I’m a member in several Facebook Groups for small business owners and digital entrepreneurs and for the past month most of the discussions have been focussed around the new VAT rules that will apply from 01 January 2015. These rules affect any small business owners (all over the world) selling digital information products, software, music, images, ecourses – where there is little human interaction, and where the customer is based anywhere in the EU. I’d like to share the advice and news with you here as well, in case you are not yet familiar with the changes.
Disclaimer: I’m not an accountant or a financial adviser, so the information below is my understanding on the VAT rules published by the HMRC and from other articles, Q&A sessions, blog posts written by more suitably qualified experts. This is more of a heads up on what’s coming and what’s changing, so that you can make informed decisions about planning your business strategy in 2015.
What’s changing?
New VAT rules come into force on 01 January 2015. Any sales of digital products and services from that date will be affected if your customer is based in the EU (regardless of where you are in the world).
Digital products include ebooks, ecourses, webinar recording, videos, software, downloadable resources, music, images etc. Regardless of how much they cost, and how much you make per year in your business – there is no minimal threshold (unlike the current VAT rules).
Excluded are non-automated services (i.e. marketing and design services, consultancy, mentoring), live training and coaching (1-2-1 or group), live webinars, non-automated product delivery, physical products (CDs, printed books, DVDs).
To comply with the rules you will need to register for VAT (if you are in the UK) or your alternative in your country, and then register for VATMOSS scheme (in the UK or your alternative) in order to submit quarterly VAT returns for all countries in the EU.
This also affects you if you abroad like US or Australia – you will still need to register for MOSS in one of the EU countries in order to submit returns and pay back tax collected.
VAT charged on affected digital products is calculated based on the place of residence of your customer and their applicable rate. So if I sold an ecourse to someone in France, I need to charge them French VAT. While for my UK customers I would charge the usual UK VAT tax of 20%. And this applies for all 28 member states.
To work out where my customer is actually based I need to collect 2 pieces of non-conflicting evidence as a proof (or more if first 2 had a conflict). These evidence pieces could be their residential address, landline phone country code, IP address, mobile SIM country code, bank account location (from where purchase was paid) etc. There are several options on the list of what you are allowed to collect, but it means that if you are in the UK, like me, you also then have to comply with Data Protection rules for collecting, processing and storing this information.
More on VATMOSS:
http://www.telegraph.co.uk/finance/businessclub/11254829/New-EU-VAT-rules-threaten-to-kill-UK-micro-firms.html
http://idea15.wordpress.com/2014/11/24/how-vatmoss-is-the-end-of-small-enterprise-in-britain-and-how-we-can-change-it/
http://onemanbandaccounting.co.uk/eu-vat-changes-2015/
http://www.huffingtonpost.co.uk/soozi-baggs/new-eu-vat-regs-seriously_1_b_6177222.html
What does it mean for a small business owner?
If you are already selling digital products on your website:
If you are in the UK, you will need to register for VAT and VATMOSS in order to comply with the rules. You will need to track evidence of where your customers are, apply correct VAT rates for each member state, prepare and file quarterly VAT returns – basically there is a lot of extra admin involved for what could just be equivalent to a few hundred £ per month worth of profit.
Solutions:
1. Stop selling digital products.
I’ve seen some entrepreneurs announcing that they are pulling out their digital products all together, at least for the next 6 months or so, until the dust settles and new rules and their application become clearer. If digital products make up a small percetange of your revenue you might be able to follow suite, and for example use some of your products as freebies to build your list in 2015.
2. Start selling through an ecommerce marketplace.
If you currently sold on your website (through PayPal or Stripe) and relied on your membership site and/or email system to deliver the products to customers, you could now switch to a marketplace that will collect payments and deliver products on your behalf. Marketplaces will be responsible for accounting for VAT on your behalf, tracking evidence, storing data, and thus eliminating these requirements from you.
The downside is that you would lose some of your revenue to pay for those marketplaces, like Shopify, Etsy, Amazon, eJunkie, Simplero, Clickbank. But check with those tools first they will definitely comply with the new rules in full and if you need to do anything from your side.
There is also a brand new VAT solution Taxamo which offers payment processing, VAT calculation, reporting on your behalf. Effectively it’s cloaking your PayPal/Stripe payments with another layer of tracking and reporting, but otherwise you still keep full control of your products and delivery. It’s also cheaper than many other options. But you are then responsible for registering for MOSS and filing your returns (generated by Taxamo) yourself or through your accountant.
3. Add a human interaction element to all products.
If you are selling products online, you could consider changing them to turn them into live programs – either live 1-2-1 coaching or group coaching, live webinars, in-person marking of assignments and homework. If the primary element of your products is the human interaction (and downloads and resources are a small extra), you shouldn’t need to worry about VAT rules.
Or, according to HMRC Q&A session on Twitter, the following process will also constitute more than minimal human intervention. Granted, it will require you to manually process payments and send all your digital products to customers, so unless you are only selling a handful per day – it won’t be easy to manage. The exact position on this seems to be a grey area at the moment – whether you can actually manually email the SAME document without VAT, or this only applies if it’s a customised document.
a customer clicks “Buy Now” button on website and is added to a list. At end of day the vendor takes list, manually completes an e-mail with each customer’s details, attaches the relevant content and hits “Send”; or
a customer emails vendor with details of the products they wish to purchase. Vendor manually replies to email and attaches the content.
If you are already selling digital products through a marketplace:
Check that your marketplace will be compliant with the new rules, and if you need to do anything from your side. If not – consider switching to another marketplace or using a different approach (see above).
Note that PayPal on its own is not a marketplace but a payment processing solution, so it’s not compliant with the rules.
If you are not already selling digital products:
If you’ve never wanted to sell digital products, and your business is all about in person interaction, services, and private coaching – you are not affected. You can continue as you are now and only register for VAT once your income exceeds the threshold.
If selling digital products in 2015 was a big part of your business plan, you will need to consider alternatives – will you be selling through a marketplace or Taxamo? Will you be selling only in-person coaching or training programs? Will you postpone your products’ launches until later in 2015, when some rules or their application might change?
You could chat to your accountant about all this, your local tax office (especially if you are not in the EU, but sell to the EU) and work out what’s the best way forward for your business.
What I’m doing here for my business
My plan was to launch digital training courses early in 2015 – but now I’m also considering my options. Taxamo doesn’t remove the extra administration burden from my business plus having to register for MOSS. Simplero is just too expensive because of all their “product delivery / membership site” features which I can easily set up and run myself, after it’s one of services I offer to my clients!
I’ve tried contacting Shopify and ClickBank so far to establish if they are going to be fully compliant or not. There is a solution (plugin) that will integrate ClickBank sales with my Infusionsoft system for email marketing – so potentially this could work really well for me. Also both of those can integrate with other email marketing platforms, and ClickBank can work with Ontraport and WishList Member. So far to me it looks like the winning solution if you wanted to go for the marketplace idea.
I’ll be updating this post with further information about different platforms and solutions that would work for small business owners and digital entrepreneurs. And if you have some updates or useful articles to add new insight – please also share those below in comments!
What can you do about it?
If you are not happy about these new rules and if you believe that the minimum income exemption should have been upheld across the EU – write to your MEP, so that they can lobby on your behalf in the European Commission. Here’s a template you can use from
If you are in the UK, sign this petition asking Vince Cable to intervene and set up an exemption for UK only. Sign petition.
To keep up to date with the latest developments for VATMOSS – join a free Facebook Discussion Group with over 800 members (at the time of writing).
And plan your strategy carefully for 2015 – personally I believe in playing by the rules and not trying to ignore the changes, hoping they will not notice or catch me. I hope you will do the same 
Finally, my friend from a Facebook business group Star Khechara recorded this video interview with an multi-national accountant Lisa Marie Robinson where they talk through the options as well. The download they mention in the video (which was available in the YouTube description) is available here.
Over to you…
Share this information with your friends, colleagues and other small business owners. They might not be aware of these changes yet, and you could save them a lot of effort and business mistakes.
If you have any additional resources, insights, tips that could benefit other readers – please share below in comments and I’ll include where possible in future article updates.
Finally, let me know what you are planning to do about it – stop selling your products, switch to a marketplace platform, or offer only live programs instead?
But please don’t despair about it – there is a way to solve this and still have a profitable business in 2015. As accountant and business coach Judith Morgan says – “focus on what you can do, not what you can’t”.
Look forward to your comments!