In the olden days, VAT law may have been complex, but one of the simple fundamentals was that the ‘place of supply’ for a digital product was considered to be the address of the supplier. In other words, if you signed up for one of my online courses, it was counted as having been sold in the UK, where I’m based, even if you were a German sitting on a mountain using your French mobile in the Italian Alps. The ‘place of supply’ bit was easy. It was my business address.
However, that meant that some clever bods in big businesses were able to use this to their advantage, to reduce their VAT bill. That’s why so many of the multi-national online businesses have been relocating to places like Luxembourg, where the VAT rates are currently lower than, say, the UK or France. They saved. You, as a customer, saved. But the tax man in your country was missing out.
So back in 2008, the EU decided to put a stop to this. And you can understand why.
Under the new EU-wide VAT legislation that comes into force on 1st January 2015, if you sell a ‘digitally-delivered product’ to a consumer, then the ‘place of supply’ is no longer wherever the business is based.
It is now wherever the customer is when they download the product.
And this includes everything from online courses to MP3 meditations to e-books to mobile phone apps to knitting and craft patterns.
Sounds simple enough, doesn’t it?
It means that if you’re in France and you buy an e-book, I pay French VAT to the French tax authorities. Of course, that could get rather messy once you factor in all of the EU member states, so the law kindly offers an easier alternative – a ‘Mini One Stop Shop’ (‘MOSS’) for VAT (hence the term ‘VAT-MOSS’). This means I collect the required information during the purchase process, fill in the online forms each quarter and my UK government sends the VAT to the individual countries on my behalf.
It’s really kind of them, isn’t it?
But there’s a problem. How on earth do I know where you are when you buy my course?
Now, if I were one of those multi-national online businesses with a gazillion super-clever techy geeks, figuring out where the customer is when they download is easy peasy lemon squeezy. Those firms have full access to all of the purchase information – including IP address (the location of the computer), banking details and more – pretty much everything apart from the colour of your PJs and your inside leg measurement.
For the multi-nationals, this new legislation is a tax headache, rather than a tech headache.
But just imagine the scenario: instead of having behind you the might of an IT army so large it would make Alexander the Great feel inadequate, you’re a sole trader or micro business, relying on third party payment processors like PayPal or Worldpay to act as the link between you, the customer and your product.
Things don’t look quite so pretty.
Whether you’re Amazon selling millions of Kindle books or Aunty Jen’s Yurt Yoga selling a handful of ‘how to de-stress with Jen’ online videos , the new VAT legislation requires you to prove where your customer was at the time of purchase.
And, unless you’re selling via a third party reseller, the onus is on YOU, as the micro business owner, to PROVE the place of supply.
And you have to do this by providing two non-contradictory pieces of evidence.
HMRC in the UK (effectively the UK government’s tax team) tells us that we need to know the following:
- If the purchase was made through a telephone box, a telephone kiosk, a wi-fi hot spot, an internet café, a restaurant or a hotel lobby, then consumer location will be the place where the services are provided – for example, the member state where the phone box/kiosk etc is located
- If they purchased my online course or your craft pattern or Aunty Jo’s yoga video on board transport travelling between different countries in the EU (for example, by boat or train), the consumer location will be the place of departure for the consumer’s journey
- If they bought through an individual consumer’s telephone landline, the consumer location will be the place where the landline is located
- If they purchased through a mobile phone, the consumer location will be the country code of the SIM card
- If it was through a decoder (what’s one of those, when it’s at home, wherever that might be in the world?), the consumer location will be the postal address where the decoder is sent or installed
I can already hear the wave of WTFs (please excuse my language – the situation calls for it) echoing around the internet at this.
But you’ll be really relieved to know that, if you buy one of my courses or download one of my e-books or MP3s, I DON’T actually know whether or not you were at home, at work, skiving down at your favourite wi-fi cafe or if someone was sneaking off for a romantic weekend away with their beloved on the Eurostar to Paris. And that’s a good thing.
Unless we’re talking about the new EU VAT laws.
In order to be allowed to sell my ‘digitally-delivered’ products (i.e. downloaded, not live or face-to-face), I HAVE TO collect this information.
To comply with the new laws, I have to collect two (or three, if they don’t match) of the following types of evidence – and I have to check DURING the purchase process that they give the same country:
- Your billing address
Ok, so you might give it to me, but plenty won’t, and that costs me sales, ‘cos I sound like a scary bunny-boiler if I ask for your physical-world address for an online e-book.
- Your IP address
This is the geographic location of your computer. I CAN get it by manually trawling my website’s visitor logs, but believe me, I’d rather be creating radical life-changing stuff for you than losing the will to live, wallowing in my website’s databases.
- The location of your bank
Woah! So if I ask you for that, then I reckon I’ll be left with about 1% of my customers. Creepy stalker-lady-credit-card-stealer-alert.
- The country code of the SIM card you used, if you completed the transaction on your mobile (which 60% of my visitors do)
Again, I’m in bunny-boiler territory here. And frankly I’d rather spend the evening with my kids than surf Google to check out where your mobile phone number is from. Sorry!
And in case it wasn’t exciting enough, if you buy my online course using your French credit card whilst you’re on secondment for work in Hungary, then I have to collect a third piece of data to tip the balance and prove the ‘place of supply’. So my systems need to be able to collect at least 3 of the above pieces of information, just in case…
And I have to create a system that will collect and check all of this information faster than my chickens chase a slug, while your transaction is processing. If the data gives a ‘computer says no’ message, I’m supposed to turn you away.
And if I don’t collect the information – even if you’re based in the UK, like me – I’m breaching the laws because I can’t prove I don’t owe VAT to France or Slovenia.
Are you still feeling like doing business with me? Or have you run a mile yet?!
Now, following a ‘Twitter clinic‘ run by HMRC today, it seems that they are expecting the payment processors to do all of this for us.
(You’ll have seen these guys – they’re the PayPals and Worldpays and Sagepays and the likes used by smaller businesses to process credit card transactions.)
And, indeed, based on the thousands of comments I have been reading on Twitter and in the various Facebook groups over the past two weeks since awareness of this kicked off, most micro businesses are expecting that, too.
I should be breathing a huge sigh of relief…
But here’s the clanger…
I have been in discussions with by far the biggest provider of merchant services for micro businesses, PayPal, over the past week, and they can’t help us.
After dedicated to-ing and fro-ing, here’s what their legal teams allowed them to tell me:
Here’s What PayPal Said:
For small merchants, we can currently provide the following data that is on file with us:
1. The Country Code of the Buyer. This would be the country that the PayPal Account of the buyer is registered in.
2. The phone number of the buyer as it is registered within Paypal
These are the pieces of information we can provide, given the proper account settings and usage of Express Checkout.
This is confirmed both in their email to me and on today’s press release.
Here’s Why PayPal’s Solution Is A VAT-MOSS Waste Of Time
As I explained above, the information that I (and hundreds of thousands of other businesses – huge and teensy) am required to supply under the new EU VAT regulations is where the customer is at the time they purchase – NOT at the time when they created their PayPal account.
So knowing their registered address and phone number from their PayPal account is completely irrelevant, when it comes to complying with the EU VAT laws, as they currently stand.
It misses out everyone who purchases online at work, on a cafe’s wi-fi, via their mobile phone, whilst travelling, whilst at their friend’s house, whilst away on business – all of these cases are missed by relying on the address that was used when the customer first registered with PayPal – and that’s assuming they haven’t moved lately.
By law, we require their CURRENT address and their IP address (or SIM country code in the event of a purchase using their mobile).
And remember: the selling company is liable if this information isn’t collected correctly – NOT the payment processor. So that’s me, not PayPal.
PayPal’s email to me also shared another gem:
“The last piece of information you’d need is the IP address of the customer – this piece should collected by the webserver.”
In other words, PayPal is telling me that I have to manually find your IP address and check it is the same country as your registered address, before I sell to you – but that’s not going to happen if you’re buying at a time when I’m not sitting at my computer. Actually, it’s just not going to happen, any time. And that leaves me in breach of the laws.
PayPal is effectively washing its hands of the EU VAT-MOSS regulations.
They are happy to provide sellers with potentially inaccurate proof of location information and are telling us to manually trudge through our websites’ visitor databases to see if this matches with the customer’s registered address from the purchase.
This is not something I can do in real time. Yet the laws require me to do it DURING the purchase process.
So any business using PayPal is highly likely to end up breaching the VAT-MOSS laws.
And – broken record alert – the SELLER is liable, not PayPal.
Now don’t get me wrong. I’m not on a PayPal-bashing-mission, though their response to these legal requirements is woeful.
This problem goes further than PayPal. We’re still waiting to hear back from the other key players in the market as to whether they can help us to meet our VAT-MOSS obligations. What is scary is that these regulations have been in the pipeline since 2008 and no one has been checking that micro businesses can actually comply with them.
And it gets worse…
You also need to keep the data for 10 years, on an EU-based server.
The server bit leaves me stuffed – my eco solar hosting in California would immediately put me in breach of the VAT-MOSS regulations.
Then there comes the scary bit about having to abide by the equivalent of the data protection rules for each and every EU member state – as well as registering with each individual data protection commission, paying their feeds, and either becoming a world-renowned polyglot or paying translators to make sure you’re not breaking the law.
And this comes at a time when, as Sergio Maldonado, an international privacy compliance consultant, tells us, the EU Data Protection agencies have been telling businesses to stop collecting IP address information.
PayPal and their friends could handle all of this for us, if they processed the data, as HMRC is expecting. But they won’t.
Basically it’s impossible for small businesses to comply with VAT-MOSS law without paying for third party software solutions or selling through resellers and losing a huge cut of their sales.
What can you do?
We either need our payment processors to enable us to comply or we need an exemption (e.g. for businesses below the UK VAT threshold) from these onerous requirements.
- Get informed: Write to your payment processor and insist on them telling you EXACTLY how they will ensure you can comply with VAT-MOSS – you can use my checklists (above) as a crib sheet. Make sure you ask them whether THEY will do the VAT charging and distribution at the correct legal rates or whether you have to take the hit by selling at your usual price and paying the VAT via VAT-MOSS out of your margin.
- Lobby for an exemption: The evidence for ‘place of supply’ was designed as corporate legislation and I’m sure it was never intended to target micro-businesses – who have no sensible means of accessing that data.
You can lobby for an exemption for small businesses (e.g. under the UK VAT registration threshold), so that just the customer’s address (something we can reasonably obtain) is required as proof of place of supply. If you’re in the UK, you could:
- write to your MP
- write to HMRC (email@example.com)
- and write to or phone Vince Cable (firstname.lastname@example.org).
Vince runs the government’s Department For Business And Innovation and he is one of the few people in the country who could persuade HMRC to listen and potentially grant this exemption. At the moment, we have heard rumours that the person in Vince’s team who is handling VAT-MOSS is blissfully unaware of the tens of thousands of tweets or the numerous Facebook groups that have sprung up to raise awareness and get urgently-needed. Frankly, we need to make our voices heard.
- Spread the word
The vast majority of micro businesses don’t even know about this legislation yet. Please spread the word by signing and sharing the petition, joining in with our Twitter #VATMOSS discussions and telling your friends on Facebook.
We’d love to hear from you!
How is VAT-MOSS going to impact your business?
Which questions do you have?
What actions are you taking?
And if you get answers from other payment processors to the questions we’re asking, PLEASE let me know, so I can keep this article updated. Thanks!
Please share via the comments!
Above all, please let’s stay positive. Although we can’t change the structure of the legislation at this stage, we ARE seeing amazing things starting to happen, as a result of the past two weeks’ campaigning. And more will come. Thank you for whatever part you chose to play in finding a solution for this huge VATMESS.
With love, Namaste,
Disclaimer: I am not a Chartered Accountant and this article is not intended to give financial advice. It is about raising awareness of a hugely important issue. It is ESSENTIAL that you get professional advice if you are making any decisions about how to comply with VAT-MOSS in your business. Thank you!