Warning: I am not an accountant or a lawyer. This is my interpretation of the EU law change and is not official financial or legal advice.
Well happy new year everyone! For many businesses, 2015 started off with a bombshell EU VAT law change which seems small businesses selling any digital goods/services suddenly left at loggerheads. In this blog post I will go into the new EU VAT system which came into place on January 1st 2015, how it affects your online store and what you need to do to protect your business.
The EU VAT law change 2015 change explained
The new EU VAT system turns itself on it’s head: where you previously paid VAT for the country in which you had registered your business; you now need to charge VAT based on where your customers are located.
The law change was only announced a few months before it’s implementation which hasn’t given a lot of people a huge amount of time to prepare for it, along with the hazy guidelines most online sellers are very confused about what needs to happen.
The bottom line though is wherever your online business is registered, even outside of the EU, you now need to add tax rules to your eCommerce store or software which adds VAT if whoever your selling to is a member of one of the 28 EU states. For example: if you run a business based in the UK and a customer from Italy makes a purchase from you, you now need to charge that customer 22% (currently) VAT rather than 20%. If your business is registered outside of the EU, you still have to charge the VAT.
Click to see the full list of EU VAT rates for each country
Still with me? OK, here is the really horrific part. If you think that you can escape all this then you are mistaken. The UK has a high VAT threshold meaning that you can be earning up to £81,000 a year before you are legally obliged to register for VAT. However, some of the countries which you might be selling into have a much lower VAT threshold so you would be legally required to register for VAT there.
For example, say you are a UK business. You turn over £30,000 profit a year so you are not required to pay VAT. With this new law, if you make a single sale to a customer based in Malta, you would need to register for VAT in that country as well as charge that Malta customer the country’s VAT rate, currently 22%. This is because Malta has a €0 threshold before you have to apply for VAT in that country. Similarly, if you sell more than €10,000 of products in Greece, you would have to apply there for VAT as well. You could end up having to be VAT registered in 28 countries separately which is completely implausible for a small business owner.
See the VAT thresholds for all EU member states for FY15
To combat this, you can apply for the MOSS (Mini One Stop Shop) scheme. This basically means that you can apply for that, send them all the records and they will pay all the relevant VAT fees on your behalf without you having to become VAT registered in each state.
The stickler? You have to be VAT registered to apply for the MOSS!!!
This law applies to the sale of any digital goods or sales which include, but are by no means limited by:
- Cloud based software/Software As A Service
- Music Downloads
- Film/Movie Downloads
- Video Tutorials
So, anything where there isn’t a physical product. For example, you could sell an eBook and be forced to comply with the new law or you could sell a print version of it and have it shipped out without having to charge random VAT rates if they are in an EU states.
You must keep two forms of proof you collected the correct VAT rate from your sale for 10 years. At any point during that 10 year period, the country can demand to see evidence that they have not been short-changed. This in itself is strange considering tax records usually have to be kept for only six years (here in the UK anyway).
These two forms of evidence actually cause people problems as well since it can be difficult to find pieces which they will accept. Most freelancers use a payment provider such as PayPal or Moneybookers to process payments and most have already said that they cannot provide more than one. The other could come from IP addresses or addresses which the customer themselves have to provide you but this can add an extra step in the sales channel which can potentially reduce conversions and also relies on the customer telling the truth.
Why has this law been brought in?
Well, there is much speculation about this but I believe it is mainly to combat the increasing number of companies which are trying to avoid paying tax. A popular tax avoidance scheme is to register your company in a place which has low tax rates and license all of your sales through there. So, you could run a business in the UK but because all of the sales typically go through to somewhere like Luxembourg, you pay tax at that rate which is much lower, saving you money! (That’s a very simple summary but basically how it works as I understand it!)
This new law seems to be trying to claw back money being lost to the Governments around the EU to people taking advantage of that by forcing companies to pay VAT to the country they are selling into. This works great, until you take into account the millions of small business owners (where it can only be one person or just a handful) around the world who suddenly have to conform to a corporate-standard as just a freelancer where their livelihoods could be at stake.
To sum up…
The new EU VAT law change means you must charge customers VAT based on where they (not your business) reside if they are within the EU. This also includes businesses outside of the EU selling into it, such as US based companies.
The law applies to the sale of digital goods.
You must register to be VAT registered in an EU country if you sell more that their VAT threshold into it in any fiscal year; or, you can become VAT registered in your home country and join the MOSS scheme which means you must only do it once.
How will the EU VAT law change affect eCommerce businesses?
Generally, not good. For the large businesses, which were VAT registered anyway, it will be more of a change in how the VAT is worked out for each order. For small businesses, like the majority of those using open source eCommerce software like OpenCart or PrestaShop, it will mean that you will likely have to apply for VAT and set up your online store to comply with the new EU VAT laws.
Setting up your eCommerce store to comply with the new EU VAT law change automatically
Next up I’m going to show you how to set up your online store to create tax classes for each of the EU states. I will be setting this up in OpenCart but you can apply the same technique for any online store. It essentially involves creating Geo Zones for each of the member states, creating tax rules for them and applying them all into a tax class. This sounds complicated but it’s really not that bad, just a bit monotonous but in the end, your store will be working out which VAT rate to charge each customer and doing it all automatically. This will save you a load of hassle in the long run.
So, login to your eCommerce store. Remember that I will be using OpenCart but you can do the same in any online store you run but the options will be in slightly different places and none of the changes require any code changes or technical knowhow.
Go to: Settings > Localisation > Geo Zones
Now, here we will need to set up each of the EU states as a Geo Zone so we add them to tax rules later on. For each of the countries in the EU you will need to add here. So, if you go back to the top of this post and click the first expandable section to see the list of countries and rates (alternatively click here) now add each of these countries as a GEO Zone and add a little description. Remember as you add each country, leave it set to “All Zones”, they’re not making us go that specific just yet!
See the screenshot below to see how I’ve done it.
Now click save and repeat for the next 27 zones. (Tedious I know but just remember how much time this will save you in the long run!)
Now I assume that you have all of your Geo Zones set up and ready to go.
Next step, go to: Settings > Localisation > Tax Rates
Now, for each of the Geo Zones you’ve just set up you’ll need to create a Tax Rate for that region. Create a new rate for each and name it “[Country] EU VAT – [VAT RATE]. For example: Belgium EU VAT – 21%, then assign it to the Belgium Geo Zone you just created. Set the Value to whatever tax rate you need and then change the Type to Percentage. Save.
Repeat for the other Geo Zones.
The final step is to create an actual tax class which you will be able to assign to all of your products from the Catalog admin section.
Go to: Settings > Localisation > Tax Classes
Create a new Tax Class, call it EU VAT, add a small description if you like. Now, you need to add each of the tax rates you’ve just created and save them. Make sure all of them are Priority 1 and the Based on section is “Payment Address” (remember, we’re applying the tax based on where they live not where they are having the products delivered to, which might be different).
Now just apply the tax class to all of eligible products in your catalog, you might want to run a SQL query if you have a large database. Your store will start applying the correct tax rate to customers, who will need to have a default address stored in the website.