VAT OverviewUntil the end of 2014 VAT (Value Added tax) is added to most purchases within Europe when you buy something. Currently this is about 20% but the rate varies between country and there is no VAT at all some items but the VAT rate is always set at the rate of the companies country. VAT make products more expensive and adds an administrative/accounting overhead to companies, but most EU countries set a threshold so that if your EU Sales are less then the threshold you do not need to charge VAT. This allows micro-businesses to compete with larger businesses who have many benefits of economies of scale not afforded to smaller businesses.
JThinks positionJThink is very much a microbusiness - for over seven years I have been designing, developing, marketing and selling my software. I don't make a fortune but I make enough to support myself. In the UK the VAT threshold is currently £81,000 so as long as my EU sales are less than that I do not need to be VAT registered.
Luxembourg is the problemUnfortunately Luxembourg and companies such as Amazon have been abusing VAT for a number of years. Luxembourg set their VAT rate to only 3% for products such as books and e-books and then companies such as Amazon registered their EU operations in Luxembourg so they could charge VAT at only 3% undercutting their competitors. Despite the low VAT rate Luxembourg receives a surge of tax that it would not have got otherwise.
New Draconian legislation introduced by the EUSo how does the EU sort this out, does it punish Luxembourg directly, no it introduces new draconian VAT rules starting January 1st 2015 that make no sense and punish small businesses. As a further kick in the teeth for the next few years the additional VAT raised will be given to Luxembourg to compensate them for their loss . Coincidentally the current president of the EU is Jean-Claude Junker , from 1995 to 2013 he was the Prime Minister of Luxembourg.
This is better explained by the HMRC than the EU but I shall attempts to sum it up in a few sentences
1. New rules mainly effect e-services such as e-books and software
2. VAT is now based on the customers countries not the companies country.
3. The VAT threshold is removed for any sales outside a companies country
New rules effect e-services such as e-books and softwareIf you look at the documentation and examples the focus is very much on telecommunications and ebooks, after all the main driver of this leglisation was originally the Amazon issue. However software has been quietly added the mix so this affects Jaikoz and SongKong
VAT is now based on the customers countries not the companies country.This means that depending on where the customer is based the VAT rate will be different. Countries such as Italy have recently slashed the VAT rate on ebooks so that their citizens are not greatly impacted by the change but so far there have been no such reductions for software.
It also means that companies have to record additional information about the customers location, thankfully today the deadline for implementing this additional information has been extended from January 1st 2015 to June 30th 2015 so I don't yet have to make major changes to my order processing system, but I may have to if Paypal doesn't get onto this. However I do have to charge VAT starting from January 1st , so nothing has changed there.
The VAT threshold is removed for any sales outside a companies countryThis is real killer for companies such as myself, if I sell one copy of my software to a cusotmer based in Denmark then I have to charge VAT. Perversely it is now less expensive to supply software to customers outside of the EU then within because not VAT is charged. So as EU citizens expect the prices of many items to rise. The one area where the HMRC has backtracked is that I now may maintain my threshold for UK sales, so UK customers do not need to pay VAT.
How does this affect Jaikoz and SongKong ?Unfortunately I cannot afford to absorb this cost myself, nor take different revenues based on where the customers resides so I have had to pass on the VAT costs, as it is I have not increased my price for a number of years. This is a tax that goes directly to the EU and make things more difficult for micro businesses so the tax will now be added at purchase time.
Can I avoid paying this Tax ?If you are a VAT registered business then you can always claim back any VAT charged.
This tax is only payable to those of you based in the EU but not the UK. If you are based anywhere in the rest of the world such as US, Australia or Japan there is no change.
One idea is that if you have a generous friend who resides in one of these countries maybe they could purchase the software and give it to you.
If like me you think this is step in the wrong direction you can find out more about it at http://euvataction.org/ this includes a petition that can be signed here