As a sole trader there is a new law coming into effect as of the 1st of January 2015, which will mean changes to the way I sell digital products to customers. These include my patterns and forthcoming eBooks.
This will also affect anyone wishing to sell to the EU. So if this is you, then please contact your relevant government department for guidance, as it is likely to be an enforced change... especially given the high profile press coverage of larger companies who have been seen to be avoiding certain taxation laws by operating in countries with little, or no VAT tax. This new law attempts to tackle this.
The changes are given in these guidelines as;
Changes to the VAT place of supply of services
The implications in money, time, logistics and even the discussion of how this will effect micro businesses (like mine) are enormous!
It seems I'm very late to the game on this one... the guidelines were published back in June 2014 and although I am registered as a sole trader, I was not notified by the tax office of these changes. I am making an assumption based on the research I have done so far that suggests that HMRC may have over looked businesses who aren't currently registered for VAT in the UK. If this is you, then take heed as this does effect your business from January 1st.
Currently the UK law states that unless I trade at a level of £81,000 per annum I am exempt from VAT collections and so as I trade at a rate lower than this (much lower) I am not registered.
However, this new law drops that threshold to £0 (not just in the UK, but the EU and rest of the world too) when selling to the EU and so I am very much implicated in the changes. Although it has to be said that there is some confusion between HMRC staff, the text and research I have read so far... in that I may not be required to pay VAT on any UK-UK sales, unless I hit the £81,000 mark. In the interests of trying to do the best thing I am making the assumption that I am VAT responsible in UK-UK sales too at a £0 threshold. This is an assumption I am making for my business... I ask you to compile your own research and make your own business determinations.
Now there is a whole heap of information out there on this subject and the government's literature is as you would expect somewhat long-winded and confusing... so it's pretty scary to just be finding out about this now!*
Before I go any further, I have to state clearly that I am no tax expert (you should be in contact with your relevant Government department for the exact details)... but I am going to try to summarise the options for a business in my position in a very succinct way, as I understand it. Feel free to comment below if you understand differently.
I also want to state that this is not a political blog post, so please let's keep it professional. I fully abide by the law of the country in which I reside and wish to see this particular change through... my personal political opinions need to stand apart. The following conversation is a discussion on my options and how I am looking at proceeding with these changes.
It seems I have several options for dealing with this new law and becoming compliant;
- I can registrar for VAT in the UK and every quarter file VAT returns for my entire business.
- This would mean raising all of my product prices, not just digital products and finding a website solution that could handle the back-end checkout to charge VAT where relevant. As not all countries apply in this ruling and those that do may have different rates of taxation this is quiet a task currently in the eCommerce world, particularly on a budget. You can see why this is making my head hurt at the thought! It would be impossible to implement in the time frame.
- Business to business transactions seem to be exempt currently, so while that's good news, it does make accounting all the more difficult... not that I have many business to business sales, but there are some to consider.
- I would also need to hire an accountant, as I do not have the knowledge or time to file quarterly returns in a much more in depth taxation system. I could use the VAT Moss system, which is aimed at making filing easier by condensing the filing in one place rather than a need to register with each country. However, again time is everything here. I work 5-7 days a week (and most evenings) to try to make ends meet as it is... this change may mean the end of pattern and ebook sales for me and could affect my production rate for other product (which is the bulk of my sales).
- There are also data collecting/storing issues for proof of sale requirements... how does my website handle this? Can payment systems help? There will need to be some web-wide changes to how on-line payments are made going forward... please note this does not affect on-line payment security!
- VAT and accountant charges implies an increase in my prices.
- I can relinquish my sole-trader status and register as two separate businesses; one to handle my unaffected 'tangible' sales and one to handle all of my digital VAT-able sales.
- I have no idea how this would be possible and it certainly leads to a complicated accounting system I'm not sure I have time for, with one pair of hands.
- It also has cost implications as I'm assuming the two businesses couldn't trade from one website in the interests of clarity... or could they?
- VAT and running costs implies an increase in my pattern prices.
- The other question is... how long before 'tangibles' are implicated? Would splitting a company really be beneficial long term?
- I can stop trading these products directly through my own website and use a 3rd party selling site... before I found out about this I had just decided to make that change and switch all of my patterns to Ravelry. I did this so that updating any possible errata and other pattern changes could be sent out to all purchasers from one system, making my life much easier. However, Ravelry are not a true 3rd Party selling site, they only act as a 'forum' for me to sell direct to customers, not a marketplace/platform where I gain royalities from sales... so I still have to be VAT compliant in my own right.
- I need to find a 3rd party site that sees their position as VAT responsible. In doing so they collect, report and pay all VAT requirements on my behalf and I collect in royalty the resulting funds after reductions.
- This implies 3rd party VAT and commission costs will be an increase in my pattern prices.
- Would selling through a 3rd party be the best option for me? I am not a knitwear designer and therefore supplying knitwear patterns/ebooks is not my only income generator. Instead I use these tools as a way to advertise and sell my 'tangible' products at www.sarastexturecrafts.com . Selling through a 3rd party may hinder that... and could harm it if they sell similar replaceable suggested yarns and fibres.
- On top of all of this I can't help but think that the big companies (that this law was originally aimed at) have a Big opportunity to get Bigger. I don't think I need to name names here, we have all seen the press. Do I want to aid that growth, which will ultimately affect me? Or could it be an opportunity for getting my name out there??
- I can stop trading these products digitally and make them hard copy only.
- Will customers want to pay for shipping?
- VAT and production costs implies an increase in my pattern prices.
- I come back to the 'tangibles' issue. Going forward is this change really worth it long term?
- There is an option for non-EU states to stop selling to the EU.
- Will this effect your sales?
- I could stop selling to the EU.
- This will affect my sales... and as I'm not 100% convinced that UK-UK sales under £81,000 are excluded I am choosing to believe that this is not an option.
Ysolda Teague (who's blog I follow and so should you) posted this chart by Andrew Webb, Senior VAT Policy Manager at HMRC... from what I understand it seems to make my decisions a bit easier... I really need to find this 3rd party platform that will help me to comply with the law and not affect my ability to sell my yarns and fibres. Or I need to stop selling digitally for the time being... which I'd rather not be an option.
I have been looking into this as best I can and am hoping to have more information soon on how this change will change my digital products.
*I first came across this subject thanks to Woolly Wormhead's post New EU VAT Law an Important Notice and then again in Ysolda's They didn't know - the impact of #VATMOSS on really small businesses... please go and read these blogs and thank the authors in their comments section. This is a complicated subject and they made it much, much easier for me to digest! They also have some great references too, like how small companies and freelancers can deal with the vatmoss eu vat changes.
Have a wonderful day everyone... Sara x
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