This post is for knitting designers, online shops and platforms. If you’re a knitter, read this post instead.
First off, a disclaimer: Seek professional advice. This is not professional advice. Discussion on an internet forum is not professional advice either.
Until the first submission dates for tax returns pass, and people fail to remit their VAT, there is no case law. Get your own advice from your own tax office, lawyer or accountant; whatever you need to allow you to sleep at night.
I am not liable for any action or inaction on your part. It is up to you to open this can of worms and take a good look inside. Then make up your own mind what you need to do.
I got involved in this topic because I was concerned about the legal threat to Ravelry, and all our collective design businesses, of ignoring this legislation.
To say that we have received conflicting advice from EU tax offices, politicians and pundits over the last few months is a gross understatement. Officials seem to have been as poorly briefed as us. In addition, things are changing so fast that this post may be out of date before I’ve even published it.
Right, let’s dive in.
What’s changing on 1st January?
VAT will be due to be paid in the EU, based on the customer’s location, for digital services such as knitting pattern downloads. So, no matter where your business is based, if you sell to EU customers, you need to know about this.
I don’t live in the EU; what is VAT?
It stands for Value Added Tax. In the EU the basic rate is 17-27%, depending on the country. Some countries have special rates for specific categories. For discussion, I’ll use UK basic rate of 20%.
VAT is a tax that runs through the whole supply chain. For example, my graphic designer and my accountant both have to pay 20% VAT on their sale of services to me. It’s broken-out on their invoices so I can see how much tax they are paying because if I was VAT registered, I could then claim the VAT element back from the tax office to offset against my own VAT bill for the tax due on my sales. The idea is that each business is only paying VAT on the value they have added –it’s typically more like a few percent by the time you’ve offset VAT owed on sales against VAT already paid on expenses.
One of the issues with this implementation is that it looks like a simple sales tax because for a business outside the EU, who can’t offset their own VAT spend because they don’t live here, they just have to cover the whole 20% at the end of the supply chain. It’s easy to equate it to a sales tax but it runs deeper than that.
It’s always been a tax paid by businesses, and the price shown to consumers in a UK shop has to include it – it’s never added as a surprise at the checkout. Only trade shops can show prices excluding VAT because although a business will have to pay it, they’re expected to be claiming it back later, so it less relevant to the price ticket.
Why is VAT going to be applied at the customer’s location on digital services?
VAT used to be applied at the supplier’s location, but this created a loophole. Big businesses could afford to establish themselves in low-tax countries, thus dodging lots of EU VAT on the majority of their sales. By taxing based on the customer’s location, that loophole is closed.
It’s a big change in order to catch big fish. But, small fry are getting tangled in the net.
Are knitting pattern pdfs a digital service?
Yes, when they are delivered by an automated system. If a customer is automatically sent a pdf or a download link, it is a digital service. They are, essentially, a very short ebook.
A pdf sent manually by email in response to a customer payment/order may not be a digital service because of the level of manual intervention by the supplier. If the email is generated by an automated system that creates the email and attaches the pdf for you, it is a digital service. We hope for further clarification on exactly what has to be done to make an email sufficiently manual because this may be a viable option for those selling very few pattern pdfs to the EU.
A live workshop is not a digital service. If you make a video available later as a paid-for download, this part will be a digital service.
A genuinely free digital copy that accompanies a physical book also doesn’t count. If something is free, it can’t be taxed.
Free patterns are not taxable.
Who has to pay VAT on digital services?
If you sell on your own website, using your own software to invoice the customer and deliver the pdf, then you are liable to remit VAT to the EU. (I will blog more about this in another post.)
If you sell via a platform, the legislation says that the platform is liable to remit VAT to the EU.
The point of this part of the legislation is to protect micro-businesses from having to deal with the VAT headache. The EU’s assumption was that most micro-businesses sell via a platform, which will be responsible for dealing with the pain of VAT for you. (I’ll talk about that assumption another time.)
Etsy is still working on their solution. Patternfish and LoveKnitting expect to collect and remit the VAT on patterns sold through their websites.
Ravelry believe that they have found a loophole in the legislation, so that it is not their responsibility to remit VAT on behalf of designers. However, HMRC (UK tax office) have said that they have yet to find a platform produce a credible rebuttal of the legislation. You need to make up your own mind. It is not possible to require someone to remit a tax which is not actually their responsibility to declare.
One thing has been made very clear to us: Ravelry do not plan to remit VAT on pattern sales. Ravelry have worked (extremely) hard to offer designers a range of options, on their reading of the legislation that VAT is the designers’ responsibility. The options are continuing to sell on Ravelry as now (Ravelry assumes the designer will report the VAT themselves), diverting EU sales via a special link to LoveKnitting, diverting sales to another website/platform of your choice, or stopping selling to the EU via Ravelry.
Some of these options will still be open to us in the event that Ravelry decides that the loophole they have found is insufficient, or that the business risk is too great. So, although the work is being done with the intention of being used to help designers remitting VAT, the functionality is still hugely welcome if the reverse is eventually found to be true by the tax office. There are options that will still work, such as diverting all EU sales to other websites or LoveKnitting. For that, I am extremely grateful to Ravelry and LoveKnitting. (I intend to blog in more detail about the Ravelry options in a subsequent post – there is a lot to cover.)
I have been corresponding with Jonathan Heath at HMRC on this matter. In his email to me of 27 November, Mr Heath explained (“developer” means content developer, i.e. designer):
“The EU guidance on the application of Article 9A is very clear and, in effect, it means that unless an e-marketplace is merely providing an advertising service (i.e. it redirects the customer to the developer’s website and the download and payment, etc., are provided by the developer’s website) then the e-marketplace is responsible for charging and declaring VAT on the supply. This is irrespective of the wording of any contract between the developer and the e-marketplace. Probably the simplest criterion for people to consider that brings this into play is the download itself. If the download is done via the e-marketplace then the e-marketplace is liable for the VAT.”
I received another e-mail this morning, which was much more strongly worded and more specific. I will share the less strongly-worded content (“place of supply” means where the service is supplied to, i.e. customer location):
“I cannot see how a designer using Ravelry can obtain the information needed to determine the place of supply without getting that information from Ravelry. Ravelry have the IP address, etc, and the designer does not. In addition the designer is not in a position to change the price (if that is what the designer wants to do) based on differing VAT rates, or to even apply differing VAT rates when the sale takes place. Ravelry have control of what is charged at the point of sale (even though the base price charged is set by the designer) so on a practical level, as well as a legal level, Ravelry have to be the ones responsible for accounting for the tax. As I understand it Ravelry also create and issue the invoice for the sale even though the invoice will mention who the designer is. But the invoice numbering system is the Ravelry one.
Because of all of this I would not see HMRC pursuing individual designers for VAT on sales through e-marketplaces that fulfil any one of the criteria. We would pursue the e-marketplace instead if there are issues. The law is clear on who is responsible and the criteria can be applied to show who should be responsible.”
You need to make up your own mind and seek your own advice.
Next up will be a post about the options which Ravelry have provided to designers (Part 2), and then MOSS (EU VAT return portal) registration in the UK, including registration for non-EU businesses (in case any are reading this).
If you need more information now, there is a ton of official information available – HMRC guidance summarises the full EU guidance. There was an EU seminar series, which is a useful introduction. What we await is clearer, simpler information on implementation of some of it.
Disclaimer: This blog is provided for information purposes only. It is not intended to amount to advice. You should investigate the facts for yourself and not rely on the contents of my blog post. Seek professional advice before taking or refraining from action based on any of the information in this blog post. I am not liable or responsible for any reliance placed on the contents of this blog. These are big issues.