Okay! So big, important post today, targeted at UK freelancers who sell digital products, about new VAT regulations that apply to you (and other EU freelancers: this discussion regards EU-wide legislation, so any changes or thresholds are agreed in Brussels will, as far as I can tell, affect you too – you may wish to skip to Updates/What to Do Section). There’s already been a lot of incredibly valuable information, thoughts and action posted around HMRC’s new VAT changes, but I thought I’d try and collect as much good info as I could in one place, in case it’s helpful.
*Disclaimer – as always, I remind you that I am not a lawyer, and nothing I say should be considered legal advice. I’ll leave that to your lawyer and HMRC.
This is all to the best of my understanding – if you spot any errors or old information in here, please do let me know!
This’ll be quite a long post, with a bit on what VATMOSS is, what our options are, selling through third parties, Kickstarter/Patreon and donations, updates/things to do, and useful links.
What it is:
HMRC has introduced new regulations, in place from January, which are apparently designed to prevent large corporations from avoiding tax, and avoid small companies having to pay separate VAT in each EU country it sells to. What has made me absolutely livid is the apparent lack of understanding of who sells products online. Unlike regular freelance regulations, there is no threshold of earnings under which you do not have to be registered for VAT – sell a single knitting pattern pdf to someone in the EU, and you are expected to register for VAT and meet the new admin requirements on digital sales to EU nations.
This will require you to:
-Register for VAT
-Account for VAT in your prices on digital products, either upping your prices or taking the hit yourself.
-File a return four times a year via the VAT Mini One Stop Shop (VATMOSS)
-Retain two pieces of non-contradictory data proving the location of each buyer for 10 years (!) (which also means meeting data protection regulations)
-Split your business into two, one for EU sales and one for everything else, unless you want your now VAT-registered business to have to charge VAT to your clients for your commissioned freelance work as well, increasing your prices/fees.
What our options are:
–Do all of the above to keep selling as-is. For most of us, this is simply not an option. If you’re just selling a few comics online, what you’re making is in many, many cases not going to be enough to justify, or even cover, the time all of the above would take. It makes me incredibly upset to think of all of the businesses that start with someone just selling a few patterns/assets/books, trying something out, in the spare hours outside of their full time job – of the few of those that flourish and go on to become careers – and how some of those successful businesses may now never happen because the starting hurdle is too inaccessible to someone who just has a few hours and wants to test the waters. Even existing microbusinesses with some experience may not be able to meet the new requirements. I’ve already heard of online microbusinesses making the horrible decision to shut down.
–Register for VAT in every EU state you sell to. Again, not an option.
–Sell through a third-party platform who will be responsible for meeting these regulations themselves. This is clearly the most obvious option, but given that many platforms have terms and conditions along the lines of “the transaction is between the seller and buyer”, I wasn’t hopeful about any being willing to take on the burden. However, there’s been news on that front, and it seems this is the way to go for now. More on that in next section.
–Offer free content with donation button, or similar approach, on your site.
Selling through third party platforms:
There seems to be some cause for cautious optimism here for sole traders, if not for platforms. This immediately stood out as the most viable option for us to continue to sell our content, if we could find a reliable platform that was willing to take on the burden. In a flow chart produced by HMRC (as used here in a Digital Arts article) to clarify who needed to register, one of the questions is “do you only sell your e-services through a third party platform or marketplace (for example not through your own website)”, where the “Yes” branch takes you to “The rule changes don’t apply to you”. However, I was leery that the terms of many platforms wouldn’t allow them to simply state all VAT and other tax is the responsibility of the seller, leaving us with large companies like Amazon as the only option – an option many may object to.
However, in a twitter Q&A that HMRC held this week, this is addressed:
“C1 What constitutes a marketplace? #VATMOSS
A simple definition is that if a marketplace is responsible for authorising/allowing the download it is responsible. #VATMOSS
C3 Can you clarify the platform tip? Are *ALL* platforms including @Etsy @paypaluk @folksy responsible without exception? #VATMOSS
They are responsible if they authorise the download or payment process or set T&Cs. #VATMOSS
C5 If microbusinesses use PayPal buttons on their site for digital products, can we assume #VATMOSS will be covered by PayPalUK?
No. PayPal is not an e-marketplace. It is a 3rd party payment provider. #VATMOSS
C6 So which platforms will take responsibility and which will leave us to do it ourselves?
We are referring to platforms where order is placed, payments are processed and delivery made through its website. #VATMOSS
C7 Many crafts sell digital services direct through platforms that can rebut the criteria, and won’t deal with #VATMOSS for us.
We have not received a credible rebuttal to date, as all these platforms are responsible for authorising the download. #VATMOSS”
This is not good news for the platforms themselves, and I sincerely feel for them, and worry for the smaller ones. For freelancers however, this seems to state that although we cannot sell through our own sites without being VAT registered, we can still sell through third-party platforms without needing to be.
However! I definitely advocate caution until we can get some official clarification on this. This post is a collating of a twitter conversation, posted on a third-party site. So, despite being from the tax horse’s mouth, I would still far prefer this in writing on the gov.uk site or similar, so I have documents to back myself up and avoid ‘unlimited fines’. There is some room for misunderstanding after all – for example, the very end of the twitter Q&A features an annex on what constitutes enough “human intervention”. It seems very clearly to say to me that if you are manually emailing files to buyers, you’re in the clear – yet knitwear designer Ysolda writes of attending a talk where Andrew Webb, Senior VAT Policy Manager at HMRC “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“.
Ysolda’s article goes on to discuss third party sites, and Webb’s response:
“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.”
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.
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.“
So while HMRC seems to have given the go-ahead to continue using third-party sites without being VAT registered, I’d feel a lot better having it in clear text on a government site/document, or alternately, in writing from the platform itself that they are taking responsibility for VAT.
Crowdfunding will be affected by this too, and the guidance is more vague. Kickstarter/Indiegogo etc are likely to be more affected by Patreon, a they’re generally more clearly transactional than Patreon – “x amount of money for x item” is clearly a transaction even if the word donation is thrown around.
Some Patreon campaigns are also fairly transactional, and I have a feeling this will all come down to wording on what is and isn’t okay. From the abovementioned twitter Q&A:
“C9 How will #VATMOSS interact with things like Patreon and Kickstarter pledges, where people are rewarded for donations?
It depends on the nature of the reward #VATMOSS”
There are also options here to potentially offer free downloadable content with a donation button, but that’s probably worth a big discussion on its own, in terms of the results of that, page setups, user behaviours, etc. If I get time, a separate blogpost on donation models and crowdfunding related to this might be a good idea!
Updates/things to do:
–Ask HMRC for official documentation specifically confirming their twitter Q&A answers that selling via any third party site that serves and authorises the downloads is exempt. Their email for VATMOSS is email@example.com
-Enterprise Nation have been very active here, and managed to meet with senior decision makers earlier this week to make micro-businesses’ concerns known. It seems to have been a positive meeting, but it remains to be seen if further discussions in Brussels will lead to any positive results. See their writeup of the meeting here.
-There is a petition to uphold the VAT threshold here – this seems to be an EU decision, but things like this will hopefully encourage and help our representatives to push harder on this in EU discussions.
–Write to your MP and your MEP. Especially your MEP, as it seems like any changes will need to be agreed in Brussels. Enterprise Nation have a template you can modify to send on, with a link to find your MEP, meaning it will only take you a few minutes, so please do!!
–If you’re not in the UK but are in another EU country, please please contact your own MEP, as if other countries also come to the table with concerns from their freelancers, we all have a better chance of results!
-Knitwear designer Ysolda’s excellent writeup
-Down the Tubes has a great collection of links here
Feel free to send any updates on that you feel I should add – otherwise follow the discussion via these links, and I’ll post any major updates I find.