Firstly please take the following information as a guide as I am not a tax expert, so if you have any further questions then it is best you contact your local tax authority, but here it is in a nutshell;
I have just been informed that come January 2015 anyone who sells digital downloads; so that could be crochet patterns, gaming apps, e-books, etc, if it's digital and you're selling it, you will now have to pay VAT, no matter who you are, how much you earn or where you live in the world.
*UPDATE* I don't know 100% how this applies to selling on Etsy, Amazon or Ravelry, but as my understanding goes, and through the research I have done via the British Government website on this subject, is that you should be okay if you are not taking payment directly. If you sell a digital item, which you then email after receiving payment directly via PayPal for example then you WILL be liable, but if you sell instant downloads via Etsy and they take the payment, take their cut and then pay you, then this falls under B2B (business to business) and Etsy have to worry about the VAT, not you. Again I reiterate that I am not an expert on this matter so do contact Etsy, Amazon etc first if you have any concerns. Google Play are updating their system so you can avoid the VAT problem, which you can read more on here.
Quote from HMRC "Determining who is making the supply
Where digital services are supplied B2C, it is the supplier of those services who is liable to pay the VAT to the tax authorities. Consequently it’s essential to identify who that is. In the majority of cases this will be straightforward, although special rules apply for services through internet portals, gateways or marketplaces.
Supplies via internet portals, gateways or marketplaces
If you supply digital services to consumers through an online portal, gateway or marketplace then it’s important to determine whether you’re making the supply to the customer or to the platform operator. Where the platform operator sets the general terms and conditions, authorises payment or delivery, or doesn’t clearly state the name of the supplier on the receipt or invoice issued to the consumer, then they’ll be seen as making the B2C supply even if they’re contractually only an agent."
Now, HappyBerry doesn't even earn enough to reach the tax threshold here in the UK, let alone the VAT threshold, but that will no longer matter because the EU have changed the rules, which will mean I will have to register for VAT regardless of how much I earn if I wish to continue selling patterns on our own website. But sadly it gets worse, sellers who also do this won't just have to register with your own country, oh no, you will have to register for VAT in every European Union country, under their laws, in their language, in their currency!!
So how come??! Well, it is because VAT will no longer be charged and accounted for based on where the business supplier is established, but according to the EU country where the customer belongs.
Now, I don't wish to be a doom and gloomer, I hate anything to do with tax, politics or complicated economy stuff, but this news came as quite a shock to me (I literally wondered if it was April 1st then I realised I had to order Christmas presents soon) because I realised that people in my situation, especially digital sellers who don't have an accountant to inform them of such changes, will be completely clueless to these new rules and will inevitable be breaking the law come January.
You could of course ignore all this and carry on as you are, but you face being audited by ANY of the EU tax authorities and face fines. Youch!
But it gets even worse. You may be fooled into thinking this doesn't affect you if you say live in the US, or Canada, even on the Moon, but if you sell digital downloads and sell to people in the EU then this will apply to you just as much as me here in the UK.
So Helen, who sells the odd knitting digital pattern in Iowa, just happened to sell one of her patterns to Isha in Germany, even though it was only for a few dollars, Helen now needs to register for Tax in Germany and pay anything due in Euros.
However, I think the situation could even be worse for any digital download seller, regardless of whether they sell to the EU, because it could apply even to say, an American company, selling to American people, who's customers registered their accounts in America, because if your American customer just happens to buy your digital download whilst on holiday in say, France, then the company is liable to suddenly pay VAT to France, even if they logged into their normal account Don't get me started on people travelling to multiple EU countries on a cruise.
However this also affects consumers! You may be fooled into thinking this is just a horrid post and go back on your way to downloading and purchasing some wonderful crochet and knitting patterns, but you may start to experience a shortage, because as companies and individuals struggle with these new changes they may be forced to close down and cease trading. We may have a worldwide shortage of crochet patterns! well digital ones at least. Not to mention music, gaming apps, e-books etc.
So why is this happening I hear you ask?
Maybe the EU have just gone mad, or more likely it is because the EU are fed up with larger companies such as Amazon and Google etc avoiding tax, but stupidly forgot how it affects us little people.
You would be fooled into thinking there may be a threshold amount, but there is none. You could literally earn as little as a 1 dollar, 1 pound, 1 yen, if your customer is based in the EU then you are liable. I know it's madness.
So what are your options if you do sell digital downloads?
Worst case scenario you will have to register for VAT in every single European Union country and pay extortionate amounts to an accountant to deal with all the paperwork, currency conversion and language barriers. This will require you to charge VAT on ALL of your products not just digital ones as well, but you can't just charge your country's VAT rate, it will need to be charged to the customer's country's rate. I know, impractical to even get your head around let alone do. This would require changes to your own website if you have one, not only to charge VAT in numerous different amounts that could possibly change frequently, but you will also have to keep records for up to ten years proving where these people were when they bought your download. You can't even rely on their IP address as Mr Frenchman, if he buys a digital download whilst on route to Paris from London and uses a French IP address and he lives in France and is basically just French as far as you and he knows, the VAT will apply to the UK as that was where he was travelling from. So you'd better get a crystal ball out while your at it because you're going to have to be psychic to know that kind of information,
So option 2. Well if you are British, then you can apply for the new MOSS program and register for VAT just in the UK (even though you earn no way near the threshold, this becomes irrelevant if you sell digital downloads), where HMRC will work this out all for you, (there is a similar program for the US), but this will involve you filling in VAT forms and for every quarter, so four times a year. You will probably need an accountant, which can get expensive and you still face the records and website issues stated above.
Option 3? Ban selling to the EU. You could implement website changes (if you have control, you wouldn't on say Etsy) to prevent selling to EU customers, which no-one wants, but you still face the problems listed above of customers being on holiday and you becoming liable. Blocking IPs are not fool proof either.
Give everything away for free, which of course is ridiculous or sell actual products. So you can harp back to the stone-age and post patterns in the mail instead, as actual goods do not come under the same rules. Great for Royal Mail I guess, but it's massively increasing your carbon footprint, time and cost.
Option 5 - probably the best solution
Sell through a market-place, but do check who takes the payment from the customer. If you sell through Amazon, they take the payment and not you, and then pay you what's left after their cut, similarly with Etsy Instant downloads, Patreon etc (although sponsorship is a grey area anyway). So all may not be lost, even if it does mean taking a small loss from the charges and percentages taken from your sales by the market-place. Even if the market-place you sell through says the responsibility lies with you, if they take the payment then it is still business to business, which means they are liable regardless under the EU rules. A saving grace maybe.
How will this affect HappyBerry. Well, it will mean over-all some positive changes for you guys who love my patterns as most of our patterns will become FREE! And some other exciting changes will be occurring to accommodate this issue, and over the next few months I will let you know what they are. So at least we are ending this post on a happy note!
There is a petition to protect us Brits, which you may want to sign.
And you can read more on this issue here.
Some info on how this affects those in the US:
I implore you to spread the word, as many sellers may be unaware and it may put pressure on the EU to introduce a threshold amount. Thank you.