This is because it is a digital product, and digital products are much misunderstood by those who deal with VAT matters, and how they are delivered by small businesses and entrepreneurs.
What am I going on about?
Well, this week we were scandalised to learn that from the beginning of next year, anybody from the EU states buying digital products will have to pay VAT.
But not just UK VAT, EU VAT, which will have to comply with the country of the purchaser. If I sell digital products to a EU citizen, I will need to complete a VAT return within 20 days of the sale to the purchaser’s country’s tax system or I will receive a hefty penalty.
There is a HMRC scheme called MOSS (Mini One Stop Shop) which is designed to help businesses sort out the VAT requirements in all 28 EU states, but forces them to become VAT registered in the UK. This is regardless of income as the upper limit to require VAT registration will be scrapped.
What is affected?
This applies for pre-recorded digital products such as an e-course delivered via email through an automated system, but not for ‘live’ delivery, such as a webinar, as this involves ‘personal input’.
This applies to e-books, e-courses, pdf products, recorded training videos and resources, music or audio downloads and software, but not for physical goods, emails and online bookings for event tickets.
This applies only for digital products sold as B2C, business to consumer, whereas B2B or business to business is not affected.
What other problems are there?
I’m not going to become VAT registered, since I cannot afford to hire an accountant or incur any other administrative costs. My income is well below the £81,000 level previously required to be registered for VAT.
If I am to be compliant to sell digital products, I will need to have in place provision for EU buyers, or I will have to find a way to avoid selling to them. It will not be easy to filter these people out, neither is it a good idea to be discriminatory against EU citizens.
Also payment systems such as Paypal are unable to provide details of each purchaser, nor the data required for these transactions, such as their location or billing address, IP address or bank details. This has to be submitted with the VAT return and records kept by the purveyor of the digital products for 10 years.
Also because I will need to retain these records, I must be registered with the ICO for data protection reasons. The ICO is at the moment overwhelmed with applications, so goodness knows how they will cope with more coming in from the New Year.
It’s worth realising this is a worldwide phenomenon, as anybody from any country dealing with EU buyers will have this problem.
What I can do about it?
Apart from taking my e-course off my website for the near future, I will need to investigate other marketplace platforms to deliver my e-courses for me. This is because I will be dealing with them as a B2B (business to business) transaction, and the other party will have to deal with the VAT issues.
I could deliver my e-courses as a paid-for live webinar, which doesn’t fall under this jurisdiction, and then offer my training programme as an added free bonus. This isn’t as satisfactory, as I like to deliver my e-courses in small bites over a period of time, not all at once within an hour!
I could adapt my e-courses into an e-book and sell it through platforms such as Amazon or Smashwords, which would be as a B2B arrangement to absorb my VAT issues. But then this wouldn’t be able to include my video training and other resources.
I have already been proactive and signed a petition to get this reversed. I strongly advise you to also do this! HMRC and the Government are woefully ignorant of how many small (and tiny) businesses partake in selling digital products, nor do they understand the processes and that this practice isn’t confined to the ‘big’ companies. Neither can websites, sales pages and social media promotion activities avoid being seen and accessed by EU citizens.
Sorry this isn’t a normal post about digital products
But I do think this is information that should be shared, and with as many people as possible. It is an unacceptable situation that will drive many small businesses to give up. Many of these are solepreneurs who won’t be earning huge amounts of cash, so won’t be viable (like me) to be eligible for VAT registration.
It’s such a shame that financial matters like this are implemented by officials who haven’t bothered to do enough research in the right areas to find out how much impact this will have on small businesses throughout the UK (and abroad). Some bloggers are saying that it is as if the powers that be don’t care about sole traders and one-person-businesses, as if they are ‘below the radar’ and don’t really matter to the British economy.
Well, let’s see what the government thinks when all these business owners who cannot sell their digital products any more apply for income support from the state, or register themselves as unemployed, because they have been driven to give up what they do because of this VAT requirement. That will certainly scupper their statistics!
Let me know your views in the comment box below: