From 1st January 2015, all businesses selling virtual / e-products, or digital products into EU states must charge VAT at the rate relevant in the member state in which the purchase takes place. Dealing with the these new EU VAT changes will not be easy.
Whilst this new EU ruling will have an annoying administrative impact on all business, it is those smaller businesses, not currently registered for VAT in the UK, that will feel the biggest impact. Developers and digital product sellers who have not previously ‘had’ to register for VAT in the UK (as they are below the turnover limit requiring them to register) now find they ‘must’ register if they are to continue selling into the E.U.
Registering for VAT is not necessarily as bad as it may seem at first as costs associated with accounting for the VAT can be easily offset by reclaiming VAT on business operating expenses. However, dealing with the varying VAT rates across all member states may well prove to be a nightmare.
There are 28 member states and rates of VAT, or sales tax, vary significantly from a low of 17% in Luxembourg to 27% in Hungary. Worse still, each state also has its own specific peculiarities. For example, Italy, that has a standard VAT rate of 22%, appears to have cut the tax on e-books to 4% in 2015, but this reduced rate does does not apply to apps or software.
Beyond the administrative tangle this situation creates, other more philosophical and interpretive questions are raised. For example, could an interactive e-book be really regarded as an app? Just how much interactivity will be allowed before the digital book needs to be re-classified and who will make this assessment and how will it be judged?
Is there an easy way out of this mess? Well, apart from stopping selling in Europe all together (as a number have done already), you could cut your profits and use a reseller such as Amazon or Apple to handle the sales and let them deal with the re-charging complexities and handling the VAT. However, there is a big downside to this solution in that you will pay for it. Amazon, Apple and their ilk are not registered charities, in fact they are far, far from being charities. In practice it may prove that their fees could far outweigh the cost of establishing, and maintaining, a multi-rate bookkeeping programme.
For those using Google Play for distributing Android apps, there is an even greater issue. While, following the sale, the likes of Amazon and Apple have the contractual relationship with the EU purchaser, with Google Play, the app seller has a contractual relationship directly with the E.U. customer and this is where the VAT trap is waiting. If Google do not administer the VAT charge correctly, it is the app seller that is liable not Google. In other words, they may take the problem off your hands as far as the initial charging and administration is concerned, but if it goes wrong you, the app seller, will be responsible.
Part of the problem affecting the smaller development houses stems from the fact that non registered and/or smaller businesses appear to have been simply forgotten when drawing up this E.U. legislation. This is both surprising and disappointing as it looks like it may prove to be a bit of a boost to a limited number of US Corporations to the detriment of many smaller European based application developers.
So if you are an app, or other digital product, producer or seller dealing around Europe, what is the best way to deal with this new problem?
Well, the first step may be to admit that you are not a VAT expert and especially not an EU VAT expert. The second step may be to recognise that if you have an accountant handling your accountancy administration, or indeed a bookkeeper, they may also not have the more up-to-date and wider E.U. knowledge to effectively help you deal with this problem.
In other words you will need to take detailed professional advice specific to your situation, but make sure that the party providing the advice really is up to speed with all of the rules and regulations and not just winging it. This may require the appointment of a new (probably larger) accountancy practice.
If you decide to do it yourself, it will be essential that you keep up-to-date with all the relevant rates of tax, rates changes and adjudications on how the rules should be applied across 28 member states which you will need to to monitor on a very regular basis. This is probably not a good idea.
One other option is to sell up, or license the product to larger business who will handle the sale, the VAT, the legal problems and everything else. The return on this may be lower, but it can also be much greater and without the legal, or accountancy headaches. It will also produce cash that can be used on new developments – perhaps something that is useful to the rest of the world, but not Europe.
If you believe selling or licensing may be an option for you please get in touch, we will be able to help you. Alternatively – enjoy yourself!