A new law that comes into effect from 1st January 2015 is completely changing the way VAT (value added tax) is charged and collected. It's not quite the same as US sales tax, and it's always been based on where the seller is located, but the biggest change to the new law is that this is all being turned on it's head - from 1st January the VAT rate of where the *customer* is located will be applicable, and this also means that anyone selling to an EU customer will be affected, regardless of whether the seller is in the EU or not.
Currently, this law only applies to digital goods and services - sellers of tangibles are safe for now.
The law was intended to catch mainly large US companies such as Amazon and stop them using loopholes in EU law to pay less tax. The lawmakers believe that micro-businesses selling digital items are protected, as they've written the law in such a way as to ensure that it's the platform or portal that's VAT responsible. Except there's an awful lot of grey areas: they haven't thought about individuals selling without a platform; or platforms that don't or won't fit the new VAT responsible criteria. They've also vastly underestimated how many of us there are. In short, it's a huge flipping mess.
Unlike Sales Tax, VAT has thresholds that are set by each country. In the UK the threshold is something like £81,000 and as I'll never be likely to reach that, there's no need to register for VAT. Which is good, as it's a horribly complicated tax, and would force a price increase, and I'd have to charge VAT on everything which would have consequences elsewhere. The new law essentially removes all thresholds, which in short means that unless we're selling through a VAT responsible platform, we'd be forced to register for VAT, either domestically (and use the new MOSS system to pay the VAT to each country) or in every EU country we sell to. And even if we're selling through a VAT responsible platform the VAT has to be covered somehow, either directly out of our pockets or through a price increase.
And that's a quick summary. It's a lot messier and more complex than this.
And in turn it's meant that I've been spending an awful lot of time trying to work out what I'm going to do, because I really do not wish to register for VAT unless I absolutely have to. I've always wanted to keep business small and manageable (which doesn't mean I don't want to grow my business; it simply means I don't want to "think big") and this feels like a very difficult moral dilemma as well as a financial one.
Here are my plans as they are at the moment (and yeah, it's a long one):
There's been a long, long thread on Ravelry about this, and Casey this morning posted the following response, which is particularly relevant here as most of my sales come from Ravelry, and I use the Ravelry cart on this website:
"Our current best case scenario is: for the first quarter you can continue business as usual selling worldwide without worrying about VAT at no extra cost. Extra setup work would be required and buyers in the EU would have a different experience on Jan 1 that would hopefully improve in the weeks after.
Our current worst case scenario is: for the first quarter, we offer you a way to disable EU sales or put in alternate links for EU buyers. This would a disaster for Ravelers in the EU who buy patterns and is a last resort, avoided at all costs.
You’ll notice both are the 1st quarter only. That’s not ideal but right now, limiting our goal to just trying to make it through Q1 gives us a little more to work with."
The very last thing I want to do is cut off sales to my EU customers - that would be devastating and highly unfair. I'm very much hoping that the first option comes into play, but naturally I do have to warn my EU customers that they will see some changes, and that we're all working to try and ensure that everything runs as smoothly for them as possible. It would be amazing if Casey can implement a system that covers the VAT (thus avoiding VAT registration, by partnering with a VAT responsible set-up such as FastSpring) and allows us to continue to sell to the EU. Fingers crossed!
Naturally what happens to my Ravelry shop also happens to this website - more on that shortly. Except that maybe it doesn't as API is seen differently (as I say, more on that soon).
Etsy still haven't issued a statement about what they intend to do. The law does appear to implicate them, especially with their direct checkout and automated delivery, but Etsy has never had any system in place for VAT, let alone be in a position to sort things out quickly. Like many, I'm waiting to see what they say before deciding whether to close my shop there or continue selling.
Craftsy seem to be doing nothing for the digital pattern side of things, and issued a statement early on that said VAT was the designer's responsibility (not sure they've looked into this new law thoroughly - who is VAT responsible in these cases isn't straightforward). I sell very little through Craftsy, a handful a month, and I'll likely close that shop before 1st January. eta/ I've since learnt that Craftsy don't currently provide the pieces of evidence that the new law requires, making it difficult for anyone to sell to the EU through them.
LoveKnitting are a large online UK yarn store who have recently moved into selling digital patterns, and they are being fully supportive not only of indie designers, but also on the VAT front, which is such a relief. I'm also really pleased to say that in the first month, the few patterns I'd uploaded have sold well, so I'm working on getting as many patterns uploaded as I can. Not everything is reformatted yet, so I've notched that up a gear or two, too!
PatternFish have also said they'd be VAT responsible, and that's very positive news. My sales through PatternFish have been very low, and in turn I haven't prioritised that venue, but I do plan to get more patterns listed, and get the current listings tidied up with the reformatted patterns, fresh photos, etc. This will all take time as a craptastic internet connection really hinders things, but we'll be back to the UK very shortly and I'll be able to get more of this done in less time and with less frustration.
I'm still working on getting my books back into print, and as they're print, they're not affected by this new law. I was hoping to use the Print+PDF option Magcloud offer but there's been no word yet on how they see the VAT issue, as it would apply to the PDF version. Either way, they are clearly a platform and it should be safe to proceed. I'm also working on print ready patterns, as that would offer an alternative to the digital side of things, and I'll keep you posted.
This is localised and unaffected - DSF are currently my only distributor and everything there will carry on as normal for the time being.
LYS digital sales (Ravelry In-Store)
This is an odd one, but as the sale of my digital pattern to the shop is a B2B (business to business) the shop will be VAT responsible. Not all shops are VAT registered in the EU (and this won't affect things in the US, as they'll have local sales tax) but either way, it should be the shop's responsibility.
And now the pricing issue. *sigh*
I've been stating for quite some time that my pattern prices will have to go up to £3.50 from the new year to cover increased costs in production, support etc and everyone has responded positively to that (thank you!)
In real terms, although I'm aiming to work with platforms that are VAT-responsible, they won't be swallowing the cost of the VAT, only the administration. Figures show that approximately 32% of my customers live in the EU, and with an average rate of 20% VAT, 20p of every pattern sale at that new price of £3.50 will be covering the costs of VAT. In an ideal world, I'd put the price up to £3.75, as I can't afford to cover the increased costs of production AND the added VAT implications, but I kinda feel that jumping to £3.75 so soon with such little warning and when I've been promising a different price isn't fair on you guys.
As promised, the price of each single pattern will be £3.50 from January 1st.
Also from January 1st, there will be 2 price points for eBooks: £10 (TWT, CWT, PWT, WWT etc) and £12 (Bambeanies, Going Straight)
Then from September 2015 the price of the single patterns may go up to £3.75, depending on how the new VAT law pans out. The eBooks may also go up to £11 and £13.
If the new VAT law changes again (one thing we're all campaigning for is the reintroduction of thresholds, which would mean no VAT for micro-businesses like me. It's unlikely to happen but hey) and/or the costs of VAT really have little effect, then there'll be no need for another price increase. If however the VAT implications are as great as feared, then I'll have a clearer idea by then of whether there needs to be another price increase. (and there's lots of things to take into account, including any loss of sales due to an increase etc...)
How does that sound? It feels like a better compromise; I'd really like feedback here... :)
It's all mighty unfair, huh? But it is what it is.
ps/ if you're on Twitter you can follow the #VATMOSS tag to get an idea of how this law is affecting digital sellers. But do tread carefully; you need to be informed but it'll make your brain hurt.