A new law that comes into effect from 1st January 2015 is completely changing the way VAT (value added tax) is charged and collected. It’s not quite the same as US sales tax, and it’s always been based on where the seller is located, but the biggest change to the new law is that this is all being turned on it’s head – from 1st January the VAT rate of where the *customer* is located will be applicable, and this also means that anyone selling to an EU customer will be affected, regardless of whether the seller is in the EU or not.
Currently, this law only applies to digital goods and services – sellers of tangibles are safe for now.
The law was intended to catch mainly large US companies such as Amazon and stop them using loopholes in EU law to pay less tax. The lawmakers believe that micro-businesses selling digital items are protected, as they’ve written the law in such a way as to ensure that it’s the platform or portal that’s VAT responsible. Except there’s an awful lot of grey areas: they haven’t thought about individuals selling without a platform; or platforms that don’t or won’t fit the new VAT responsible criteria. They’ve also vastly underestimated how many of us there are. In short, it’s a huge flipping mess.
Unlike Sales Tax, VAT has thresholds that are set by each country. In the UK the threshold is something like £81,000 and as I’ll never be likely to reach that, there’s no need to register for VAT. Which is good, as it’s a horribly complicated tax, and would force a price increase, and I’d have to charge VAT on everything which would have consequences elsewhere. The new law essentially removes all thresholds, which in short means that unless we’re selling through a VAT responsible platform, we’d be forced to register for VAT, either domestically (and use the new MOSS system to pay the VAT to each country) or in every EU country we sell to. And even if we’re selling through a VAT responsible platform the VAT has to be covered somehow, either directly out of our pockets or through a price increase.
And that’s a quick summary. It’s a lot messier and more complex than this.
And in turn it’s meant that I’ve been spending an awful lot of time trying to work out what I’m going to do, because I really do not wish to register for VAT unless I absolutely have to. I’ve always wanted to keep business small and manageable (which doesn’t mean I don’t want to grow my business; it simply means I don’t want to “think big”) and this feels like a very difficult moral dilemma as well as a financial one.
Here are my plans as they are at the moment (and yeah, it’s a long one):
Ravelry
There’s been a long, long thread on Ravelry about this, and Cassidy this morning posted the following response, which is particularly relevant here as most of my sales come from Ravelry, and I use the Ravelry cart on this website:
“Our current best case scenario is: for the first quarter you can continue business as usual selling worldwide without worrying about VAT at no extra cost. Extra setup work would be required and buyers in the EU would have a different experience on Jan 1 that would hopefully improve in the weeks after.
Our current worst case scenario is: for the first quarter, we offer you a way to disable EU sales or put in alternate links for EU buyers. This would a disaster for Ravelers in the EU who buy patterns and is a last resort, avoided at all costs.
You’ll notice both are the 1st quarter only. That’s not ideal but right now, limiting our goal to just trying to make it through Q1 gives us a little more to work with.”
The very last thing I want to do is cut off sales to my EU customers – that would be devastating and highly unfair. I’m very much hoping that the first option comes into play, but naturally I do have to warn my EU customers that they will see some changes, and that we’re all working to try and ensure that everything runs as smoothly for them as possible. It would be amazing if Casey can implement a system that covers the VAT (thus avoiding VAT registration, by partnering with a VAT responsible set-up such as FastSpring) and allows us to continue to sell to the EU. Fingers crossed!
Naturally what happens to my Ravelry shop also happens to this website – more on that shortly. Except that maybe it doesn’t as API is seen differently (as I say, more on that soon).
Etsy
Etsy still haven’t issued a statement about what they intend to do. The law does appear to implicate them, especially with their direct checkout and automated delivery, but Etsy has never had any system in place for VAT, let alone be in a position to sort things out quickly. Like many, I’m waiting to see what they say before deciding whether to close my shop there or continue selling.
Craftsy
Craftsy seem to be doing nothing for the digital pattern side of things, and issued a statement early on that said VAT was the designer’s responsibility (not sure they’ve looked into this new law thoroughly – who is VAT responsible in these cases isn’t straightforward). I sell very little through Craftsy, a handful a month, and I’ll likely close that shop before 1st January. eta/ I’ve since learnt that Craftsy don’t currently provide the pieces of evidence that the new law requires, making it difficult for anyone to sell to the EU through them.
LoveKnitting
LoveKnitting are a large online UK yarn store who have recently moved into selling digital patterns, and they are being fully supportive not only of indie designers, but also on the VAT front, which is such a relief. I’m also really pleased to say that in the first month, the few patterns I’d uploaded have sold well, so I’m working on getting as many patterns uploaded as I can. Not everything is reformatted yet, so I’ve notched that up a gear or two, too!
PatternFish
PatternFish have also said they’d be VAT responsible, and that’s very positive news. My sales through PatternFish have been very low, and in turn I haven’t prioritised that venue, but I do plan to get more patterns listed, and get the current listings tidied up with the reformatted patterns, fresh photos, etc. This will all take time as a craptastic internet connection really hinders things, but we’ll be back to the UK very shortly and I’ll be able to get more of this done in less time and with less frustration.
Magcloud
I’m still working on getting my books back into print, and as they’re print, they’re not affected by this new law. I was hoping to use the Print+PDF option Magcloud offer but there’s been no word yet on how they see the VAT issue, as it would apply to the PDF version. Either way, they are clearly a platform and it should be safe to proceed. I’m also working on print ready patterns, as that would offer an alternative to the digital side of things, and I’ll keep you posted.
Print Distribution
This is localised and unaffected – DSF are currently my only distributor and everything there will carry on as normal for the time being.
LYS digital sales (Ravelry In-Store)
This is an odd one, but as the sale of my digital pattern to the shop is a B2B (business to business) the shop will be VAT responsible. Not all shops are VAT registered in the EU (and this won’t affect things in the US, as they’ll have local sales tax) but either way, it should be the shop’s responsibility.
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eta/ News just in says that Ravelry will team up with LoveKnitting to manage EU cross border sales!
That’s fantastic news for Knit Designers! Having been working with LK for a while now, helping them develop their platform and feeding back on how indie designers work, and I can tell you they’re great to work with, very positive and this is a brilliant solution to the #VATmess.
Thank you Ravelry and LoveKnitting!
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And now the pricing issue. *sigh*
I’ve been stating for quite some time that my pattern prices will have to go up to £3.50 from the new year to cover increased costs in production, support etc and everyone has responded positively to that (thank you!)
In real terms, although I’m aiming to work with platforms that are VAT-responsible, they won’t be swallowing the cost of the VAT, only the administration. Figures show that approximately 32% of my customers live in the EU, and with an average rate of 20% VAT, 20p of every pattern sale at that new price of £3.50 will be covering the costs of VAT. In an ideal world, I’d put the price up to £3.75, as I can’t afford to cover the increased costs of production AND the added VAT implications, but I kinda feel that jumping to £3.75 so soon with such little warning and when I’ve been promising a different price isn’t fair on you guys.
So…..
As promised, the price of each single pattern will be £3.50 from January 1st. (i.e I’ll absorb the cost of the VAT)
Also from January 1st, there will be 2 price points for eBooks: £10 (TWT, CWT, PWT, WWT etc) and £12 (Bambeanies, Going Straight)
Then from September 2015 the price of the single patterns may go up to £3.75, depending on how the new VAT law pans out. The eBooks may also go up to £11 and £13.
If the new VAT law changes again (one thing we’re all campaigning for is the reintroduction of thresholds, which would mean no VAT for micro-businesses like me. It’s unlikely to happen but hey) and/or the costs of VAT really have little effect, then there’ll be no need for another price increase. If however the VAT implications are as great as feared, then I’ll have a clearer idea by then of whether there needs to be another price increase. (and there’s lots of things to take into account, including any loss of sales due to an increase etc…)
How does that sound? It feels like a better compromise; I’d really like feedback here… 🙂
It’s all mighty unfair, huh? But it is what it is.
ps/ if you’re on Twitter you can follow the #VATMOSS tag to get an idea of how this law is affecting digital sellers. But do tread carefully; you need to be informed but it’ll make your brain hurt.
Hi Woolly, that's a really useful summary overall. The only thing I am not sure of is the LYS digital sales. You are absolutely right that a VAT registered shop will take the responsibility, as they are the closest part of the supply chain to the non-taxable customer.
I'm not sure about the non-VAT registered shops though. If they are selling to customers just in their country, and are within the local VAT threshold, it is possible that they might be viewed as a non-taxable customer, and the VAT responsibility therefore falls on the platform or the content owner.
I don't envisage any problems selling via UK shops for myself, though it would be for Ravelry should the HMRC hold them responsible for the VAT on the sales.
You're right Karen, the Rav In-store scheme is still a bit an issue.
I hope we'll be given the option of being able to remove non VAT registered EU shops from the list, but that depends on a lot of things. It also depends on whether sales to EU LYS are also covered by the general EU sales that Ravelry hopes to implement.
We can still switch off LYS sales to certain shops and stick with local (UK) and US, RoW etc for now if it becomes a major concern (though again, I'd not want to if at all possible)
Given how low the VAT threshold is in most other EU countries compared to the UK, I doubt there'd be that many non-VAT registered shops across the EU?
great summary of the complex VAT laws.
Your patterns are well worth the £3.75…most US ones are $5-$6 so you are still very competitively priced.
Your pricing structure is very open and it is lovely to be able to buy directly from the designer.
First off at £3.75 your patterns are still less than my standard $6 USD. And I've really been thinking I need to bump things up a bit. You have amazing patterns and I feel they are a bit underpriced.
Thank you for the summation of this mess. I still am having trouble figuring out what it means for me as a US seller. I'm at less than 20% of my overall sales to EU countries, but it's still a decent chunk. I still can't figure out if US citizens have any options other than going through a platform. And it may well be that I end up routing all my EU sales through elsewhere. But I don't know how confusing that will be to my customers. So much to think about. And I still don't think the EU VAT folks have any idea how many of us "micro businesses" they are dealing with and screwing around with our income.
Yikes. I think my head just fell off!! We all want you to make a profit and keep doing what you do. Go up to whatever you have to.
I agree with those who say that your patterns are quite underpriced, even at your proposed £3.75. I have paid more for patterns that weren't nearly as clearly written and that didn't provide detailed descriptions of unusual techniques.
Excellent summary, thank you. I think this has got everyone's head spinning and it will doubtless take a while for the dust to settle. In the meantime, I'm sure you won't be the only one increasing prices (I certainly expect to) and as many have already said your prices are currently more than reasonable so a 75p increase still won't push them into the expensive bracket.
You have really covered this well. Thank you. I have to say, I currently pay £3.85 for a medium size flavoured coffee which I can only drink once. £3.75 for a pattern I can knit over and over again still seems like good value to me.
US sales tax is actually set county (yes, county without the R) by county. I used to work retail in a county with particularly high sales tax (9.75% as opposed to the UK's current 20%) and people from out of county would blanche at their total. That's why US sales tax isn't inclusive.
Putting your patterns up to cover the fact that you're (going to be) now responsible for collecting tax doesn't bother me. When VAT, prices went up in all the shops and no one threw a tizzy fit about paying more than they had the day before.
We're experiencing something similar in Scotland right now as everyone has to charge at least 5p for carrier bags – all carrier bags, even for getting a take-away. Shops have to do it, customers have to pay it, no-one likes it. But people understand.
It's going to involve a lot of explaining though :-\
At 3.75 pounds, your patterns still fall under $7 CAD, so that seems reasonable to me given the number of size options you offer for your hats.
The whole thing sounds messy and complicated so I hope you're able sort out a way to sell in a way that makes sense for your business without driving you crazy.
Thanks for the great post, this is giving me some food for thought on my own patterns. Registering for VAT isn't something I want to do as patterns are a very small part of my business. I think I'm going to have to find a new host for my designs, and you've given a good list of places to start looking.
I'd gladly pay £3.75 for your patterns. And I'm still struggling with the VAT changes.
Thank you so much for explaining all this!
An easy to follow explanation, thank you.
You don't mention the data collection and retention requirements (key information re. every digital sale to be kept for ten years). That means those sole traders forced by the changes to VAT register (even those using Paypal who haven't previously collected personal information) will almost certainly find themselves needing to understand the Data Protection Act/register with the ICO as data processors/controllers. A #VATMESS indeed!
>"Figures show that approximately 32% of my customers live in the EU, and with an average rate of 20% VAT, 20p of every pattern sale at that new price of £3.50 will be covering the costs of VAT" //
At £3.50 gross of course 70p is VAT and the take is then £2.80 net of VAT. You'd need to charge £3.75 to get the £3 you mentioned in a March post.
Perhaps you should register a business in a non-EU country (Delaware is the classic USA location IIRC) and sell your digital goods from there!?
Annie – the possible requirement to register with the ICO is another reason I'd prefer to avoid VAT registeration and the whole MOSS system! That's taking the red tape beyond ridiculous. And each of us, with the average unit price of £3.50/$6 would have an awful lot of customers to keep details on :/
This link provides a more indepth legal overview, and discusses the implications of being VAT registered clearly (my post applies more to the knitting world, and to those like me who do not wish to be VAT regsitered):
http://idea15.wordpress.com/2014/11/24/how-vatmoss-is-the-end-of-small-enterprise-in-britain-and-how-we-can-change-it/
Yes pbhj, if I had to pay VAT on every £3.50 pattern it would be 70p a piece, but I'd only have to pay it on 32% of my patterns, bringing the cost per unit down (although in reality each of these platforms will charge me for the admin and it's be closer to 50p per unit lost in tax+fee)
Registering in a non-EU country will make no difference – designers who sell from outside the EU are also liable for VAT under this new law! The whole point of this new law is to prevent VAT evasion.
One key difference between Sales Tax and VAT is that VAT isn't an end consumer tax – it's collected at each point the item/product gains value, and it's to be paid by the person who adds the value (i.e. me) Customers usually end up paying for it, as prices are increased to cover it, but it's not a direct tax.
By law the price we display has to include the VAT (unless explicitly stated otherwise) and in general different countries or customers are not charged different prices – everyone pays the same price and the VAT comes out of the revenue.
I may not represent your entire customer base, and I recognise that a price increase would have an impact on your total number of sales (requiring careful consideration on your part) but your prices could probably double before I'd consider not buying a pattern of yours because of the cost.
So I guess the bottom line is that over 2/3 of your buyers are not in the E.U. and not subject to VAT. And you are raising your prices 15% for everybody to cover the VAT for 32% of your sales. So non- E.U. sales will be subsidizing E.U. sales. Oh well. Life can be so complicated.
I'm not raising my prices (yet) to cover VAT Katie K – the price increase in January is to cover the increased costs in production, and was advertised long before this #VATmess came along. I'll be absorbing the cost of the VAT.
If I find that I have to put my prices up in September then that will be for the VAT, and yes, a small percentage of each and every sale after that point will be covering the VAT.
I just want to reach out and thank you for writing this blog post… I have only recently come across this issue and your article has made it much easier to digest. I will be linking to it over on my blog on the post dated 29th November 2014 at http://www.craftsoftexture.com
Sara x
Thanks so much for this really useful article! As I mainly sell through etsy Ive some how managed to not hear about this issue until they kindly emailed yesterday morning! Looks like I'm going to be moving shop for a bit
Thanks
Lisa x
This is the best explanation of this whole mess I have read! I know it's a headache for a lot of people and I do feel for them especially when it's an income most rely on.
Thank you Woolly for taking the time to explain it all. 🙂