While most of us were busy nursing a New Year’s hangover on January 1, 2015, the EU was introducing new VAT legislation, which could have huge consequences for tens of thousands of online businesses.
In a snapshot: this new legislation changes the way VAT is applied to digital products purchased from within the EU.
Prior to the changes, VAT was charged in the seller’s country only — meaning only one set of accounts were needed to keep your VAT tax affairs in order.
However, going forward VAT will be charged in the country in which the digital product is purchased, making the entire process a whole lot more complicated — this is known as the place of supply rule.
This will have a big impact on all websites selling digital goods to a global market — including eBooks, online courses, web hosting, software, photos, and MP3s.
Bad news for small businesses
The changes – well-meaning in nature – were designed to stop huge multi-national corporations from using tax avoidance schemes to save billions of euros in tax payments. I’m talking Google, Amazon, and Twitter, who would funnel their profits to low-VAT EU member states such as Luxembourg to shave millions off their tax bill.
Unfortunately, though, it’s small online businesses who will suffer the most from the changes – largely due to the cost of compliance. This is because minimum thresholds for VAT registration have been removed completely.
To look at how things used to be, in the UK, for example, a business could operate without registering for VAT as long as their annual revenue was below £81,000 (around $125,000). This made a lot of sense, as smaller businesses simply can’t afford exorbitant accountancy fees to comply with VAT laws.
Post-changes, if that same business makes just a single £1 sale, they will need to register and pay VAT on that sale to the UK exchequer. The same applies if they make a further €1 sale in France, and again if they make one in Germany.
When you consider that there are currently 28 EU member states, that’s a lot of paperwork to potentially fill out.
Hurting the good guys
While I understand the desire to stamp out tax avoidance by taxing large corporations fairly, this new legislation does not seem to be the answer.
The aim of the new tax laws is to create a level playing field: by preventing big companies from registering for tax in low-VAT countries, this should, in theory, stop them using their tax-savings to undercut their competition — a fair and competitive market is one of the main goals of the EU.
However, it’s not the multi-nationals who will be hurting from these changes, with their dedicated accounting teams and millions of dollars to cover the cost of compliance.
It’s the smaller businesses that people like you or I setup that take the hit. Can a one-man business really afford the time, money, and effort required to comply with VAT legislation in 28 different countries? Almost certainly not.
If smaller businesses take the decision to trade only in select territories due to the new VAT rules, then the new legislation is having the opposite to the intended effect: it is actively hurting competition, which goes against the EU’s core values.
Mini one-stop shop (MOSS)
To help ease the burden of the new VAT legislation, businesses have the option to register for the Mini One-Stop Shop scheme – MOSS for short.
By signing up for MOSS, you avoid having to register with each individual member state for VAT purposes. Instead, you pay all your VAT via MOSS.
For example, if I registered for MOSS in the UK, I would pay all the VAT I owe to Spain, Germany, Italy, and so forth in one lump sum. The UK government would take their share, and it would then be their responsibility to distribute the rest to the right countries – though I would still need to keep detailed records showing them where to distribute it to.
Of course, the main benefit is that it requires significantly less admin, which smaller businesses will be grateful for.
However, it’s not all good news, as MOSS requires you to keep financial records for longer (10 years), and any VAT overpayments will take longer to reclaim as it has to be done via the EU refund scheme.
It’s a (small) start, but it’s nowhere near enough; as a scheme designed with smaller businesses in mind, it only helps to some extent. The main problem is still collecting and reporting all the sensitive buyer data, something which MOSS doesn’t cover.
How it impacts WordPress users: where is your customer located?
Now you have an understanding of what the changes are, let’s take a more detailed look at how the new VAT legislation impacts WordPress users.
Perhaps the biggest question: how do you know where your online customer is located? Without this, you won’t know which countries you owe VAT to.
Again, this gives a big advantage to big corporations like Amazon — if a customer buys from amazon.co.uk, I can safely assume they’re purchasing from within the UK; if they buy from amazon.de, they’re buying from Germany, and so on.
For small online businesses, it’s not so easy.
Many websites will use a payment processor like PayPal, because it’s the easiest one to integrate. However, all PayPal offers you is a buyer’s email address, from which it is almost impossible to work out location – PayPal is not obliged to give you the information you need to comply, either.
A potential solution is adding an extra location field to the checkout page, but asking a customer to jump through extra hoops is likely to hit conversion rates.
It really is a nightmare, and digital store owners are rightly seething.
However, it’s not all doom and gloom, with the WordPress community pulling together to adapt to the VAT changes.
Because of the significant impact the new law has on online shops selling digital products, it is little surprise that a number of WordPress plugins have been appearing to help you deal with EU VAT — some developers initially created premium plugins, only to give them away for free, which really is great to see.
As the legislation is new, most of these plugins are new to the market, and as such have a limited number of downloads and ratings. However, the best plugin I’ve seen so far is the WooCommerce EU VAT Compliance WordPress plugin, which, as the name suggests, can be integrated with WooCommerce stores to help you sell digital downloads.
The plugin helps you identify your customers’ location by looking at their billing address, shipping address, and IP address. The plugin also records all purchases, which makes reporting much easier – this functionality was added to be used in conjunction with MOSS, and allows you to submit information to authorities stating how much is owed to each country.
And, the plugin will soon be updated to forbid all visitors from the EU from making a purchase – that’s one way to avoid VAT problems!
So there you have it: a bit of insight into the new EU VAT changes, and how they impact WordPress users.
If you run a store selling digital products, dealing with these changes probably isn’t the way you imagined kicking off 2015. The changes are there to correct an issue that needs dealing with — namely, big corporations avoiding VAT tax payments — but the execution seems way off, to the point where it is the smaller businesses that hit the most. In fact, it could be argued that the new legislation actually strengthens the position of those it was intended to stop.
There are many groups applying pressure to the EU rule makers, and with a bit of luck some of the more stringent laws may be relaxed. However, until then, all we can do is make more thorough records of what and where we sell to ensure we comply with the new laws. There are a number of great plugins to help WordPress users with this, and I expect this number to increase in the coming weeks and months.
And, as a word of warning for physical store owners, there are strong rumors that this VAT legislation may be extended to cover physical goods, too, in the not-so-distant future. This could be catastrophic for small eCommerce stores, and online consumers in general.
As always, we will keep you posted if there are any developments.
What are your thoughts on the new EU VAT legislation changes? Let us know in the comments section below!
Shaun Quarton is a freelance blogger from the UK, with a passion for online entrepreneurship, content marketing, and all things WordPress.