EU VAT Regulations, Crowdfunding and Patreon

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EU VAT Regulations, Crowdfunding and Patreon

#1 Post by DesertFox »

I couldn't find a particular thread discussing the EU VAT rules that were brought in on January 1st, so I thought it might be worth bringing up for those of you here who are unaware of what has happened. It pretty much affects anyone (although it affects EU creators more) that wants to sell their visual novels as a small business.

What are these new EU VAT Regulations?

On January 1st 2015, the EU brought in new regulations on digital sales within the EU, whereby VAT is taxed based on the rate of the customer's country as opposed to the seller's country. Originally intended to target large multinationals attempting to gain competitive advantages by basing themselves in low VAT jurisdictions, the rules are deemed cumbersome and unrealistic for sole traders and small businesses.

The new rules apply to “automated digital services” – that’s anything downloadable or used online, unless it’s custom-made. From 1 Jan 2015, as a seller, you have to pay VAT in any EU buyer’s country, at that country’s VAT rate, even if you aren’t in the EU. There is no threshold: even if you sell one item for 99c, the law still applies. To prove where the buyer is, you need two non-contradictory pieces of information, which you need to store for 10 years. MOSS (Mini-One-Stop-Shop) is a system set up in each EU country, to collect the VAT and distribute it for you, so you don’t have to VAT-register in each country. Overseas users can sign up with VOES, the equivalent for non-EU-residents.

What counts as an e-service? Do my commercial visual novels count?

The law applies to “broadcasting, telecommunications, and e-services that are electronically supplied”. The e-services definition applies to a surprising number of things, including images or text, such as photos, screensavers, e-books and other digitised documents e.g. PDF files, music, films and games, including games of chance and gambling games, and of programmes on demand, online magazines, website supply or web hosting services, distance maintenance of programmes and equipment, supplies of software and software updates, advertising space on a website...

Why did they do something that hurts small businesses so badly?

The law was originally designed in 2008 to stop to billions of euros of consumer tax being lost due to multi-nationals setting up in low-tax jurisdictions – an aim which few would argue with. The European Commission argues that this will create a level playing field, because it means that sellers can’t undercut their competitors unfairly by using a lower VAT rate. However, because there’s no threshold, it actually disadvantages the smallest companies and individual traders. It creates a divide between the multinational companies who have the systems to comply and those sole traders and microbusinesses that simply can’t.

What if I sell through a third party like Steam?

If a third-party platform handles the payment and supply and also sets the standard Terms and Conditions, they are responsible for VAT. Unfortunately, not all third party platforms are ready to comply with this legislation and many have only found out about this recently. So please do check with your third party platform. Payment providers such as PayPal are not third-party platforms (they just provide a payment mechanism) so they are not responsible for accounting for VAT. At present, many of them will not even supply you with the relevant data you require to comply. The EU VAT Action Campaign Facebook group has a growing list of compliant and non-compliant platforms which you can use as a guide.

I'm outside the EU so this doesn't affect me right?

The rules apply to all sellers providing digital services to customers within the EU, no matter where in the world the seller is located. Quite how this will be enforced is unclear, but we are hearing noise that other countries will follow suit if this is successful – so unless we stop this now, expect selling outside your own borders to get even more complicated in years to come!

How does this affect crowdfunding and sites like Kickstarter or Patreon?

This is a slightly grey area, since it could be argued that rewards constitute donations/gifts as opposed to purchased products. However, I imagine the taxman would probably disagree and count it as a purchased download. You can argue that the human element requires a lot more fiddling and messing about, emailing, and that there are delays between being backed and the backer receiving their reward. It's a grey area and until recently, Patreon and Kickstarter refused to offer any help on the matter. Crowdfunding is just another thing that's likely badly affected by this new legislation.

What data do I need to prove my customer's location?

To prove your buyer’s location, you need two pieces of non-contradictory information, such as…

[*]the billing address of the customer
[*]the Internet Protocol (IP) address of the device used by the customer
[*]the customer’s bank details
[*]the country code of SIM card used by the customer
[*]the location of the customer’s fixed land line through which the service is supplied
[*]other commercially relevant information (for example, product coding information which electronically links the sale to a particular jurisdiction)

What does 'where they're located' mean?

The buyer’s location usually means their home country or where they’re usually resident, but not necessarily. The law actually applies to where the customer “uses and enjoys” the product. If it’s something they can download or use anywhere, use their place of residence. This is what the EU guidelines call “over the top” services. If it’s something they can only download or use in one place, use that place. For example, wifi in a café can only be used in that place. And if that place is a boat, a train, or a ship, then use the place of departure. (For more details, see EU Guidelines, 7.4) This would be very simple if people stopped moving about so much. For example, a UK resident is on holiday in Spain. She pays for wifi in a café and downloads a Spanish-phrases app. She can only use the wifi at that place, so that’s charged with Spanish VAT. She can use the app anywhere, so that’s charged at UK VAT. No problem for the holidaymaker – so far. However, for the app-seller, the customers’ IP address and her billing address conflict, so the app-seller needs more information (bank details, landline, etc) and must either block the sale or chase the customer for personal information. Another example: a UK citizen usually resident in Sweden but currently working in Singapore goes on holiday to Italy and downloads an ebook using his British credit card. His bank details are British, his billing address is Swedish, his SIM card is from Singapore, and the IP address is Italian. Either our unfortunate globetrotter can’t buy anything digital or everyone who sells to him is breaking the law.

What if I send files by email, one at a time?

This is a grey area. The EU guidelines specify “minimal or no human intevention” and it’s debatable whether manual emailing is minimal intervention. The UK tax office, HMRC, originally gave conflicting advice on this. Their most recent guidelines (29 Dec 2014) say a PDF document manually emailed by the supplier is not covered by the new rules, while an automated email is (even if you manually click send). Estonia has said the same. Austria has said that manual emailing is not exempt. The Netherlands tax office has given conflicting advice on this to different individuals. (This information is based on advice given to individuals, so we don’t have an official source to link to.) The other 24 countries’ positions aren’t yet known. Manual emailing also creates practical issues. File-size limit means some files can’t be emailed and the inevitable delay (especially across time zones) has led to unhappy or angry customers for some suppliers. Unfortunately, they have stipulated that using Dropbox and Copy.com does not count since it would be a link to the download, as opposed to the file being sent.

Can I block sales to the EU?

For UK businesses, HMRC has told Syed Kamall MEP that they can block sales to the rest of the EU if they can show it would impose a disproportionately high administrative burden on the business. However, EU anti-discrimination law may not fall under HMRC’s authority.

For EU businesses, refusing to sell to other EU customers may be a breach of EU anti-discrimination law: “Because of a protected characteristic, you and anyone working for you must not refuse to serve someone or refuse to take them on as a client” (page 12). Race, which includes nationality, is a protected characteristic, so you can’t discriminate on grounds of nationality. You can refuse service for an “objective justification” (legal term), but it’s not clear whether the compliance burden of the new rules constitutes an objective justification (although HMRC clearly feel it can do). An objective justification “is a shorthand way of referring to the legal test of objective justification, ie that the service provider’s treatment of the service user must be a proportionate means of achieving a legitimate aim” (page 102).

For non-EU businesses, your own country’s anti-discrimination law applies, and it may be legal for you to block EU sales. However, geoblocking has a very bad effect on businesses, customers, and collaboration. Moreover, geoblocking relies on IP addresses, which aren’t always accurate and which can be changed with VPNs (Virtual Private Networks), so if you do use geoblocking, you may still be selling to EU customers. You would then have to comply with EU VAT, even if someone else’s app got the location wrong. The EU guidelines Article 9.5.9. say, “In many circumstances, taxpayers rely entirely on verifications undertaken by third party trading partners, such as payment service providers and other intermediaries. It is necessary to stress that the correct determination of the place of supply remains with the supplier.” (Page 73)

Are there any solutions for me?
Yes, many third-party services are offering solutions for small businesses and sole traders to sell their games. BMT Micro and itch.io are two useful services, along with Sendowl. There's Steam as well, which is always a good platform to aim for, although be wary of the percentage cut that will be lost from your sales. For EU backers in particular - Patreon are now aiming to help out EU citizens when it comes to VAT, by helping to keep the data of your backers (however, you will still need to register for VAT and sort out VATMOSS yourself by filing a quarterly blank tax return). Kickstarter have not yet offered any solutions as far as I know.

Also, be aware that this doesn't affect those of you that work as freelancers and sell your digital services such as graphic design, writing, music or other work.

Recent updates:

Patreon have stepped up and offered to become a middleman:
http://www.wired.co.uk/news/archive/201 ... eon-eu-vat

MEPs call for VAT changes:
http://economia.icaew.com/news/march-20 ... at-changes

Other information:

EU VAT Action website:
http://euvataction.org/key-facts/#key_regulations

UK VATMOSS
https://www.gov.uk/register-and-use-the ... -stop-shop

How small companies can deal with VATMOSS:
http://rachelandrew.co.uk/archives/2014 ... t-changes/
Last edited by DesertFox on Fri Mar 27, 2015 3:00 pm, edited 1 time in total.

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Re: EU VAT Regulations, Crowdfunding and Patreon

#2 Post by PyTom »

DesertFox wrote:It pretty much affects anyone (although it affects EU creators more)
I am not a lawyer - and this is the sort of thing where you probably want to actually talk to a lawyer, or sell through a marketplace that does.

I suspect that it's kind of an open question as to if this will affect anyone outside the EU, since EU laws are limited to their borders, despite what they might pretend.

On the other hand, if this is allowed, it might have some massive benefits. I think we here in the US will finally be able to balance the US budget by passing a special tax on residents of non-US countries.

(Sorry, but countries passing extraterritorial laws is a pet peeve of mine. I don't like it when the US does it, and I don't like it when the EU does it.)
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Re: EU VAT Regulations, Crowdfunding and Patreon

#3 Post by DesertFox »

PyTom wrote:I suspect that it's kind of an open question as to if this will affect anyone outside the EU, since EU laws are limited to their borders, despite what they might pretend.
Most definitely. I'm simply reiterating what the EU believe will happen.

The other thing about this model is that if it's a proven success (so far it has received mostly negative press) then there's a chance other countries may look to implement similar models.

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Re: EU VAT Regulations, Crowdfunding and Patreon

#4 Post by firecat »

reads it and rereads it slowly...simple non-law language, please i dont understand how it affect everyone. i also dont think that this kind of law can be enforce, just look at the major gaming sites where many of their sales are taken from pirates. theres no way to control the internet and thats how everyone likes it.
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Re: EU VAT Regulations, Crowdfunding and Patreon

#5 Post by papillon »

It also doesn't affect most VN sellers online as long as they use a decent payment processor to handle the transactions and not a direct paypal order.

So you don't have to be on Steam, you can be selling through things like BMT Micro or itch.io and you're still fine. (Originally itch.io was noncompliant but they created a new system in order to deal with this.)

While this is an important regulation to know about if you're planning to set up a formal business because it can affect certain kinds of planning (like, handling your own credit card payments or trying to build your own webstore), it's not really a big deal for the majority of people in our particular niche.

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Re: EU VAT Regulations, Crowdfunding and Patreon

#6 Post by DesertFox »

firecat wrote:reads it and rereads it slowly...simple non-law language, please i dont understand how it affect everyone. i also dont think that this kind of law can be enforce, just look at the major gaming sites where many of their sales are taken from pirates. theres no way to control the internet and thats how everyone likes it.
The EU wants other non-EU nations to comply when it comes to charging the VAT rate set within the customer's nation. In practice, unless your country brings in new laws then it probably won't affect you if you're outside the EU. I agree that it's silly, but this is what the EU thinks should happen with digital distribution. They plan to expand this by 2016 to include physical products sold digitally as well. Essentially, you can choose to ignore this if you're not based within the EU. If you are within the EU, you can use some decent third party services rather than setting up your own online store.

Also, a silly cartoon:
http://websitedesignschester.co.uk/wp-c ... atmoss.gif
papillon wrote:While this is an important regulation to know about if you're planning to set up a formal business because it can affect certain kinds of planning (like, handling your own credit card payments or trying to build your own webstore), it's not really a big deal for the majority of people in our particular niche.
Certainly, sites like itch.io and even Sendowl have made the entire process a lot easier for sole traders and small businesses. It's more of a worrying issue when it comes to crowdfunding, since it seems the EU was completely unaware that sites like Kickstarter or Patreon existed. There are plenty of creative people I've seen that have shut down their patreons or abandoned crowdfunding plans, simply because they don't want to end up on the wrong side of the law by accident. While these regulations aren't going to kill the commercial EVN industry we have going, it's definitely going to make things more difficult for developers in the UK and the EU, particularly if they have plans to expand on their business. I'm not trying to scaremonger, just reiterating the new policies brought in and the impact it's having on digital distribution.

EDIT - I've added a solutions section to the original post, mentioning itch.io and other advice.

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Re: EU VAT Regulations, Crowdfunding and Patreon

#7 Post by papillon »

True true, I've never been involved in crowdfunding and don't know much about it.

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Re: EU VAT Regulations, Crowdfunding and Patreon

#8 Post by Aviala »

I really hope the law will be changed soon. I'm feeling hopeful since MEPs disagree with the law... I've been planning to do a kickstarter (or some other crowdfunding) in a year or two when Finland updates its crowdfunding law but I might have to rethink it if EU doesn't change the VAT law.

I've already been worried about paying VAT according to my own country's terms since I'm generally confused how taxes work for small businesses here, and now this? D: Why is everything so hard. : I

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Re: EU VAT Regulations, Crowdfunding and Patreon

#9 Post by Riverbird »

Thankyou for the summary...This has basically forced indie developers to use third party distributors and that's just terrible for the industry as a whole in the long run. Don't get me wrong, I'm all for the vast majority of the stuff coming from being part of the EU, but this smacks of none of the MEPs from any country properly considering the knock on effects of a policy...

I also wish our government had actually, you know, bothered let people know of this massive, fundamental change to the way people now have to business. (Symptom of a much larger problem, TBH. Taxes aren't even covered in schools and I'm still crossing my fingers and hoping that I've managed to catch all the specific ones I'm due to pay being self-employed.)

On the plus side, VATMOSS sounds a lot like the MATMOSS, the essence of pure evil from an old 1960's cheesecake flick I saw way back when, so at least it's easy to mock.

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Re: EU VAT Regulations, Crowdfunding and Patreon

#10 Post by papillon »

This has basically forced indie developers to use third party distributors and that's just terrible for the industry as a whole in the long run.
But.... didn't almost everyone use payment processors anyway?

(Except for the crowdfunding problem as mentioned, but when you say 'distributors' you don't sound like you're talking about that.)

I admit I'm kinda oldschool here, having been around since before this crowdfunding stuff started, but at least back when I was getting started nobody would have taken payments directly anyway. VAT collection has always been something of a pain that most people didn't want to deal with.

In some ways it sounds like Paypal should be the ones most angry about this, as the people who will have to move their businesses to new systems are the folks who were set up for direct automated paypal distribution.

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Re: EU VAT Regulations, Crowdfunding and Patreon

#11 Post by Aviala »

Sorry to revive an old thread, but I'm really having trouble with the VAT law.

Not even the tax professionals in Finland really seem to know what's going on with the law. I've visited the tax office (or bureau or whatever, not sure what it's called in english) multiple times, and been in contact with a VAT professional through email and phone calls, and they just seemed confused about what the law really does to us creators. I asked a bunch of stuff and mostly they just repeated stuff from their website.

According to the professionals, it doesn't seem to be possible to let a third party handle the taxes, at least in Finland. I'm not entirely sure what's going on, but it seems like it might be hard to explain why you're getting lots of money and not paying VAT taxes. I haven't used the VAT MOSS system (or started my business) yet because I'm too confused about the law. I'm just... so lost. I need to start my business soon but this all just makes me desperate.

Also, there's this thing in Finland that you don't have to pay VAT if you earn than 8,5k a year. Well, this doesn't seem to apply for anyone who sells digital products (and is therefore obligated to use the VAT MOSS system). It's really unfair and confusing.

Does anyone know more about the process of using 3rd party services that file your taxes for you? It would be the ideal solution for me since I don't have the resources to individually & manually submit each purchase of my upcoming game to the system but from what I understood it might be impossible. But then again, the tax pro seemed almost as confused about the law as me, so I don't know if I can trust them.

This law really needs to be taken down, and fast. >: I

Edit: Also, is there any new info on crowfunding and patreon? I've read that patreon had plans to handle VAT for the users but the posts are from March and I can't find any info on if they're actually doing it or not. Also, same question as before: how do I explain to the tax people why I'm getting "free money" and not paying VAT myself?

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