From Passion To Purpose

Updates From Our Meeting With HMRC, HM Treasury and A Minster On 4th December 2014

From Passion To Purpose

A small group of us had a very important meeting on Thursday – and thank you so much to Emma Jones of Enterprise Nation for helping it to happen.

We met with Jim Harra (Director General of HMRC Business Tax), Ian Stewart (Director of Indirect Tax, HMRC), Mike Cunningham (Senior Policy Advisor, VAT & Excise at HM Treasury) and David Gauke MP (Financial Secretary to the Treasury), as well as a member of the #10 Policy Unit, a representative of Vince Cable’s office and many other senior officials.

Your views were heard at the highest level.

Updates From Our Meeting With HMRC, HM Treasury and A Minster On 4th December 2014 – And How You Can Help With The Next Steps

We are still waiting for official minutes from the meeting, but in the meantime, I know that many of you are patiently waiting for an update. So this article includes some of the key points that were discussed. If any of the attendees spot anything that I have mis-remembered, please let me know and I’ll update!

I really want to reassure you that your voices have been heard, and the very senior decision-makers in that room do now understand the magnitude of the challenges we’re all facing. We believe that they are committed to finding practical, workable solutions.

The details on how to join VAT-MOSS without losing your UK VAT threshold will be out next week. From the initial comments it sounds pretty sensible and workable. We have asked them to make sure that the guide is written in terms that lay people can understand – without having to hire an accountant.
The HMRC / Treasury / Minister were genuinely surprised by the depth of feeling about the new EU VAT regulations among the micro business community. We genuinely believe they hadn’t understood how many of us there are and how big the administrative and human cost would be of implementing the legislation. They are committed to taking action and want to make sure that it doesn’t force any of us to close our doors.

But we need to keep campaigning.

In the meantime, PLEASE keep writing to your MP and your MEPs. It’s especially important for anyone in the non-UK EU to write to their MEPs, because we need to raise politicians’ awareness outside of the UK, for them to want to address this problem. The UK can’t change European VAT law on its own. Thank you!

Our Primary Aims

A de minimis level (ideally the £81,000 UK VAT threshold) below which businesses would be exempt from the new EU VAT rules on place of supply for digital services, removing the administrative burden and avoiding tens of thousands of them having to close.

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Micro businesses cannot reasonably obtain and check the 3 pieces of ‘place of supply’ evidence during the purchase process. We therefore ask for an exemption allowing micro businesses to be able to use just the customer’s self-declared address as proof, otherwise we will either have to cease trading or break the law.

Updates From HMRC & HM Treasury

The details on how to submit VAT-MOSS returns without losing your UK VAT exemption (currently £81k) should be out next week (w/c 8th December). Jim Harra (Director General of Business Tax at HMRC) made it really clear that they had had two options – one that was easy for them, but hard for us, and one that was harder for them, but easier for us. And they chose the latter. They really want to remove the headache from this process and we are hopeful that next week’s clarification will be positive news.

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You will be able to reclaim your Input Tax (i.e. the VAT on things you have to buy to run your business) based on the percentage of your sales in the non-UK EU, if you’re registered for VAT-MOSS. In other words, if 30% of your sales go to non-UK EU, then you’ll be able to reclaim 30% of your input tax. Hopefully details on the ‘how to’ will be out next week.

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You no longer have to pre-emptively register for VAT-MOSS in advance of your first post-January-1st non-UK EU sale. You will now be able to register up to the 10th day of the following month. Hopefully this will be confirmed in next week’s HMRC document.

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It was confirmed by HMRC that the intention is to roll these VAT changes out to cover all products (not just digital services) in the future – perhaps as soon as 2016. So if it doesn’t affect your business yet, it will then. The rules and processes that are set now, for digital sales, are those that will apply for all sales in the future. That is why it is ESSENTIAL that we all join in with the campaigning.

Other Points We Raised

It’s not that micro businesses don’t want to comply with the legislation, it’s that we simply can’t, without either using 3rd party platforms (who take a big cut) or upgrading to highly techy shopping cart systems. We cannot reasonably capture the required 3 pieces of data for proof of place of supply – we simply don’t get given it by the micro-business-level payment processors. So we are faced with the choice of either closing our doors or breaking the law, after 1st January.

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Many of the 3rd party platforms, who are legally required to handle the EU VAT accounting on our behalf, have only recently become aware of the changes and will not be ready in time.

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The third party platform option often isn’t as attractive as it sounds. Not only do some of them take between 30% and 70% of the sale as commission, but they will also have to levy UK VAT on the sale, if you sell within the UK, meaning you effectively lose your UK VAT exemption threshold. The new rules, intended to prevent off-shoring of tax by large multinational resellers (no names mentioned!) could actually end up driving more people to only be able to sell via those companies.

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We have been hearing rumours that SOME countries in the EU are allowing businesses below their local VAT threshold to be exempt from the new EU VAT rules. We have asked HMRC and HM Treasury to investigate this as a matter of urgency.

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We cited the “Great Olive Oil Crisis of 2013” as setting a precedent where regulations were revisited when it became clear that they would privilege large companies over small businesses because smallest enterprises simply couldn’t afford to comply.

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Corporate levels of regulation are accidentally being applied to micro biz on the proof of place of supply. HMRC had a genuine belief that the 3 pieces of data were easy for us to collect and that if we couldn’t collect them, third party platforms and payment processors would do it all for us.
After Thursday’s meeting they know totally understand that this is not the case and that’s why we need them to go full-steam-ahead on the ‘self-declared address’ option.
They can see that the level of errors in VAT allocation for member states would be minuscule, compared to the cost of people going out of business because they can’t comply. Hopefully they will successfully lobby and there will be a victory for common sense.

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The cost of implementing this legislation for micro businesses is much higher than just the administrative costs. Rosie Slosek, who runs One Man Band Accounting, explained to the Treasury that many of the people who are running micro businesses are using them to stay off benefits – or to be able to work whilst also having young children – or whilst caring for dependent relatives. The potential social cost if these businesses close is much higher than the potential lost VAT revenue.

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We also talked about the fact that most micro biz use fixed prices at checkout and won’t know how much VAT they should be charging until AFTER the consumer has clicked the ‘buy’ button. So you don’t know if the VAT should be 0% (UK exemption) or 27% (Hungary). You can’t add the VAT on after they have started the purchase process, so you would effectively have to accept a whopping 27% cut on your income from a Hungarian sale.

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We helped the attendees understand that, whilst some micro businesses are brilliant at the techy stuff, most feel proud if they manage to embed a PayPal ‘Buy Now’ button into their website – so just imagine how they will react to being told to handle APIs to gather and decode IP addresses.

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We raised the issue of conforming with Data Protection legislation and asked the HMRC to investigate whether we would need to register with each of the 28 member states, in order to retain the required proof of place of supply for the requisite 10 years.

Things that might surprise you…

The teams at HMRC and the Treasury didn’t realise quite how many micro businesses will be affected by these new rules. Their impact assessment estimated that around 40,000 businesses, UK-wide, would need to register for VAT-MOSS. An independent estimate from E-Nation’s consultant puts this figure at nearer 250,000.

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At the time of the meeting, Andrew Webb (HMRC) confirmed that only about 400 firms have registered for VAT-MOSS so far… With less than 4 weeks to go.

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In the UK, we’re fortunate in having the ‘Mini One-Stop Shop’ (MOSS) to help us with the new regs. Lots of EU countries aren’t as lucky as us and don’t get a MOSS system so will have to register with and pay VAT to each member state individually.

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If one of the other member states ‘catches’ you selling goods to their state without sending over the VAT, for a ‘first time offender’, the correspondence (and penalties) will be handled via HMRC, rather than you having to become fluent in the accounting terms of another language.

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3rd party platforms (i.e. resellers who handle the sale and the e-delivery) will be liable for accounting for the EU VAT on your behalf. BUT many of these companies are tiny – often with only a handful of UK / EU staff – and many of them only found out about the new legislation a couple of weeks ago, with the ‘Twitter storm’. It’s vital that we keep up the pressure for an exemption for micro businesses, because the 3rd parties won’t be able to meet the January 1st deadline.

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Although you might think that there has been no publicity about the EU VAT changes, HMRC has been travelling around the UK doing roadshows and seminars for over 18 months. They have had consultation groups and sent out mailings.
BUT they had so far only targeted companies that were already VAT registered, because they genuinely thought this would include the vast majority of businesses affected by the rules.
They now have a clear understanding of how many of us they missed.

What They Need From Us

We urgently need evidence that other countries are having problems with implementation, too, otherwise it’s 27:1 in the EU meeting room, ganging up on the UK.
Most other member states are reporting no issues with the implementation of the legislation.

HMRC and HM Treasury urgently need information of what other countries are doing to help their smallest businesses on this – and also how widely it is being communicated. It was generally felt that there is an unusually high level of awareness in the UK, in no small part due to the huge efforts of everyone who took part in the social media campaigns and press lobbying in the past two weeks (thank you!)

That’s why we NEED URGENTLY EVERYONE in this group who is non-UK EU to write to your MEPs and your equivalent of HMRC to (1) explain specifically how the legislation is a problem for you and (2) to allow companies under a certain threshold to be exempt from it. PLEASE
We need to provide them with the evidence they need. As soon as we can.

Our Next Steps

We will get a de-brief from Mike Cunningham (Treasury) on his EU fiscal attaches meeting last week, this coming Wednesday (10th December). He was going to raise our two appeal points during the meeting.

We are also actively collecting case studies from across Europe of how the new rules will impact your business. Please let me know via the comments if you’d like to submit a case study.

We are also launching a survey to find out, quantitatively, how the legislation will impact micro businesses. I’ll let you have the link to it as soon as it’s ready (early next week).

For now, PLEASE keep writing to your MP / MEPs / regulatory bodies / government equivalent of HMRC. In a world where we’re hearing that ‘no one is complaining’, we need LOTS of loud voices NOW. Especially given that timing is so tight. Thank you!Thank you so much for your support! Everything you can do to help will make a difference. xx Clare

What You Need To Know, If You’re Relying On Your Payment Processor To Dig You Out Of The VAT-MOSS Mess

From Passion To Purpose

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 (vat2015.contact@hmrc.gsi.gov.uk)
  - and write to or phone Vince Cable (enquiries@bis.gsi.gov.uk).
  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!