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VAT Changes on the sale of digital goods

Last updated: 6/1/15 – 17.20pm – see bottom of page
Firstly, it’s important to state that this is not official or legal advice and customers need to satisfy themselves that they’re correctly complying with the requirements of the changes.

Changes in EU legislation mean that in the from 1st January 2015 VAT will have to be accounted for differently on sales of digital goods (MP3s, PDFs etc) – to countries outside the UK which are in the EU. NB. Don’t panic about that date – see later.

These changes have taken most UK businesses by surprise – communication from HMRC hasn’t been good, (primarily only to businesses already VAT registered), and they estimated that only a relatively small number of businesses would be affected. They hadn’t realised that there are thousands of micro-businesses selling digital files which are actually affected.

This – and the groundswell of frustration and anger from small businesses – has taken HMRC by surprise, and they’re working to adjust requirements as helpfully as possible within the framework of legislation that they’re statutorily required to implement.

Here's some helpful information about the changes and many useful links, but read the info below first:

So, what’s changing?

Previously, you only needed to register to charge, report on and pay VAT if your turnover exceeded £81,000. If you’re only selling to the UK, that’s still true, but if you want to sell digital products to the rest of the EU, then things have changed:

IF (and that’s now a big ‘If’) you want to sell digital goods to countries in the EU outside the UK, then you will need to do the following from Jan 1st 2015 (but don’t panic about that date – see HMRC advice later in this document).

You may feel potential digital sales from countries in the EU outside the UK mean it's not worth it. 
  1. Charge VAT correctly on digital products to each different EU region – The good news is that Insight can do this – see below for further info. NB Don't forget to select the new tax rate on each of your digital products.
  2. Give the customer a VAT invoice – No problem, Insight does this already. NB If you register for VAT, you'll need to add your VAT number to the Shop Invoice letterhead PDF – see Settings / General / Letterhead PDFs.
  3. Register for UK VAT – even if your turnover is very little. BUT, you don’t have to charge VAT to UK customers if your turnover is less than £81,000.
  4. Apply for VAT MOSS – this is the HRMC’s method of allowing you to complete VAT return information for other countries in the EU outside the UK – it stands for Mini One Stop Shop
Each quarter, based on sales data you can export from Insight you’ll then need to:

a. Complete a UK VAT return but declaring £0 (assuming you’re not over the UK VAT turnover threshold of £81k, in which case you’ll complete this as normal)
b. Complete a MOSS Return for EU sales

Now, there are some other more technical things that need to be done.
  1. Create different regions and tax rates in your website store – so you can charge the correct VAT rate, based on the customer’s country of residence (see below for VAT rates in different countries).

    The following support document and video explains how to do this:
    See below for more info re regions & rates etc.
  2. Record two pieces of evidence of the customer’s country of residence – unfortunately, you can’t just ask the customer twice to confirm their country, it must be one instance from the customer and one from another source such as the payment provider. Now the former is easy to get from the customer data in Insight, but we’re currently looking into how the latter might be provided. Some examples might be IP address or country from the card payment provider. This is possible – see "Update 6/1/2015" below.
  3. Keep this info for up to 10 years – should you ever decided to move away from using the Insight platform, you will need to make sure you export your customer & sales data.
  4. You're supposed to compare these two pieces of country data and if they don't match up, query this with the customer. This can be done manually (see below).

NB Insight already provides substantial reporting and querying facilities which allow you to get this information out of the system.

If you’re selling digital products to countries outside the EU, you don’t have to charge VAT on those sales, as currently.

VAT Rates for configuring tax zones etc

The following link lists all VAT rates for EU countries

One merchant – not an Endis customer – we’ve read about has suggested organising tax regions and VAT rates as follows (NB you should check these against the page above).
NB This is copied as written – not all these sub regions exist in Insight or are called something slightly different – these are greyed out.

 UK: VAT @ 0%
 Luxembourg: VAT @ 15%.
 Malta, Portuguese Azores: VAT @ 18%.
 Cyprus, Germany, Austria Jungholz and Mittelberg: VAT @ 19%.
 Austria, Bulgaria, Estonia, France, Slovakia: VAT @ 20%.
 Belgium, Czech Republic, Latvia, Lithuania, Netherlands, Spain: VAT @ 21%.
 Italy, Slovenia, Portuguese Madeira: VAT @ 22%.
 Greece, Ireland, Poland, Portugal: VAT @ 23%.
 Finland, Romania: VAT @ 24%.
 Croatia, Denmark, Sweden: VAT @ 25%.
 Hungary: VAT @ 27%.
 French Overseas Departments (except French Guiana): VAT @ 8.5%.
 All other countries will have no VAT charged.

Other options which may be open to you
  1. Don’t sell to countries outside the UK but in the EU
    Some people have indicated they may do this (in reality, they hardly sell anything to other EU countries outside the UK), whereas others have
    suggested that this contravenes EU anti-competitive legislation. We don’t know the answer to this – perhaps check with your accountant.

    NB To not allow sales to any country (you can use this for countries with suspect payment histories as well), in the Delivery section of the Site Settings, E-commerce tab, simply create a new Delivery Region with those countries in, but don’t create or assign a delivery method to that region – it should then look like this:
  2. Manually send the digital file.
    If you manually email send the file to the customer rather than the Insight system automatically delivery it to them, then it doesn’t come under the new legislation.

    NB Many email systems don’t send or accept large files – or emails with large attachments may get them marked as spam and never get through to the recipient. So, use a service like which allows you to upload an transfer files up to 2Gb at a time for free.
  3. Physically send the file on a CD.
    Even more of a pain, but again, this gets round the new legislation.

1st January 2015? Really?!

Yes, but don’t panic, it’s not quite that bad...
The EU VAT Action Group (a pressure group) recently met with HMRC and a statement was released re the date of the changes.

The following is from a page on their site entitled (appropriately)...
How Not To Let EU VAT Ruin Your Christmas – Or Your Business
“It is clear that the EU-wide VAT changes will go ahead on 1st January 2015. However, HMRC does recognise the difficulties that these changes will cause for many small businesses. They are listening.

Following discussions, HMRC assures us that during the first few months they will be applying a light touch on implementation, whilst actively supporting businesses who want to comply.

HMRC will be working with us (and you) to help small businesses to find workable solutions over the coming months:
– To enable the collection of the required two pieces of data for proof of place of supply, by clarifying and confirming types and sources of data; and

– The application of the correct EU VAT rate, to enable small businesses to meet tax accounting obligations, as well as consumer rights legislation.

They will also continue to work with other EU Member States to find solutions for the issues that have been raised.”

Update 6/1/2015

There's a very helpful update worth reading in this post here on following further meetings with HMRC, but the bones of it are as follows:

Basically, there's been a small reprieve re the timing of the country data recording requirement.

Previously, two pieces of separate country data were required to be recorded:

These can be e.g:
a) Customer-supplied country info in the order or customer profile.
b) Information from the payment service provider re customer card country.

Right now, HMRC are saying they're happy that you base your VAT return on just the latter until June.

Currently, this can be accessed manually by exporting transaction data from the Sage Pay admin control panel – we've checked on our own Sage Pay account. In 99.9% of cases, the recorded customer country in the order of customer profile will match the one of the card address, so you can still create your VAT return from the order reports in ChurchInsight.

The good news is, even when June comes, you'll already be able to export the customer-supplied country data from the store order data (via the Query tab). Theoretically, the two pieces of country data should be compared and if any instance doesn't match up (two different countries) then this should be queried with the customer.