EU VAT – How Did The First Week Go? It's Not Pretty…

EU VAT Action - Week 1 Results

So the new EU VAT rules have been in force for just over a week. We’ve been working with micro businesses to understand how they have been getting on – and here are some of the stories we have seen in the first week of the implementation of these new EU VAT rules.

  • Businesses are closing
    We have heard from 200+ UK businesses who have closed completely because they cannot deal with the administrative burden that the new rules place on them. It was either economically unviable for them to comply or they simply couldn’t face the administrative burden and have decided it’s no longer worth running a business. The case study comments are heart-breaking and are a devastating unintended consequence of this legislation, which could be immediately rectified by applying the existing distance selling thresholds to digital goods – even on a temporary basis.
     
  • Businesses are refusing to sell outside their home country
    We have seen many examples of EU businesses excluding EU sales from outside of their home Member State, to avoid the rules, which of course breaches fair trading & discrimination rules and causes the business to lose money. If you’re selling via a website, then your business is automatically worldwide. It is crazy to have to turn away customers, just to avoid the EU VAT administration burden.
     
  • The EU is becoming an outcast
    We have seen MANY examples of USA companies now refusing to sell to EU consumers, so that they won’t be hit by the new regulations, even though they already applied to the USA. This reduces consumer choice. Prices are increasing, too, to help cover the regulatory burden and the VAT ‘fudge factors’ (see below), so consumers are being hit twice.
     
  • Consumer choice cut and prices rise
    We are aware of thousands of businesses who have now dropped digitally-delivered services from their website, which will potentially damage their business and was never their intention, prior to hearing about the rules. It simply doesn’t make business sense to exclude digital products in this age, but they feel they have no choice.

    Many of those who are keeping digital products have had to put up prices to cover the extra VAT and the huge amount of admin.
     

  • Major 3rd party platforms aren’t complying
    Many of the major 3rd party platforms, including Etsy (massive for sole trading craft sellers) have not been able to comply, even though their compliance was a requirement of the legislation. If they can’t comply, how can a sole trader?
     
  • The sticky plasters are helping, but they’re a temporary fix and taking them off will hurt
    The concessions we have negotiated from HMRC and HM Treasury in the UK have kept many people in business, but will only last for six months.
     
  • The UK won’t get the millions it was promised.
    The news we are hearing this week from businesses is that Estonia has done a good job of publicity and there has been some in the Netherlands and Germany, but that’s about it. France is unofficially exempting those below the VAT threshold and Italy has failed to implement the legislation. The vast majority of affected EU businesses have still not heard about this legislation, which is why the UK is being so much more vocal than non-UK.
     
    The downside of this is that, in the UK, we’re crippling our smallest businesses in order to collect tax on behalf of other countries, who aren’t reciprocating with the same gusto, meaning the £300 million per year of ‘cherries’ that the UK government was promised for implementing this is unlikely to come our way.

Impossible Things To Do Before Breakfast, Including Complying With EU VAT

To help national governments and the EU to understand why their current, “there, there, dear” response isn’t adequate, we have been collating a list of aspects of the legislation that are ‘impossible’ or at best economically unviable and unreasonable, for micro businesses.

It’s a work in progress, as people start trying to comply, but here are five of our ‘favourites’ so far:

  1. Display the correct price.
    You don’t know where a customer is based until the final stage of the checkout process. The UK and some other Member States require you to display the VAT-inclusive price at all times. You can’t do this unless you know where your customer is and if you insist on them declaring their country before visiting your sales page, you’re likely to lose the sale.
    Even if you could get their country, the 90% of businesses below 100,000 € turnover use PayPal’s ‘buy now’ buttons, rather than a shopping cart, so you wouldn’t be able to display the correct price. It’s coded into the website page, not the shopping cart.
    Most micro businesses are having to bypass this by applying a best guess ‘fudge factor’ to cover VAT and then work it out afterwards. This causes UK and worldwide prices to go up unnecessarily, to compensate for Hungary’s 27%, and is already costing people sales because the digital market is so price-competitive. And it’s a completely unjustifiable level of admin for the sale of, say, a €2.99 e-book.
     
  2. Manually email, to bypass the VATMOSS rules, but actually get the email to arrive.
    We have already seen people whose Yahoo accounts have been blocked for spamming because manually sending a pdf to a stranger (a customer) multiple times a day sets off the spam alerts for the main free email providers. This effectively closes this person’s business until they can get their account unblocked. As requested, we will write to the key email providers for statements on this.
    Even if you can send the pdf, most incoming email servers automatically reject emails with large file attachments from people not in your address book or whitelist, because there is a high risk that these are from spammers or contain a virus file.
    So we have moved from instant downloads with happy customers to grumpy customers who have to wait for a manual email that may or may not ever arrive. Getting a reputation for spam can also cause your email address – and even your website server – to be blacklisted as a spammer, meaning you are then dropped from Google search results.
     
  3. Apply the correct rate of VAT.
    Most of these businesses use PayPal or other very small business shopping carts. Some of these CAN handle country-based VAT, but not until the final stage of the checkout process. And they can’t handle multiple rates per country. If you sell an e-book (with ISBN) and a pre-recorded course to a customer in Italy, the transaction requires two different VAT rates.
    If you sell that same e-book with a live webinar, then the e-book is taxable in the place of supply, but the webinar is exempt from the new rules and is taxable in the business’s country. So you could have two different countries in one transaction. Micro businesses are not set up to handle this level of complexity.
     
  4. Accurately collect the place of supply.
    Customers will quickly realise that, for example, pretending to be in Luxembourg gets them a discount. It is easy for a customer to declare a false address on a web page. It is also easy to use software to fake your IP location. As studies have shown this week, IP addresses are also incorrect in up to 10% of cases.
    And if customers buy during their lunch break at work, most companies use secure VPN instead of IP, so you wouldn’t get the IP data. It’s not available from mobile devices. So the customer’s declared address and the system IP address are not reliable pieces of data.
    And most micro businesses don’t have access to data such as the country code of the landline / mobile used for the transaction or the credit card bank details – and nor should they. These businesses simply cannot comply with the place of supply data collection requirements. And if the customer is buying after clicking an email link then they potentially never visit your website, so you have no way of collecting anything other than their PayPal account address.
    And there are huge concerns with them storing this data for 10 years.
     
  5. Get the Member States to agree on what ‘digitally-delivered’ means.
    The UK HMRC has been helpful and has issued clear guidance, clarifying it and adding definitions each time we have requested them. However, these definitions are quite different to those in, for example, Holland and Spain. In those states, the proportion that is ‘digital’ falls under the law and the proportion that is live doesn’t.
    In the UK, any product with more than minimal human intervention is exempt. A business cannot comply with the different definitions for each of the 28 Member States.

These examples illustrate some of the administrative nightmare that has now hit the smallest businesses, as a direct result of this legislation.

The next size up of businesses have had to fund website developers to create hugely complex shopping carts to handle it for them. But even for them the cost has been huge. One business I spoke to yesterday has just had to pay £100,000 to upgrade their server to handle the data processing needed by the hugely expensive EU VAT-compliant shopping cart they have had to develop. This is still a micro business (turnover < €2,000,000), so the compliance has been a huge hit for them this year. The biggest companies, such as Amazon and iTunes, were already geared-up for international sales, so this transition has been easy for them.

Ironically, a major side effect so far has been driving even more micro businesses into the arms of these 3rd party platforms, hugely cutting the micro businesses’ margins and increasing the profits of those whose behaviour drove the creation of this legislation.

If you have news from the first week of implementation or an idea for the ‘impossible things to do before breakfast’ discussions, please let us know at the EU VAT Action Campaign Group on Facebook.

If you’re not into Facebook, please tell us your news & ideas via the comments below.

Thanks!
Clare Josa & the EU VAT Action Team

33 thoughts on “EU VAT – How Did The First Week Go? It's Not Pretty…

  1. Excellent summary! I like the bit about France unofficially exempting people below the VAT threshold and Italy not passing the legislation. On the positive side it gives an indication of what is possible – but on the negative side it means I’ll be losing business hand over fist to competitors in Europe (as well as the USA). :-(

  2. “The vast majority of affected EU businesses have still not heard about this legislation, which is why the UK is being so much more vocal than non-UK.” – this overview also explains why the outcry has been particularly loud in the UK (and completely understandable, too):
    http://www.vatlive.com/eu-vat-rules/vat-registration-threshold/

    You definitely raise some valid points. However,

    1. Is doable in a Woocommerce shop. It’s also possible to resort to 3rd party resellers, until useful solutions emerge (say, PayPal works out a solution).

    One important point, too: Paypal is NOT a free solution – they are charging plenty of fees for their services. I agree that their lack of a solution now for those who rely on their services is baffling. If this new solution is hurting one of Paypal’s core customer groups (“the 90% of businesses below 100,000 € turnover use PayPal’s ‘buy now’ buttons,”) – why isn’t Paypal acting? They’ve known about this legislation for ages.

    3. You are probably right about Paypal – I personally have no experience here. However, shop systems can do this via plugins (and Paypal can also be integrated in shop solutions). Woocommerce is free, plugins are relatively affordable. It does take time and effort to switch to a new system.

    4. That’s indeed a tricky one. Again, shop systems can help do this – and I’ve thought about a solution in those fringe cases evidence 1 and 2 doesn’t match up: Why not simply check for a matching country code in a phone number, using the same approach as 2-step verification – ie send out an sms for those rare cases? That way, you should have as much proof as humanly possible. I personally haven’t had an IP country mismatch in my shop, but maybe I’ve just been lucky.

    As for the storing of data, many countries already require you to store invoices etc (which contain personally identifiable information) for five years or longer for auditing purposes – so it’s not like storing customer data is a completely foreign concept. I do agree 10 years is a LONG time, though.

    I’m not out on a crusade to disprove you, but I think many of these points are actually solvable – and they’re a distraction from the core issue here: The complete lack of lower threshold. That’s where the main focus should be, in my book: Setting a reasonable VAT threshold to allow micro-businesses/hobbyists to continue selling without the VAT burden.

    1. Silly question – how many customers buying an e-book from a stranger are happy to give that person their address, let alone their phone number? Let alone be required to respond to SMS verification. Most would run a mile and assume you’re a bunny-boiling stalker.
      From the evidence we have been shown, we have not yet found a single solution (off-the-peg) that truly complies with the complexity of the legislation. And businesses shouldn’t be forced to sacrifice 30%+ of their margin to 3rd party platforms, just to keep trading.
      The huge concern with data storage is that it could be hacked. Most of the businesses hit hardest by this legislation haven’t had to do more than keep basic accounts before. Suddenly they are having to handle corporate levels of administration and compliance – and few make enough money to be able to justify the huge time and financial commitment this would require.
      Yes, a threshold is urgently needed. But so is a ground-up reworking of the legislation for those who would be above the threshold.
      The complexity of complying with this legislation is a massive barrier to trade for most micro businesses, unless they’re hugely tech-aware.

    2. There are some solutions out there but not everyone uses WordPress so they would have to spend time and effort completely rebuilding their sites when they already have a perfectly satisfactory system.

      Paypal isn’t free but you only have to pay when you make a transaction whereas many solutions require a monthly fee which can be expensive if downloads are an occasional or low income.

      I think the explanation of the problems people are facing isn’t to say this is insurmountable, just that it’s a very hard climb! The problems back up why a threshold is a sensible solution.

    3. “Why not simply check for a matching country code in a phone number, using the same approach as 2-step verification – ie send out an sms for those rare cases?”

      Well, you are already asking your customer for more information than they want to give you, so requesting their phone number as well is not going to be welcome, nor is an sms. Trying to verify proof of location when items do not match-up is time consuming and I think you will find that your own customers will input more ‘fake’ data if you request more – i.e. they will input an entirely fake phone number because they don’t want you to breech their privacy this way and they don’t trust you to store it/not use it for other purposes.

  3. …… let’s also not forget that the outcome of the EU VAT legislation is being studied from afar. We know for example that Japan is considering a similar scheme, as is the USA. How will that pan out? If your business sells to the EU and USA, each item will have 78 different prices!

    1. You’re right Chris, Etsy is full of negative comments about EU sales and being made to collect EU taxes – madness. Quite rightly they argue, why shouldn’t we have to collect their US state by state purchase/ sales tax – their VAT equivalent in broad terms? Then, as you note, there’s the rest of the world’s tax authorities no doubt watching, rubbing their hands and hoping to join in. Prices will go up minimum 25% unilaterally and small businesses are already going to the wall at the prospect. Thanks EU for starting this nightmare off. Amazon et al won’t suffer – we shall and are. Remember this. Keep protesting everyone – it’s our only small business future hope.

  4. I have a small biz (sole trader) – Implementing a compatible for for paypal cost myself several weeks of work, and about a couple of percent of my yearly turnover. I still need to weed out all my paypal subscriptions – which will cost me again a couple of percent of my turnover. Also I will pay about 1-2% of turnover for external services for each sale additionally now (Vatapic.com and Octobat.com)

    Effectively this will reduce my income for 15% in 2014 (calculated that already), and an estimated 15% in 2015. Just to comply 99% correctly. This is crazy – but I see no other possibility. This does not include any loss in business do to the more difficult registration/checkout.

    Biggest problem for me are subscriptions – noone thought about them when they thought up their famous 2 pieces of location crap. If paypal country or credit card country would be sufficient – I could have saved a lot and integration would be relatively manageable!

    Also in the end it will have cost me about 3 month of work time. So basically the rest of my biz heavily suffered – and I spend the most dreadful Christmass ever. From being a strong EU proponent I will from now on VOTE for any party that makes EU cripple and cease to exist – so high is my anger (as long as that party is not right – well let’s hope there is a vote-able party)

  5. Reblogged this on Shalini's Weblog… about "Stuff" and commented:
    #EUVAT: This really is grim reading :-(
    At present my business is not directly affected because I don’t sell any digital goods / services (Or whatever the EU views them as !) But it does affect my future plans. And it is having a devastating affect on so many small businesses, including businesses owned by my friends.

  6. Digital purchases from Amazon: There is no mention of VAT next to the product description. It is only shown in the final invoice after the customer has hit a ‘buy’ button (which means they have committed to the purchase!).

    As I understand it, that’s a breach of UK requirements. If the price is net of VAT, either the VAT amount or the price including VAT must be displayed alongside. If the price includes VAT, that must be stated alongside.

    If HMRC/Trading Standards are not going to police the giant corporations, why should the Micro Businesses suffer?

  7. Hi, thank you very much for this summarization. I have added the link of this article everywhere I could (of course not spammed).

    Many people say: “It is easy, just collect the data from customers and you are OK”. It is really hard to explain them, there is something like: “buy now”, “guest checkout”, etc. and that you don’t get any such data.

    Even, they do not understand that one more form (collect customer’s data) in checkout process means: customer will leave the site.

    I really cannot understand it. I leave on borders between two countries. Just compare electronic services with products. When a customer will buy a croissant in your bakery: “Hey, wait a moment, you are from other country, don’t you”, “Yes, you are, so please le me know number of your credit card and let me know your identitiy card, I will make a copy of it, I will calculate new price for you.” …. This is really crazy. In the EU, there should be free market, but … no comment … it is really absurd :-( :-(

    Thank you for this website and thank you for articles and updates. I have lost my business so I am on the way to write comments and critize EU :-( :-(

  8. It strikes me that this needs to be got into a select committee (treasury committee?) so that Vince Cable and others can be publicly quizzed. I would love to see a helpful committee member being given most of the points above and trying to get questions answered. In my experience, embarrassing a minister is the only way to get proper action.

  9. Refusing to Sell to other EU Countries.

    If you only sell in your own country, you are most likely ‘covered’ by a VAT threshold, which means you do not have to account for VAT unless you exceed that threshold. So I recently asked EU Direct if a Micro Business can refuse to sell to other EU regions.

    My email to EU Direct and their response:

    [Case_ID: 998376 / 7172495] EU Discrimination Law

    Since the introduction of the new EU VAT rules, it is difficult for many Micro Businesses to make a profit on sales outside of their own country. With this issue in mind, business owners want to avoid selling to consumers in the EU (e.g. a seller in Germany would wish to put a notice on their website saying ‘Not for sale to other EU countries’. Is this legal?

    REPLY

    Dear Mr Ward,

    Thank you for contacting us.
    As a rule of thumb, it may be said that, under competition law, it remains the freedom of companies to decide whether and what to sell in which country. There is no competition law rule that would oblige private undertakings to market the same range of products in all EU Member States or to provide all their services in all the EU Member States.

    We hope you find this information useful. Please contact us again if you have other questions.

    With kind regards,
    EUROPE DIRECT Contact Centre
    http://europa.eu – your shortcut to the EU!

    Disclaimer
    EUROPE DIRECT is the general information service of the EU. Please note that the information provided by EUROPE DIRECT is not legally binding.

  10. Thanks for all your hard work.

    We have closed the (fortunately) small part of our business that sold a photo app until further notice. Trying to think of solutions and trying to sign up to VAT MOSS generated too much stress for us to cope. We are still hoping for a workable resolution by the tax authorities.

    If the rumours about implementation of this for physical goods from 2016 come true this will lose us 50% of our income and thus our livelihood. Partly because we can’t comply, partly because our products would be too expensive or if we swallowed the VAT it would wipe out any profit.

    Due to the EU VAT problem all ideas to generate additional or new income have been put on hold because all were based on online sales of so called electronic services. (I still don’t believe that a photo, an app or a story is a service. For me it is a product.)

    Please carry on with your work.

  11. Guys but I have a question: this rule shouldn’t apply to the US company that sells services in eu(b2c) ? because I don’t see any US company that has complained the new EU VAT rules…they just ignore it.

  12. We are a one of the US based sellers that chose to stop selling to the EU because of this mess.

    We chose not to remove the EU Countries from our checkout, but present a warning message to our customer that informs them about the new law and because of it we can not sell our digital downloads to their country. The transaction is actually prevented if they try to checkout from one of these countries.

    We have found that this approach of education before prevention has prevented a lot of customers from preventing address fraud to get around the law and stirred up an interest in asking us for more information about the law. Some links to this site have definitely been in more than a few company emails.

    All of that said, setting up this system on our website was a custom in house proceedure and it is causing us to alienate our already existing customer base in the EU.

    In my opinion there are three major problems:
    1. Good information on the new VAT laws is hard to find and almost none of it is non-legaleese for a merchant to understand and comply to. I will say the UK website was great and the only one that provides real world examples.
    2. There is no EU sponsored system to calculate VAT to integrate into existing sites. In the US the marketplace fairness act is making headway, but the lack of a free and easy system for a small business to use to comply to the law is what is keeping it from passing.
    3. The administrative burden of the new law is too great for a small business to handle. Sure keeping old sales invoices around is not new but, the law also requires two forms of location identification per invoice which existing order fulfillment systems are not setup to handle and besides IP address, which is only 90% accurate to country and not accurate for mobile or proxied customers, must eCommerce systems are not setup to collect in anyway. A customer selecting “UK” as a billing country durring checkout doesn’t count as location ID from what I have read so far.

    PS. To the guy shouting about WooCommerce. Take a close look at the EU VAT plugin for Woo. It only helps with the VAT collection, not in any of the administrative stuff and most small businesses use their eCommerce site as their order fulfillment system.

  13. Trying to get information from the Tax Authorities of some countries is a challenge to say the least. I just found that the Greek authority will not accept an enquiry unless you have a VAT number. Also, the enquiry is limited to 1000 words which is almost impossible with so many questions to ask, each of which being inter-related.

    It’s a theme across most of the EU actually – very difficult to ask each country for information, yet all have made it easy to send them tax revenue!

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