to be divvied up across the continent. That gives you a month to decide what you are going to do.

If you have a range of products bringing in a good income, the burdens of compliance will be a minor headache which is worth it in the end. On the other hand, if you are selling only one item as I do or do not enjoy a high volume of sales, the costs and efforts required for compliance will negate any financial gain you might have made. Case in point: a company called Taxamo tweeted me about their VAT MOSS service which would certainly benefit many sole traders. For others, though, their €20 monthly fee will eat in to most if not all of the profits on sales.

The sad fact is that this process will drive many small traders out of the digital market. Ending sales outside your own borders may well be the best option for you.

For me, the impending change has been a moral dilemma as much as a financial one. The e-book I wrote was about the Consumer Rights Directive, which was the law intended to increase cross-border sales. I wanted to help the web community understand how to sell more across Europe. If I end its sales to international customers to save me some paperwork, I am going to be Europe’s biggest hypocrite. On the other hand, like most ED readers, I am a sole trader. I am the coder, the designer, the sales team, the HR manager, the banker, the travel agent, the PR officer, the legal team, the IT manager, and the janitor. I’m also a mum, a church volunteer, and a university student. Do I have the capacity to add VAT returns on to that?

There are no easy answers for me or for any of us, but there are plenty of resources available to help you make your decision. These include Rachel Andrew’s blog post and resource library on the law; this table of EU VAT rates; and HMRC’s resources. HMRC are also very helpful on the phone.

While you reflect on your options, give some thought as to how we, as a community, can break this cycle of only ever learning about laws that completely change the way we work by mere accident.

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