“In this world nothing can be said to be certain, except death and taxes.”
Benjamin Franklin
Come January 1st 2015, many people believe death and taxes becomes be a reality for small businesses online.
As you are hopefully aware on January 1st new legislation comes into effect in the EU which impacts anyone who sells digital services online. The full legislation refers to digital services as follows:
Broadcasting
Includes the supply of television or radio programs to a schedule by the person that has editorial control of those programmes.
Telecommunications
Includes the service of sending or receiving signals by wire, radio, optical or other systems – and includes fixed and mobile telephony, fax and connection to the internet.
E-services
Includes video on demand, downloaded applications (or ‘apps’), music downloads, gaming, e-books, anti-virus software and on-line auctions.
These can be broken down further into the following:
• Download and online games
• E-books (e.g. Amazon Kindle)
• Download and streaming music and videos
• Cloud computing, including software provided as a service (‘SaaS’)
• Mobile phone services
• Internet telephony (e.g. Skype)
• Streaming television (e.g. Netflix)
If you are reading this, then it probably affects YOU.
Welcome To The New Digital Economy Folks!
In short the legislation means anyone who sells digital content for delivery online via an automated mechanism, ie a membership site or download delivered by email, is liable to collect the VAT for the country where the buyer is located.
If you do not collect it you will be liable for the VAT of any EU based purchase and you must keep records for 10 years. Any member state can request an audit at anytime, and with each member state having different VAT rates and thresholds things are about to get very messy. Welcome to the new digital EU!
Welcome To #VATMESS
Given the scope and complexity of our users sites it is clear many of you will be affected by these new rules. And with the place of supply rules, this includes our users outside of the EU. Yes my American brothers and sisters, this means you if you make a single EU based sale for just $1 you may owe a random EU state VAT!
While this blog post could go into many directions ranting and raving about the lunacy of these rules, I’ll leave this to my personal blog (if I ever decide to publish it after this mess).
Instead what I’m going to outline is my understanding of what is required and a proposed solution to this problem.
Otherwise here is a small taster of what you may have to deal with…
Now I don’t know about you but I’m less than excited at the prospect of dealing with an automated system which doesn’t even recognise the impending changes.
Lets Be Proactive
I’ve seen many bloggers state they will simply shut down their digital businesses on Jan 1. For FastMember (and me personally) it’s not an option. While we are a small startup, we have plans to be much larger and we still have customers to serve. Shut down is not happening.
Failure Is Not An Option.
I encourage you to adopt this attitude too.
Also we want you to be confident you can continue using the FastMember platform, knowing it will be fully supporting your digital business.
At present I am un fazed by these rules. I see this as a challenge. Not ‘The End’.
What You Need To Do
The following is not legal or accountancy advice. Get your own advisors if you want this. I’m not responsible for your business success or mistakes.
OK? Then read on.
Here is my understanding after annoying my own accountant.
You do not need to register for VAT in the UK if you are below the threshold. You will simply be required to sign up for the HMRC MOSS scheme and collect VAT on any EU sales made.
Still a burden, but not quite the full burden I initially thought.
A Better Solution…
Still as a digital startup we need to make things as hassle free as possible, both for you and ourselves. We have 2 proposed solutions to this digital madness.
1. Use ClickBank.
FastMember has been ClickBank compatible since it’s inception. By using ClickBank as your vendor you may well find a way around these issues as they collect the VAT on your behalf effectively letting you bypass the entire EU VAT ‘mess’.
If you can serve all EU based customers a page which takes them to ClickBank you may pretty much save your business a big headache. Sure there might be a small cost involved based on listing your product in their marketplace and an increase in transaction fees. However when you weigh this up against the burden of tax compliance and data protection legislation (10 years of record keeping based on users location details) the benefits far out weigh the costs.
Besides having access to a network of affiliates which can promote your products can only be a good thing. Unlike Amazon and other online vendors, Clickbank do not keep your customer list to themselves so you can follow up with your buyers and build your digital business with full control. You also decide the commission rates affiliates get. It’s a good solution and many small businesses have grown into multi million dollar operations through this model.
2. Use Stripe (with some tweaks)
We have developed a fully integrated solution for Stripe.
You can check out full details here
You can accept payments directly on your own site and let Stripe collect the needed data, leaving them to deal with PCI compliance.
By integrating Stripe further with Quaderno or Taxamo and registering with the MOSS scheme for your country you will have the means to be fully compliant with the least amount of hassle.
Again some extra cost involved, but its better than a full on battle with EU’s red tape system.
With A Few Tweaks
Unless you plan to just use Clickbank for all your sales, these 2 solutions may need a few tweaks on the FastMember side to be fully usable.
What we have planned
- A Geo Location Recognition add on system which will recognise where your customer is located. This can then redirect your buyers to a Clickbank (or any other) compatible landing page depending on which country they are in.
- An EU VAT add on system which will determine the country and EU tax rate your buyers should be given. This would then add the VAT at checkout when using Stripe or PayPal and also send your customers an invoice at time of purchase. You still need to manage your VAT accounting, this will just make the process a lot easier.
These will be both paid add ons, both between $50 to $100 each, depending on how much development is involved. This will be a lot less than the cost of full on compliance and wading through reels of red tape or developing your own custom solutions.
However you can get access to both of them, plus the Fast Stripe add on, (and all future add ons too) as part of our NEW Fast Club.
You’ll get the needed add ons delivered by Jan 1st 2015 and be ready for compliance with the least amount of effort and a minimal cost involved.
Join Fast Club now and be ready for 2015.
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What do you think? Am I off track? Should I get a better Tax advisor?
Thanks for the info Dave, what about using PayPal – won’t they handle the VAT crapola?
PayPal only process payments on your behalf, they are not liable for dealing with the VAT. Just like a credit card merchant account wouldn’t deal with it either. It’s your responsibility as the business owner. This is my understanding anyway.
However I’m sure there are things they can do to help their customers be compliant. This could even be a good value added service if they provided a system for their users. However the bigger the business the slower any changes can be implemented so I wouldn’t hold your breath.
VAT is just an excuse to tax without any justification, what benefit do digital platforms gain? The truth here is simple just do business with Non VAT nations, easy to do problem solved.
If only it was this easy. As I understand it the US has sales tax for each state which ‘should’ be charged on every purchase. Obviously the logistics of collecting this and chasing up businesses with small online transactions is a nightmare so they seem to have let it slide. But I’m sure as we move forwards and more and more authorities realise they are missing out on revenues this is going to be the reality for everyone on a global scale.
To choose to cut business off with VAT charging nations isn’t the solution. We need to face the fact that this is the future and find a way to work within the system or come together and lobby against it. Lobbying could take years with little result and a lot of wasted effort. I’d rather find a solution where I can focus on growing my business instead. A 3rd party vendor who deals with the headache for a fee is good tradeoff until you have enough resources to have your own system in place.
I agree, I know over the last several years that if I have a choice of buying a digital product from a NON VAT nation and a VAT, I make the logical choice, naturally its not always going to be that way but it has been an easy choice, most of my customers are US based so its not really a problem for me at all.
Taxes can be a big issue for many different entities, from states that charge taxes on automobiles every year to some places where they have no tax for some items.
Logically to survive a Tax must serve a purpose, other wise it will not survive, just look at what has happened in France over the last five years, specifically look at the number of failed businesses, in the digital start up industry, that will tell the real story here.
Its less about fairness and justification and more about purpose and longevity.
Here in the USA, there isn’t a tax on digital downloads such as eBooks, videos, etc.
They’re trying… but it hasn’t passed yet.
As for all my friends in the EU, my heart goes out to you having to deal with this.
Being in business for yourself is challenging as it is without all the additional regulations and laws that are in place.
Honestly, I can’t see many US based websites charging a VAT tax to their EU customers and then actually sending it in. I’m talking about purchases being made on a domain owned by a small to mid-sized business (not giants like Amazon, Clickbank, etc.).
I guess time will tell what happens, but either way you slice it, this is a lousy tax no matter how you look at it.