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How to Dodge the VAT Bullet

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Remember Mr.Anderson from the first Matrix movie? The little guy getting crushed by the system? Well, ’tis the season and so the merry bureaucrats of the European Union (EU) decided to crush all small online business owners.

Their weapon of choice is the dreaded Value Added Tax (VAT). The VAT is a tax system so complex that EU countries set thresholds for turnover below which businesses are not required to deal with it.

The VAT Complex

The reason for the complexity of VAT is that it is a tax with much variability in it. To demonstrate this, let me show you how many basic VAT scenarios are there:

Non-VAT Payer Sells to Anyone

This is what most small online businesses do so far. You create a plugin, add-on, pattern, ebook, whatnot and sell it to anyone for a few dollars, pounds, or euros. You don’t care about VAT and everything is super.

VAT Payer Sells to Non-VAT Payer

This is the case where you buy something from a larger company that is above the VAT threshold for turnover. The larger company’s product price already includes the VAT. You pay the price including the VAT and the seller takes care of the rest.

VAT Payer Sells to VAT Payer

There are actually two subsets to this case.

If both VAT payers are residing in the same country, then the buyer deducts his VAT expense of the purchase from the VAT owed to the tax authority. While the seller adds the VAT income to the VAT owed to that same tax authority.

In the second scenario, the VAT paying seller resides in one EU country, while the VAT buyer resides in another EU country. In this case, the VAT rate used is zero. But both parties need to document the purchase by filling out a form called EC Sales List, so that the tax authorities in both countries can make sure that there is no VAT evasion going on.

VAT Rates and Thresholds

In addition to the above scenarios, there are lots of VAT rates in the EU. And they often change.

Even the threshold above which a business must register for VAT varies among the 28 member countries of the EU. And those thresholds also tend to change around.

When to Become a VAT Payer

So, to put the whole picture together, if there is no good reason for you to become a VAT payer, it is best not to become one.

Don’t get me wrong, there are good reasons to become a VAT payer as you are able to reclaim your input VAT.

Let’s say that your home country is Poland. And let’s say that you produce some goods there. You buy parts for your product in your home country — and the prices of the parts already include VAT. But you export your final products to other countries of the EU and sell them to VAT payers there. In this case you don’t charge VAT on your sales, yet you can reclaim your input VAT expenses from the Polish tax authorities.

But in most cases small businesses don’t become VAT payers because of the following reasons:

  • low yearly turnover
  • none or very little purchases that would include reclaimable VAT
  • too much bureaucratic hassle with due dates, forms, and penalties

The VAT Bullet

However, very soon — as of January 1, 2015, small online businesses that sell to consumers residing in EU member countries will be required to register for VAT and suffer for it a lot. There’s a zero threshold set for turnover.

What does that mean? Let’s say that your business is located in the UK but you have customers from other EU countries as well. If your domestic VAT threshold has not been met, then you still have to register for VAT to pay it on purchases made by non-UK EU customers. Because there is no threshold there.

People can register with each EU member country’s tax authority individually. Or they can register via a so-called VAT Mini One Stop Shop (VAT MOSS).

European bureaucrats and politicians decided in their infinite wisdom that the real big money is in online sales of digital products and services. Only if they could get their hands on the twenty cents or pennies of each sold ebook or pattern, surely then the many collapsing EU government budgets would be saved.

Let’s ignore for the moment the corruption and outright stealing by those same bureaucrats and politicians. A fact that is well-documented and going on on a much larger scale in many EU countries, especially the ones on the brink of bankruptcy. Let’s ignore the moral outrage regarding the fact that these people want to get their hands on the cash of considerably lower income people to make up for the stealing and corruption.

Let’s ignore all that and let’s focus on what is important — after you become a VAT payer, you will have to:

  • raise your prices and become less competitive
  • pay for an accountant to deal with the above-mentioned bureaucratic hassle, or
  • waste your own time dealing with it — time you won’t be able to spend on growing your business

Many small online businesses are already deciding to close up shop. Others are waiting for a last minute change of hearts from EU politicians and bureaucrats. A vain hope, I think.

Dodging the Bullet — In Theory

It would be great to have a way to remain in business, keep selling to EU customers, and not pay VAT, wouldn’t it? I think so. That’s why I came up with the following scheme:

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VAT Avoidance Scheme

What this means is that when visitors arrive to your website, you register their IP addresses. Based on their IP addresses you will know whether they are from an EU member country or not.

When a visitor from an EU country decides to click through to a product page on your website, where he or she would be able to purchase an item — you redirect this visitor to a third party marketplace.

In that case you get around the VAT hassle, because only non-EU customers will be able to buy directly from you. You are not required to pay VAT on their purchases.

And you let the third party marketplace worry about dealing with EU customers and the VAT mess.

Dodging the Bullet — In Practice

What we need for putting this thing into practice is an excellent WordPress plugin. The plugin needs to be able to flawlessly redirect visitors based on their geolocation. It also needs to do it on a per page or per post basis.

I was able to find one such plugin. It is called WordPress GeoIP Country Redirect and it is not free. It costs $15 but considering the tremendous hassle of VAT bureaucracy, I think it is not that much of an investment.

Try it out by clicking here. If you are accessing the page from an EU member country, you get redirected to a page saying “Welcome dear EU visitor!”. Otherwise, you will see the original page that says “Welcome dear visitor!”

The second thing needed is a third party marketplace for your digital goods. Thankfully, there are many of these around, most notably Etsy. In these, it is very simple to set up shop, upload your digital goods, and start selling. The marketplace deducts a small sales and/or listing fee and sends the remaining amount to your account (usually at PayPal).

Conclusion

I believe that this is a simple and elegant solution that lets you keep selling your digital products and services to customers worldwide without being burdened by the bureaucratic non-sense of value added taxation procedures.

Also, very importantly, it lets you remain competitive in a business where every penny or cent counts.

Important Note

The above information is intended for educational purposes only. It is not to be construed as legal advice, tax advice, accounting advice, or any other kind of advice in any professional capacity.
 
Seek professional help from said trades to double-check any information put forward in this post.

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Comments 3

  1. Since you specifically mentioned Etsy here, you should be aware that they are refusing to take on the VAT responsibilities for their sellers. Those considering turning to a platform will need to research to make sure the platform is both willing AND able to do this – which most small ones at this time are not. Some, like Ravelry, are scrambling to provide alternatives for their sellers, but due to the lateness of this issue being brought to their awareness, solutions for the short term are extremely limited. All I can say to everyone that is getting caught up in the mess is…

    Good Luck!

    1. Peter Post
      Author

      Hi Debra and thank you for bringing this to my attention. Whatever Etsy says is irrelevant at this point. According to EU rules they are responsible for collecting all VAT and handing it over to the EU member countries. Whether they are willing to do this or not is of no consequence to Etsy sellers. Should Etsy opt not to care, all EU tax authorities will be going after them with stiff penalties. It should be remembered that the reason for the creation of this exotic new rule was exactly that large companies were not collecting VAT. Small businesses were not thought of and are now caught up in a mess. But Etsy as a private business cannot declare that it is above EU rules. This is not an option for them. I guess Etsy is not prepared for EU VAT (the same way as most other businesses are not prepared either) but that doesn’t mean that the rules will not apply to them.

  2. Peter Post
    Author

    Good news! Just as I thought and said earlier, Etsy finally understood that it is their responsibility to collect VAT on behalf of Etsy sellers, and they are going to provide exactly this service as per their announcement here.

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