You can tell by the title that this is going to be a riveting post! It is however one I have to write as I need to explain why some aspects of purchasing my patterns are very shortly changing.
I will continue to sell my knitting patterns to everyone who wants to buy them, regardless of their location, but from January 1st and for the foreseeable future I will no longer be selling my patterns as instant downloads on Etsy but will be emailing them all individually instead. This will mean a little bit of a delay following purchase but I will do my best to send the files within 12 hours of purchase and most of the time within an hour or two (this is because HMRC have said that emailed files are not subject to the new VAT laws – see below).
Purchasers in the UK, USA, Canada, Australia and anywhere else outside of Europe will continue to be able to buy instantly downloadable patterns from my website and Ravelry exactly as before but customers within Europe (not including the UK) will be diverted to buy from Etsy.
This is why…
On January 1st 2015 a new EU-devised law will come into force regarding VAT on all automatically electronically supplied services (telecoms, video streaming, e-books, apps, music, pdfs etc) full details are here. Previously VAT has been payable on the seller's location and there were some sensible thresholds in place to nurture the smallest of small businesses and encourage entrepreneurship and trade.
From January 1st the VAT will be payable on the buyer's location and there is no de-minimis threshold – in other words if you sell a single pdf file/music download etc. to anyone in a European country that you are not resident in (whether you as the seller are in Europe or anywhere in the rest of the world) you will be expected to charge VAT at the buyer's country rate and send that VAT to that country's authorities. You will need to become familiar with the 75 different tax rates across the 28 European member states.
Most European countries have introduced a mini one stop shop (MOSS) service within their revenue and tax departments (in the UK this comes under the remit of HMRC). The MOSS system allows businesses to sign up and submit a single quarterly return of all of their EU sales in one go, with HMRC then distributing the collected VAT to the correct country's tax authorities. This sounds like a good solution but for small businesses the admin burden is extraordinarily complex. Business are expected to collect and store 2 pieces of non-contradictory information on their customers location and if these contradict then they must collect a third, see this extract from HMRC own website:
Types of supplies covered by the presumption rule include where the digital service is supplied:
- through a telephone box, a telephone kiosk, a wi-fi hot spot, an internet café, a restaurant or a hotel lobby, VAT will be due in the member state where those places are actually located – so if a German tourist makes a call from a telephone box in France, VAT will be due in France
- on board transport travelling between different countries in the EU – VAT will be due in the member state of departure eg, if a ferry operator provides a wi-fi hotspot on board ship which is available to passengers for a fee, VAT will be due in the member state of departure and won’t depend on a passenger’s place of residence
How on earth a sole trader has access to this information is beyond me – I certainly don't have access to these details from paypal purchases.
There is also a requirement for the business to store these details for a minimum of 10 years in case of an audit and that this storage of this sensitive data should be on a secure server – requiring the business to register as a data storage collector.
The law was obviously intended to stop the tax evasion of companies who locate in a low tax rate country when in fact most of their business is done in a country with higher tax rate. It seems that in planning for the new law only those huge multi-national corporations were considered and that those involved with implementation were not even aware that there are 100,000s of individuals around the world selling their own self published literature, music downloads, knitting patterns, digital art etc directly from their own websites to customers in other countries.
So, you can see how daunting this new law is for little people like me who sell toy knitting patterns from their laptop on their dining room table and it seems insane that individuals are expected to comply in the same way as a multi-national company.
As a buyer it will mean that in general you will be paying more VAT than previously and that you will have a lot less choice in where you buy from – many designers have already stated that they will block sales to the EU or will no longer sell their patterns at all. You are also going to be more frequently asked for your phone number or other verifying data when you purchase anything digital on-line.
Most individuals and micro businesses only became aware of this new law in November 2014 and then only thanks to social media (despite the fact it had been agreed by the authorities in 2008) leaving us only a handful of business days to digest the complexities and sort out some kind of compliance.
As a result an EU action group has been formed with the aim of informing the authorities about a sector of the market they had previously failed to take into account, understand or even acknowledge. If this new law affects you either as a seller or a buyer please go and read what they have to say and consider signing one of the petitions calling for thresholds to be put in place to protect the smallest business from having to close under the weight of admin.
Thanks x
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Other resources:
Ravelry and discussion about EU VAT
little cotton rabbits 
Maybe paypal or etsy will have a software solution.
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Thank you for a very sensible and well-explained post. I have a book which I sell through Amazon and they have been helpful in adjusting the prices for each country to comply with the new VAT laws, but it is still unfair that small business owners like you who don’t necessarily have the time or resources to deal with these changes are the ones who are going to be hit hardest – as punishment for tax evasion by big conglomerates whose greed has caused all of this in the first place. I have signed the petition and I hope many more people do so and our Government will push for the EU to look again at the new rules and make them fairer for those whose livelihoods depend on their small businesses. I wish you every success in 2015.
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It’s always the ‘little’ people who suffer, isn’t it!!
V x
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My husband is a Certified Public Accountant with a Master’s degree in Tax. He says even the tax professionals don’t understand most tax laws as governments purposely make them complicated. As I write, he is in the Law library researching a tax problem for a client. Good luck. What an awful dilemma as a small business to be in.
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That makes my head hurt just reading about it! Hubby and I have signed the petition. X
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Well this certainly takes the fun out of your creation sharing. Why don’t they just leave small scale PDF sharers, like yourself, alone and go after the big multinationals. I feel you angst but please don’t let this discourage you…many a grass roots movement have led to positive change.
Sincerely, Lori from Port Perry
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The new laws affect us too, it’s been nothing short of an actual nightmare. And in the following year Japan are set to add new VAT laws too. Good grief. As far as we can tell if people conduct the transaction through a third party the rules don’t apply, so we’re going with these people: https://www.paddle.com/ super simple and hopefully will work OK.
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Oh yes…signed the petition and got 5 of my friends to sign too! I will keep promoting 😊
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Well good grief! That is quite annoying isn’t it?! As if you don’t have enough on your plate to worry about!
Hope you had a wonderful holiday and continue to do so! Happy New Year to you and your sweet family! Much love!
XXXX
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Thank you for the clearest and most understandable explanation I have read so far! I hope you manage to cope with it and that it doesn’t affect your business too much. I only have one PDF pattern in my Etsy shop, which needs to be sorted out, but it puts me off trying to sell any more. As always, another law not thought through properly.
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A beautifully explained post Julie! I’m selling patterns online too and it’s a ridiculous situation that we are now in isn’t it? I’m going to need to post something similar too I guess to explain what’s happening with my patterns. Actually, as you’ve written so clearly about it I was wondering if you would mind if I quoted your explanation in my post? I understand if you would rather I didn’t of course. 🙂
S x
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Petition signed and your post shared with my Ravelry group – hopefully more signatures on their way!
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Can I ask this – what if your takings are such that you are not VAT registered? Do you have to collect these taxes? The threshold is a turnover of over £70,000 for distance sellers before you are required to register with the vat offices. So does this law now require every business to be vat registered if they are a distance seller or is it simply that this has been misunderstood by all involved and it doesn’t apply if you don’t have a big enough turnover?
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Hi Annie
This is the big problem with this new law – the VAT threshold (in the UK £81,000) only applies for physical goods or electronically supplied digital services/goods sold only in UK/Rest of world. There is zero threshold for ANY European cross-border sales of electronically supplied digital goods and services, so a single sale of an automatically delivered pdf file to someone in another European country technically means that you have to VAT register, even if like me you are nowhere near the UK threshold. I am manually emailing my PDF files because HMRC have said that this constitutes human intervention thus exempting my sales. I recommend you read this if you want a fuller understanding: https://www.gov.uk/government/publications/vat-supplying-digital-services-to-private-consumers/vat-businesses-supplying-digital-services-to-private-consumers
and also explore the EU VAT action website where they have more details:
http://euvataction.org/
and please sign the petition above on the EU VAT action page if this issue affects you.
I should also mention that the EU have plans to roll this out across sales of physical goods from as early as 2016.
J x
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Also signed petition and shared it on Twitter. Thanks for the very comprehensive explanation, I was completely unaware.
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Thank you Julie, it is so frustrating and no doubt untenable in the long run, as how many of us have the ability to collect this tax correctly? I can see the only way out of this is to deliver a PDF file as you do. Many thanks for your clear and comprehensive post. I will sign the petition too. Annie
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So complicated. Hope you have a very Happy New Year.
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I’ve only just heard about this Julie and am feeling quite dazed! Thank-you for posting this and for supplying a very helpful link.
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I was just wondering if you have seen the recent posts on Flossie Teacakes blog where it looks like she may have found a couple of potential solutions for people selling PDFs patterns online? I flag as other readers might find it helpful. I hope 2015 is everything you wish for.
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OhMyGosh — I almost had a heart attack when I started reading — especially when I got to the “after Jan 1” part. I’ve saved up buying your patterns until a certain someone makes an appearance and then I’m going to get them all as a lot. I wouldn’t care if it were snail mail as long as I can still get them. You had me worried there for a minute! Whew! Happy, Happy New Year!!!
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Excellent post explaining the situation. Companies like etsy are supposed to deal with it but are refusing to, saying the onus is on the seller. This seems not to be the case according to hmrc, but they choose to see it differently. They may get away with it while the VAT affects just online digital services, but in the next year or two, it will be for physical goods too. They will have to put something in place then, or lose a lot of their sales/sellers.
The situation is really untenable as it stands. There are a couple of places who will deal with it for you but it really is unacceptable otherwise, the admin load as well as the responsibility for the data collection is an impossible burdon. Just where and how can you store all that info for 10 years? You have a duty of care to the customer to look after that data. Even if you don’t sell to the EU I would imagine you might still be expected to show that they are not from EU countries – proving the negative in other words. A truly ridiculous situation and one that is going to get worse. The irony is, it will encourage people to sell on platforms like Amazon as a way around it, and they are the ones who are partly the reason for legislation like this.
Small business are already withdrawing their patterns for sale. Sellers on etsy are looking to have a no EU purchasing button. Choices are already being limited. So not good for the buyer either. So much for the open market place.
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Hi Julie,
I just wanted to say I’ve seen a few people putting their patterns on Payhip which uses Paypal and takes care of the VAT for the seller – have you looked into this as a solution for you? It would be a shame for people not to have access to your adorable patterns! (Luckily I already own all your bunny and bunny outfit patterns!)
Ann
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