Big changes in EU VAT catch small fish

A vast, and largely unpublicised, change happens across the EU on 1st January 2015.

VAT (or Value Added Tax) is a tax that has to be added to sales of certain products and services at a variety of different rates depending on the type of product or service. VAT is a Europe wide tax (it has different local names) and different local rates – its much higher in some of the EU countries and much lower in others.

Up until now has been paid to the country of the supplier of services. So if you live in the UK and you make a sale to a German you will pay the VAT to the UK tax authorities.

Because VAT is a hugely complicated tax, in the UK there is a high threshold (£81,000 turnover I believe) before you have to register for VAT (if you aren’t obliged to register for VAT you don’t have to charge it)

The big change is that from 1st January 2015 those offering digital services must pay VAT to the country that the purchaser is in and VAT is due from the very first sale if you aren’t resident in that country.

To prove the country it was sold to you’ll be expected to record and keep (for 10 years) two separate pieces of evidence for each sale eg the billing address and the location of the IP address and these must agree with each other.

The EU governments have set up MOSS (Mini One-Stop Shops) that you can register for to avoid having to register for VAT in every country in the EU. However, in the UK at least you can’t register for MOSS without registering for VAT in the UK so very small businesses cannot access them without voluntarily registering for VAT and having to do all the record keeping associated with charging VAT on their whole business.

 

What it means for independent knit and crochet designers*

The vast majority of knit and crochet designers are micro businesses – one person operating on their own, often from home and often making less than the personal income threshold let alone the VAT threshold. We are used to keeping records to pay our taxes but have enjoyed the benefit of not having to record keep and prepare the regular reports that being VAT registered entails.

It is also near impossible to make enough income from selling patterns alone so the majority of designers also offer other services such as teaching, designing for magazines and yarn companies, technical editing, writing. Some of these would need VAT charged on them if you VAT register in your own country. This makes using the MOSS system impractical for many.

It might be possible to stop selling to EU countries (except the one in which you reside) but this is tricky to implement and may see you falling foul of EU laws on non discrimination.

Ravelry and Etsy sales are currently a little up in the air, there is much debate over whether they should be collecting the VAT and remitting it as a reseller or whether it is the individual seller that is responsible. I think both companies have been rather blindsided by the new legislation and are scrambling to keep up. As a seller the only sensible thing to assume is that you yourself are liable until told officially otherwise and either do the paperwork or withdraw from the platform.

The other option is to stop selling direct and to use a reseller (such as Patternfish, loveknitting.com, deramores) who will be liable for the VAT as they are making the business to customer transaction. Downside is that they are smaller market places than Etsy and Ravelry and they will take a cut of the profit so your original pattern price that you used to get about 85% or more of you will now see probably around 50% or less.

If you are based outside the EU you don’t escape either, from the 1st of January you’ll be expected to charge, collect and remit tax on any EU sales you make if they are direct to the customer. If you are selling through a reseller that is taking responsibility for the VAT then you can carry on as normal. If you are selling direct to the customer you will need to either stop selling to the EU or register through one of the EU countries for the MOSS scheme that will handle the payments out. You will need to collect data to support all your sales.

So in summary it means either taking a large hit on your profits by using a reseller/middleman who will handle the VAT for you or taking a large hit on your profits because of the new administrative burden.

What it means for their customers

I suspect that from the 1st of January you may see some designers shutting shop because they can’t deal with the administrative overhead.

Those that do decide to stay in business will likely have to raise prices as the margins on knitwear design are so slim that I cannot see how they will possibly absorb the cost of the VAT and the administrative overhead or resellers fee.

I don’t think this law change was ever intended to catch the little fish, I think the assumption was that resellers would handle all the pain. But that is always the problem with throwing a big net. The little fish get caught while the sharks legal and tax teams are probably already busy with a pair of scissors!

If you want to get involved in the conversation about this law change on twitter look out for the hashtags #VATMOSS and #VATMESS.

*I am not a lawyer or tax specialist. This does not constitute advice. It is conjecture and a summary of reading I have done.

Comments

  1. says

    Thanks for this Joanne I’m finding this whole business utterly confusing and massively daunting. I expect I’ll withdraw my online patterns. It’s such a shame that so many designers will be forced to shut up shop. But I for one don’t have the time to deal with all the extra paperwork :( x

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