You may have seen references to the new “VAT rules” in our Get Legally Enlightened Facebook group or elsewhere on the web, and wondered, “What is VAT all about, and does it even affect me?”
If you are an online entrepreneur, the answer is probably yes, the new VAT changes could affect you. So I created this Q&A for you to help you understand the law, how it affects you, and what you need to do about it.
What is VAT?
VAT (Value Added Tax) is a tax that currently is imposed on European businesses, and it covers the sale of digital goods and services by European business owners to their clients. However, on January 1st, new VAT rules take effect that place a tax on ANY small business owner located ANYWHERE who sells digital products to ANYONE in the EU.
Do the new VAT rules affect me?
Regardless of whether you are American, Canadian, European, or otherwise, if you sell “digital products or services” online to any consumer based in the EU, the VAT rules apply to YOU.
Because most online entrepreneurs sell online programs to clients from all over the world, chances are that your clients could include individuals in the EU.
What the heck constitutes “digital products and services” under VAT?
Under the VAT rules, “digital products and services” include e-books, e-courses, downloadable products, recordings of live webinars, and other products or courses that you sell online to any person in the EU that don’t have a big human component or interaction to them. Examples include:
- E-courses where people log into your site (or a platform) to access modules
- E-books that you sell on your site (free e-books as opt-ins are not taxed though – b/c they are not SOLD; they are FREE!)
- Recordings of interviews, webinars, or podcasts that you sell online
- Downloadable programs with no/minimal human interaction
- Self-study or self-paced courses
Okay, I get that. But how much “human interaction” is required for a “digital product” to avoid the VAT?
All new rules often need to be fleshed out, and the VAT rules are no exception. This part is a bit vague. However, from all that I have read, it appears at the moment that if you do these things the VAT does NOT apply:
- One-on-one coaching or services
- LIVE group programs
- LIVE webinars (but if you send out the recording, the recording is subject to VAT)
- E-mail that is sent to a person’s e-mail address where you actually hit “send” (but you can include course content in it)
If I DO sell online courses and e-books and digital products without much “human interaction”, what does that mean?
The bummer is that a lot of entrepreneurs LOVE digital products and services because it frees up TIME and allows you to deliver your products to the world without being physically present.
If you DO sell digital products and services, it just means that you are subject to the VAT. This means that you have to pay a quarterly tax and do more extensive bookkeeping and reporting.
Please know that YOU DO NOT HAVE TO STOP SELLING YOUR DIGITAL PRODUCTS. You just have to pay taxes for selling digital products and services with no/minimal human interaction – and you may be very willing to do that.
So, how much is the VAT and how is it calculated?
Oh glory be! I knew you would be wondering about that. I am SO not your girl when it comes to tax calculations.
Here’s my Disclaimer: Although I am an attorney, I am not specifically a tax attorney or an accountant, so please still consult your own accountant about your particular situation and number-crunching regarding VAT. Each business is different and the calculations are solely determined by the EU, so my ability to guide you is very limited concerning numbers.
How do I pay the VAT?
The easiest way to deal with the VAT is to have your e-courses hosted on a platform that will take care of the tax calculations for you, such as Amazon, Simplero, Etsy, or to use a program like Taxamo that is specifically designed to address VAT.
What this means for you is that will need to sell and DELIVER your digital products and services through those platforms, rather than hosting digital content on your own website.
(You can still have a sales page, but link it to Amazon or Simplero’s invoicing and then have Amazon/Simplero deliver the content – rather than you deliver the content through your own site.)
You still have to pay the taxes, of course, but, under the new VAT rules, the platforms bear the burden of determining the calculations.
You may still have to register with VAT MOSS which is the electronic tax registration service to pay the VAT. VAT MOSS is the online service that allows you to pay the VAT taxes to the EU. Just like how we have an accountant figure out how much we owe the IRS in US taxes, we still have to be the one to write the check and actually PAY the taxes.
I am not going to get too much into how VAT MOSS works here, because VAT MOSS is a topic that can be covered all its own, so for more info about how VAT MOSS works, DEFINITELY check out Tamara Baranova’s recent blog post here because she explains it beautifully:
Where can I get more information about VAT and VAT MOSS?
- Join our Get Legally Enlightened Facebook group to learn more about VAT and get LOTS of other free legal tips.
- Here are more resources about VAT and information about what other entrepreneurs have decided to do for their own businesses concerning digital products and services subject to VAT, to help you decide what is right for YOU and your business:The Brand Alchemist
I am sure you have a lot of questions about VAT, but I don’t want you to worry or stress. Change is always tricky, and we all are navigating these new rules together, all around the world.
All you can do is empower yourself to get educated, seek support, ask questions, and tune into your own intuition to guide you as to what feels right for your business and your business offerings as to whether to offer digital products and services to European customers and pay the VAT.
Personally, I plan to offer MORE digital products and services in the coming year and will do what I need to do to pay VAT for my European online consumers. Paying taxes in and of itself should not stop you from offering your digital programs and services to the world. I pay taxes here in the US for my business, and, with the help of my amazing accountant, I have figured out how to do that, so now my knowledge will just extend further to understand how to pay VAT in the EU as needed.
This is a very personal decision though, so it is important that you do what feels right for YOUR business and in energetic alignment with your own desires and intuition.
I hope this information about the VAT rules was helpful to you. I am always here to support you.
If you have questions or want to connect, feel free to e-mail me, post in the Get Legally Enlightened Facebook group, or grab a free 20-minute Legal Chat here.
Here’s to getting Legally Enlightened™ and to feeling empowered about VAT!
Thanks for the shout out Lisa! Glad you found my article useful.
It’s a big change and it’s a pity that HMRC & Co didn’t make more of an effort to create awareness about this earlier so that everyone had a little more time to prepare.
But at least there are solutions to move forward, there are ways entrepreneurs can get round the changes and continue selling their digital products – so it’s not all doom and gloom!
Tamara Baranova recently posted…New VAT Rules Affecting Digital Entrepreneurs in the EU #VATMOSS
Here’s something I don’t understand: How can the EU force an entrepreneur based outside their jurisdiction to pay the VAT?
Are we to understand that the EU can force Paypal, Stripe, Square and all these online transaction services to comply?
Francois Theberge recently posted…Healing Smartly
Great question, Francois! It’s the second time someone has asked that very same question this week.
The reason that the new EU VAT law can affect businesses based outside of the EU is because the tax is imposed on where the BUYER is located, not where the seller is located.
There are many instances where countries or states tax individuals/businesses who don’t reside in that state or country.
For example, it’s kind of like how sales tax works in the US. The state of California can impose a sales tax on all purchases of goods there, even if the buyer resides in, say, Maine.
This new VAT law will take some getting used to by all of us, for sure, and I am sure that some of the kinks will get worked out over time as the law is implemented and tested. Don’t let it steal your holiday joy! 🙂
Lisa recently posted…How to Make VAT Calculations Super-Easy for You
But the state of California does not have jurisdiction to require businesses in Maine to collect CA sales tax on mail order or internet sales to residents of California. So how does the EU have jurisdiction to force a US seller to collect an EU sales tax on sales to the EU? I’m not an expert in international law but I believe there would have to be a treaty that addresses this issue before the EU could enforce its law on US sellers.
I hear your concern, Abby. It does seem unfair and unreasonable that the EU can have jurisdiction to force a US seller to collect the VAT on services sold to European consumers.
However, these new rules are in follow up to rules that were put into place over a decade ago (in 2003) to help clarify them, and encourage compliance, so the jurisdiction issue was worked out over a decade ago…
Lisa recently posted…How to Make VAT Calculations Super-Easy for You
Thank you for writing this article. However, there are some important facts missing from this article – for the latest on the rules, please see http://www.euvataction.org/key-facts/ Lisa – I’m happy to help you to update it, if you’d like.
Secondly – I feel the frustration and anger at this! But there is nothing new in this legislation for USA businesses. This has been a legal requirement under international trade treaties since 2003. The only difference is that the rules have changed inside the EU and we’re shouting about it.
However, the impact of this new EU VAT legislation is huge and massively disproportionate for micro businesses – and we need to find solutions.
If you’d like the latest insider info, dispelling the myths, clear guidance on how to stay outside of these rules, and how to avoid the most common mistakes that I’m seeing businesses making daily, I’m running a webinar to help you.
As a co-founder of the EU VAT Action campaign, I’m not just reporting hearsay or inaccurate newspaper articles. We are now inside the circles where this law was decided, working to get it changed.
We have worked non-stop as volunteers since November 2014 to get concessions, fundamental changes of these laws and an international threshold. We have even met with the UK Prime Minister and his Special Adviser on this – and we’re meeting with the EU Commissioners in Brussels next month. We now have consultative status on HMRC (UK IRS) Working Party meetings on EU VAT, so the webinar will give you the latest facts and potential solutions.
Here’s where you can register: http://www.clarejosa.com/eu-vat-webinar
I’d love to see you there. Namaste, Clare x
EU VAT Action Team
Clare Josa recently posted…TWITTERSTORMS: Monday 23 February 9-10am GMT & 5-6pm GMT
Clare, thank you so much for your post! I am sure that there are some updates to clarify VAT since this post in December so I am glad you are holding a webinar that will help people understand what they can and can’t do regarding VAT.
I know you and so many others have been tirelessly working to help make the application of VAT not be so challenging for entrepreneurs and small businesses so THANK YOU and your EU VAT Action Team for all of your efforts!
With Legal Love,