This isn't directly about knitting, and it's very long, but it is an issue that I think is important and that could affect the knitting pattern industry along with many other vital creative industries. I've tried to highlight the most important points so hopefully you can find what is relevant to you whether or not you're approaching this as a knitting or crochet pattern designer (if you are and sell only via Ravelry, just go here for a great update).
I first learned about an important change to tax legislation a few weeks ago via a knitting forum. More accurately I learned that it would affect even the smallest businesses, rather than just the large multinationals that are the true target. For years many large businesses selling digital products (classed as 'digital services' even if when you buy an ebook you feel like you're buying a product) have benefitted from low VAT rates in certain EU countries. Currently, if you buy something from another EU country you pay the VAT rate of the supplier's country. This means, effectively, that those businesses can elect to be based in a country that offers them a very low VAT rate and can undercut smaller businesses located in countries, like the UK, that have a higher rate. Luxembourg gets the tax revenue, and incentivises large employers to base themselves there. Smaller companies can't compete on pricing because of the amount of VAT they have to include in addition to all of the economies of scale — not to mention other types of tax avoidance. Changing that situation so that if you buy an ebook, the amount of VAT will be at your local rate regardless of the seller's location sounds like a great solution!
The UK has a high threshold (currently £81, 000) for VAT taxable turnover (gross total of UK sales that aren't exempt). This only applies to businesses located in the UK. These domestic thresholds vary wildly amongst EU countries, but the important point is that because some countries don't have thresholds it was decided that the fairest option would be a zero threshold for registering and collecting VAT on inter-EU supplies of digital services. This means that anyone selling even a £1 digital service, once, into a particular EU country is required to collect VAT on that sale. That can either be done by registering with the particular country in question (this is not being seen as a viable option for many people although might work out well if you have a large number of sales to just a few countries), or by using the Mini One Stop Shop online service that each country has set up to make reporting as simple as possible.
There have been several great posts and articles written about the potential implications of these changes for micro businesses and I would advise reading these if you haven't already:
Until very recently, UK businesses small enough to not currently be VAT registered don't seem to have really been considered much in the documentation provided by HMRC. People who have contacted them to ask for more information and answers to several important questions have been receiving assurances that the numbers of such businesses affected would be very small. In many cases, reported on social media, they've been given contradictory information. Frustrated by the way these changes have been communicated to such businesses people began to gather on Facebook and Twitter, and put out a call to "storm" twitter yesterday in an attempt to get the hashtag #vatmoss trending and, perhaps, show HMRC that they had vastly underestimated the number of such affected businesses. I thought this was a good idea, and had plenty of concerns, but I didn't really think that it could possibly be true that they didn't know.
Today I found out that that action on social media was way more important than I'd suspected. They didn't know.
Via Ravelry, I learned about a local body called "Interactive Scotland" was hosting a seminar about what they were calling the "App tax". I was a bit unsure about whether I counted as an interactive business but it seemed like a good opportunity to get some more information. As it turned out, there were more knitwear designers than app developers present; the number of attendees was very small; and one of the speakers was Andrew Webb, Senior VAT Policy Manager at HMRC who was instrumental in brining these changes in.
I honestly admire the cause of preventing companies like Amazon from avoiding paying VAT to the UK (and other EU countries), and Andrew Webb was clearly passionate about this and has been fighting for these changes for several years. He seemed genuinely interested in finding the best ways to communicate these changes with all affected businesses, but also surprised by the sudden appearance of a sector they didn't think would be affected who are, understandably, concerned about the consequences on their businesses.
Will businesses below the current UK threshold that directly supply digital services to consumers in EU countries have to pay VAT on their UK supplies in order to use MOSS?
Yesterday this flow chart and list of bullet points written by Andrew Webb was published. It seemed to contradict earlier information and existing laws regarding tax evasion (such as splitting a business into two companies in order to avoid VAT registering).
The biggest problem for very small UK businesses is that, in order to use the new MOSS system, they would need to VAT register in the UK (you need a registration number to sign up). This is especially problematic for people whose income mostly comes from non-digital and / or non-cross-border-EU sales. For example a professional who puts an ebook up for sale on their own website to supplement or market their freelance work would have to VAT register and charge VAT on their UK business-to-customer work. They'd have obvious problems competing with someone in the same situation who hadn't published an ebook.
Either the situation for businesses who are below the UK VAT threshold has recently changed or it was communicated so poorly that nobody understood it. This was illustrated during the seminar when Iain Masterton, Senior VAT Manager at Chiene & Tait (who gave a helpful and very clear presentation on the practical processes businesses would follow to deal with the changes) explained why these businesses would have to register and Andrew Webb interrupted him to say:
"Sorry, it's such an important point, I just need to make this potential point clear. If you are not VAT registered you… and you can distinguish between cross-border and domestic supplies you can voluntarily register in respect of your outward facing business… HMRC is willing to allow a business to voluntarily register so that it can then use MOSS simply to account for its cross-border activity without paying VAT on its domestic supplies… My colleagues issued a diagram and that is very clearly indicated".
The diagram referred to is the flowchart above.
In response to further questioning about how this would work:
"What you would do in fact is register for UK VAT but you would only ever submit nil returns because you are not making vattable supplies in the UK."
Asked if the same evidence as applies to determine the location of the customer would be enough to distinguish UK vs cross-border sales, he replied: "yes."
You definitely do not need to pay VAT on your UK sales (below the existing threshold) in order to use MOSS. You do need to voluntarily register for VAT and complete nil returns each quarter. This is an enormously significant change (or change in interpretation).
It is not yet clear how much will be required to differentiate your UK versus EU (outward facing) business, but it was clearly stated that you would not need to set up a separate company for either and can continue as a sole trader.
I don’t know if it has always been the poorly communicated intention that businesses below the UK VAT threshold would be able to use MOSS in this way (registering but not collecting UK VAT) or if this is a last ditch attempt at coming up with a reasonable solution within the existing legislative framework.
I do know that the UK representatives involved in bringing in these changes lobbied for a minimum threshold, because there is little practical reason to deal with the admin of collecting negligible revenues, but were unable to reach any such agreements which would have required unanimous consensus from all 28 member states.
This only applies to business to consumer supplies of digital services (which are very broadly defined) made to customers in EU countries from suppliers outwith the customer's country
It does apply to businesses who are selling into the EU from outside, but this has been the case since 2003, and enforcement is likely to remain an issue. I don't know what you should do if you're in that situation.
Webb indicated that the initial desire was so to create a one stop shop so that businesses could deal with all of their EU VAT through their domestic tax agency. However, "Several member states didn't think that would be sustainable, kept saying there was a fraud risk…" He indicated that the hope was to gradually build up to that goal, after the launch of this limited "Mini One Stop Shop" beginning with business to customer supplies of physical goods, but was unable to offer a timeline for that.
Do manually emailed files count?
The flowchart above states that: "Merely communicating by email and sending attachments does not constitute Digital Services." This was interpreted by many people, including myself, to mean that if someone purchased a file and you emailed it to them manually rather than automating a download that you could avoid this issue. Webb very clearly clarified that this is not the case, any file sent via the internet that a customer has paid for constitutes a digital service including files that are manually emailed.
The intention was to prevent businesses who sell physical goods, take hotel bookings online, etc from thinking that this would apply to them if they provided email via customer service. I'm not sure that anyone thought that was the case, but apparently HMRC has been contacted by concerned businesses in that position.
Attempting to share information in a simple, clear format like this is admirable, but I'm not sure it's appropriate here. There's a clear problem with oversimplifying leading to less clarity and a couple of times during the presentation flowcharts were brought up that the audience members required clarification on. If these are being shared online by HMRC without such clarification there have and will continue to be problems.
Asked "If I take a step back, put my pdf files onto a cd rom and post it to a customer in the EU is that then physical goods?" Webb nodded, general laughter. This might be an option for people who sell small numbers of very desirable products but for most is a weird step back in technology that will be off-putting to customers.
Evidence of customer location
In most cases businesses will be required to use 2 non-contradictory pieces of evidence to determine where the customer is located, and keep a record of that for ten years. Webb suggested that HMRC was unhappy with the length of that period and hoped to revisit it. He emphasised that the UK had fought against requiring more than 2 pieces of evidence and expected that all businesses would have these already — this doesn't seem to be the case. Sellers using Paypal can require a mailing address and should also be able to collect IP addresses, however if these contradict (a common enough situation) it doesn't look like Paypal will supply additional information due to privacy concerns. It was suggested that the easiest 3rd piece to obtain would be a phone number but for many businesses that might involve manual interaction with a customer who may not be happy about being asked for more personal information than they think is necessary.
Keeping records for ten years
Webb seemed to be surprised by the question of whether storage of these records would raise issues under the EU's strict data protection laws. From my, very limited, research it looks like the best option would be to store only the address and IP address without other identifying information (like the customer's name). From a practical point of view that would require, for most business, actively stripping that information from their records and many won't know what their responsibilities are — I know I need to look into this for my own business. Secure storage of this extensive amount of data is clearly a concern. It's worrying if this interaction of record requirements and data protection laws hasn't been considered.
A practical point about using MOSS.
It's required that when submitting a return you'll need to keep track of all applicable VAT rates and any changes to them. Wouldn't it be simple, and very helpful, to build these into the MOSS system so that businesses would just report their sales totals by country and whether those items were subject to the regular or reduced rates?
Are all pdfs (and similar documents) ebooks?
The question was raised of whether, in countries that have a reduced rate for ebooks, this rate would apply to all pdf documents regardless of size or content. We were assured that this would be looked into so I'm hoping to find a clear answer on that.
The question of who the supplier is
When HMRC / the EU conducted research into the digital services sector they looked at ebook publishers and app / game developers (I guess that's what springs to mind if you ask a random person about things that are digitally delivered, but I'm astounded nobody thought there might be more). They found that almost all of the businesses creating such content were selling through a third party which sells a writer/developer’s product under licence direct to the customer then pays the writer/developer a royalty each month. The platform has the business-to-customer relationship and so is liable for the VAT, and the small sole trader wouldn't have to do anything.
The legislation is written in a way that attempts to catch all such platforms or marketplaces regardless of whether they work like iTunes (customer clearly buys from iTunes, creator gets a monthly royalty payment, minus a 30% cut) or like Ravelry (platform connects customer and creator directly, creator gets the money and pays a fee to the platform for the service.)
Small platforms which facilitate direct creator to consumer purchases
Webb stated repeatedly that "the reality is that the platforms are caught" and that: "There's a presumption because the platforms are agents acting in their own name, it would be very difficult for a platform to say "nothing to do with me" even if they aren't handling payments. The majority of the time the consumer assumes they're buying from the platform."
He seemed genuinely surprised that in the craft sector (and possibly others?) customers do assume that they are buying direct from the creator and conceded that there will be cases where the platform is not responsible. This is not as clear-cut as it ought to be, and they don't seem to have considered that some such platforms are run by businesses that are themselves very small.
Webb was clear that there was a problem with the fact that "lots of people are seeing themselves in a bit of a limbo and we don't think that's good. We want that clarified as soon as possible…". In relation to platforms he said that as a tax body they're not in a position to tell platforms what to do but "we can support and help them so they in turn can support their users."
An important point that was made for those of you who are selling on a marketplace / platform that has stated that they will not be dealing with EU VAT: if the platform tells you that they are not liable then you should leave that question to the EU and assume that handling VAT is your responsibility.
If you do sell patterns via Ravelry, then I have some good news — they have partnered with LoveKnitting to deal with VAT collection for a very reasonable fee. This is a great option for EU knitting and crochet pattern designers and, for the vast majority, should be a better option than finding a reseller who takes a larger cut, or VAT registering. More info here — http://www.ravelry.com/discuss/ravelry-shopkeepers/3078160/1-25#3
Etsy have not yet announced what they will be doing but have communicated that they're working on it. I'm as curious as everyone else.
I believe Craftsy already collects VAT on the classes etc which they sell but have stated that they are unable to do so for pattern sales where they are not involved in the transaction. I couldn't find a link to this but if anyone has one I'll add it.
It's pretty well known that most muscians don't make much from iTunes, Spotify etc. Bandcamp allows them to sell directly to consumers and their terms currently state that all taxes including VAT are the seller's responsibility. I can't find any statement about these statements.
Very small niche platforms / marketplaces
I've heard from a few such businesses, but I do think it would be interesting to see how many of these there are. We often have no idea about the existence of such businesses outside of our own niches and I'm curious about the impact, if any, of this on UK based platforms who are themselves well below the VAT threshold.
Creators who have the option of stopping direct sales and only selling via a VAT handling third party
One of the many laugh / cry aspects of this whole thing is that for creators of certain types of digital products such as apps and ebooks their best option might be to limit sales to the exact companies who are the real target of this legislation. Ie. if you're an author who sells ebooks directly, you might decide that it's easier to sell only via Amazon. So they have to collect more VAT, but they'll probably increase their already dominant market share. Yay?
Costs of compliance
The government's impact study assessed the potential costs of dealing with these changes: "For up to 29,000 businesses the ongoing costs are expected to be approximately £40 per business per year, and for 5,000 businesses the ongoing costs are expected to be £220 per business per year. The one-off costs to these businesses are likely to be negligible, but there are likely to be significant ongoing costs."
What doesn’t seem to have been considered is that many individuals are looking at a jump from receiving the price they set minus a payment processing fee to subtracting both VAT and, potentially, a fee to a third party (which might result in the third party taking between up to 50% and delays in payment which could cause cashflow issues). Although it can be argued that they can increase their prices to include the VAT and any fees, in practice we know how important competitive pricing is. The goal of these changes might be to create a level playing field for all digitally supplied services but it doesn't currently look like that will be enforced in a way that balances out the impact of either increasing prices or accepting a cut in profits.
This legislation has been brewing for a long time, and Andrew Webb and other experts from HMRC have been travelling to events to communicate the changes for at least the last 18 months. However, they've only been targeting businesses who are already VAT registered, because they thought that that's who would be affected. It's extremely clear that they failed to adequately research the impact on very small businesses and therefore didn't see the need to try and communicate with them directly, or properly advise the staff who would be the first point of contact for concerned businesses.
HMRC really do seem to want to make things as simple as possible for affected businesses, and if they can find a way to easily allow people who sell directly to other EU countries to use MOSS without their UK business being affected that will make an enormous difference. I'm assured that there will be further clarification coming on this.
Although it's astounding to think that so many people weren't considered, it's also a clear indication that we need better statistics on the thousands of sole traders with a turnover below the VAT threshold. More than anything, they weren't considered because they were "flying under the radar". Currently the EU definition for a micro business is one with fewer than 10 employees and a turnover of less than 2 million euros. I'm fairly sure that everyone concerned about the impact of MOSS on their own small business has a business dramatically smaller than those limits.
Is there a disproportionate impact on women?
The government's impact study published last December states that "The Government has no information about the protected equality groups of any individuals who may be affected but no specific impacts have been identified for any protected equalities group."
That includes whether there would be a specific impact on women.
Many such businesses are run as side projects or as a source of flexible part time work that fits around caring for children or others. They don't necessarily have a reason to join organisations like the Federation of Small Businesses, and might not be aware of (or think they're relevant) to business support organisations, such as Interactive Scotland. Nor are the majority of them likely to be working with an accountant.
According to the Office of National Statistics, women account for less than a third of self-employed people in the UK. However between 2008 and 20011 they accounted for 80% of the newly self-employed. Those women will be doing all kinds of things, and their turnover will vary greatly, but I suspect that a significant number are working from home on something that they are only able to do because of the internet.
Large numbers of the affected small businesses who have become involved in social media conversations about these VAT changes are, indeed, solely operated by women, many of whom are selling digital services that weren't thought of by those working on this legislation and who aren't looking to grow their businesses beyond a certain level. I asked Andrew Webb if it was researched whether these changes would have a disproportionate effect on women and was told, not surprisingly, that that was not considered. I don't think it's likely that you could successfully argue that the legislation unfairly affects women, but the way changes have been communicated might.
Twitter and finding further information
Tomorrow there is a twitter clinic scheduled by HMRC between 3:30 and 5pm. Direct your questions to @HMRCcustomers
I suggested that it would be a good idea to host such clinics that are not at the exact hours that two significantly affected groups can't make — people who have to pick up children from school (the majority of whom are clearly women) and people who are self employed as a side project in addition to a full time job. I'm assured that these concerns will be passed on.
As I tweeted earlier today Webb apologised for the poor quality of their research and communications, and assured that more clarification will be issued. He also specifically requested that those of us at this seminar communicated what we'd learned to our own communities. I hope I've been somewhat helpful in doing that, although I think it's clear that further clarification is required in writing from HMRC.
In relation to tomorrow's scheduled twitter event he expressed the hope that people would research the issues; understand that the actual legislation cannot be changed (although they recognise that the implementation of it may require adjustments since no one has put this into practice yet); and that people try to only ask questions about things that need further clarification. I think that's fair. It's ridiculous and absurd that nobody thought about so many small businesses (which might result in negligible tax revenue but are an important part of the economy in other ways and mean people can do useful things like eat). I'm angry about how this was handled and that it wasn't possible to prevent a negative impact on small businesses, but they're paying attention now and I appreciate that they're trying to help.
I am not a VAT expert, accountant or in any way authorised to give you legal advice, and none of this should be considered as such. Direct quotes included in this post, unless otherwise stated, are taken from my notes at the seminar I attended today. I hope that they'll be confirmed in writing with clear updates to the guidance issued by HMRC as promised.