I was skimming Twitter yesterday when I saw a link to an article entitled The horrible implications of the EU VAT “Place of Supply” change. Obviously, that’s just the kind of catchy title that gets me clicking through, so I read the article, which is written from the perspective of freelance web designers and software developers who also make supplies of “digital services” (ebooks, software licenses) to EU countries other than the one they reside in. And I thought, hmmm, where else do you find a lot of freelancers making supplies of digital services? Why, in the knitting world of course! My Ravelry library and Paypal transaction log are testament to just how many independent designers there are out there selling pdf knitting patterns, and those sales count as supplies of digital services.
Without getting too technical, the change basically means that from 1 January 2015 digital services will be considered as being supplied in the country where the purchaser resides, rather than where the seller is based as at present. Because VAT is charged in the country where a supply of VATable goods or services is made, that means that patterns sold to customers in the UK will be subject to UK VAT, patterns sold to customers in Germany will be subject to German VAT, and so on. And that means that sellers face having to register for VAT and complete VAT returns in all 28 member states of the EU. (HMRC are running a “mini one-stop shop” which will simplify the process for VAT registered businesses by allowing them to submit a single return and payment to HMRC, who will then deal with making the payments to the VAT authorities in other countries, but that isn’t available to business which aren’t VAT registered.) And, as far as I can tell, at present the supply of digital services doesn’t count as “distance selling”, for which there are VAT registration thresholds in each country which most freelancers would fall well below, but as supplies made by a non-resident business, for which the threshold is 0 in almost all countries.
(There is a point to this change, which is to stop big businesses like Amazon making all their digital sales from Luxembourg where the VAT on ebooks and music downloads is 3% and thereby avoiding an awful lot of tax on sales made to customers in other EU countries, but the unintended consequences for small businesses are fairly horrible.)
The issue is now being discussed in the Shopkeepers group on Ravelry, and people are talking to contacts and trying to find a solution. I have also sent the following email to my MEPs and MP:
I am writing to you to express my concerns regarding the new EU rules regarding the place of supply for digital services for VAT purposes. While I support the legislation’s intended purpose of curbing tax avoidance by large corporations supplying digital services, I fear that it will have a devastating effect on small businesses and particularly sole traders who also supply digital services on a worldwide basis. The example I am thinking of in particular is designers of knitting and sewing patterns which are sold as pdf downloads. Thanks to websites such as Etsy.com and Ravelry.com, there is a substantial and growing market for these downloads, which have the advantage for producers of significantly lowering production costs over printed patterns and eliminating delivery charges, while consumers benefit from receiving their purchases immediately and not having to pay shipping costs. Many of the producers in this market are sole traders or hobby producers with only a handful of patterns available. Even among the professional designers it is rare for turnover from pattern sales to reach the VAT registration threshold, which means that they cannot take advantage of the mini one-stop shop for EU VAT and would instead face the prospect of registering for VAT and making returns in all 28 EU member states. This would make continuing to sell patterns uneconomic for most designers and would almost certainly force a great many out of business.
I am sure that the purpose of this legislation was never to force small entrepreneurs of this kind out of business, and I am writing to ask you to lobby for a change in the regulations to implement a de minimis level of digital sales to EU member states other than the one the seller is resident in before VAT registration is required.
Thank you in advance for your assistance with this matter.
I don’t suppose it’ll do any good, as they’ll probably just wonder why this madwoman is writing to them about knitting patterns, but you never know. I would be very sad if this means that I have to live in a world where I can’t access a huge range of knitting patterns at the click of a button or two!