How the EU VAT rules make EU startups and digital businesses uncompetitive in a global market.

Unless you have been residing under a rock for the last month (and I’m starting to wish I had been) you’ll be aware of the impending EU VAT Place of Supply change. Much of the noise has been made by those businesses who will be forced into VAT Registration because of it, and rightly so. However, for those of us who are VAT Registered and so must update our systems to cope, the issues of implementation loom large.

I’ve already written about how we are thinking of going about changing our systems for Perch, and I actually think that we are more fortunate than many startups and small enterprises in that:

  • We already ask for accounts to be created up from including a billing address
  • We have allowed EU VAT Registered businesses to pay exclusive of VAT and then pay VAT due under the existing reverse charge rules. These rules don’t change on Jan 1. We have processes already to validate VAT numbers and so on.
  • As a business selling predominately to other businesses we don’t display prices inclusive of VAT, so any VAT calculation can be done after we have located the customer.
  • We’re web developers and have a custom system which we can update as required. Our reliance on third parties is right at the point of payment and we’re loosely integrated as we accept both Stripe and PayPal.

Despite this how we actually go about implementing the changes is very unclear, I’ve started a list of unanswered questions over at GitHub. Feel free to add to that or raise issues.

This post is really to point out to my colleagues working in startups and small businesses how disastrous this ruling is going to be for things like providing a good flow through the checkout. We have a huge User Experience issue here.

I also believe these changes will make European businesses less competitive, both financially and in terms of the barriers to purchase we will need to throw up. Yes, businesses outside of the EU are supposed to comply as well, but I’m not seeing a lot of action on that.

What will you have to do and not do after Jan 1 when selling a product?

From a user experience point of view, the changes are going to be messy. From a business point of view they could be commercially devastating if a competitor can sell without needing to go through this process.

You will need to charge VAT at the correct rate and also provide proof of why you charged that rate

If you display prices excluding VAT you will need to ensure that the right amount of VAT is added, or not added in the case of a customer outside the EU.

If you display your prices VAT inclusive and swallow the differences you still need to have proof of location in order that you can complete your MOSS return. You presumably also need to be able to prove that a customer stating they are outside the EU is truly using your product outside the EU.

No sale without collecting address and other personal details

After January 1st you will need to have two, non-conflicting pieces of evidence as to your customers location. For web sales this probably means collecting IP address and billing address.

You will not be able to allow a customer to buy an ebook, software or a subscription to your SaaS without first asking for the full address and potentially other information to identify them. The explanatory notes state that:

“Article 23 states that when establishing the place where the customer belongs, the supplier should base himself on factual information provided by the customer and that he should verify it by normal commercial measures such as those relating to identity or payments checks” – 9.5.4 How much detail does the supplier need when verifying the evidence

If the customers IP address and billing address conflict you are going to have to halt the purchase unless you can gather some other proof of location. As yet I don’t know if the self certification option will be allowed. If it is, at the very least you are going to have to throw up a screen asking the user to confirm where they will “use and enjoy” the product. However note that,

“… it should be borne in mind that the items of evidence have to be different and should not duplicate each other. For instance, when a customer gives a billing address and later confirms that same address through self-certification, that can only be taken to constitute a single item of evidence. The same is the case when the customer gives his bank details which in turn refer to an unique payment mechanism or are confirmed by the service provider, or when an IP address and the geolocation point to one and the same location. In those cases the supplier can only be seen to have one item of evidence.” 9.5.5

Yeah. We’re screwed.

You will not be able to use PayPal Add to Cart buttons, a simple “Pay with Stripe” form for purchase of digital products

These simple options for payment of digital products won’t give you the ability to confirm customer location prior to purchase.

The Explanatory Notes (9.5.1 5) do suggest that if you payment provider shares billing address information with the seller prior to purchase (e.g. in a pre-Auth scenario or perhaps if you verify a card prior to a trial) that could count as one of the forms of proof, under “commercially relevant information”. However you can’t take advantage of that in a simple payment scenario.

In terms of checkout flow you also potentially have to halt the purchase process to gather additional information if these sources conflict. This is going to require systems that are aware of this.

It is not yet clear – based on the above – if we can use Billing address as also validated by our Payment Provider.

Are we actually going to need to ask for copies of passports, or a copy of a household bill to sell a 5.99 ebook or to allow someone to sign up for our service?

Many off-the-shelf stores will be no longer fit for purpose

Many startups and small enterprises use some kind of off-the-shelf store or service for sales of their products. It’s something I have always suggested to people. If you can avoid building a bunch of infrastructure at the start, don’t do it. Lean on third parties.

However if that third party does not become the actual seller of the product on your behalf and so can act as a intermediary (as the Apple App Store does for example) you need to comply with this legislation. If your solution does not help you with the issues raised above you will need to find a new solution or bring thing in house.

Preventing barriers to purchase by removing steps to checkout? Not any more.

Dealing with all of this, and the fact that many people will need to cobble together a solution based on third party APIs, is going to mean we all need to add steps to our checkout process.

The future checkout user experience

Let’s say that I’m someone from a non-VAT registered business in the UK. I’m in a hotel in Berlin and I just listened to a speaker at a conference, the talk was great and I see they have a great service that will really help my business. I decide to sign up there and then to try it out.

To subscribe I have to add address details and I can see there is a lot of text saying it is important that this address is correct due to a European VAT ruling. I’m not VAT registered, why should I care? I don’t really read it. I fill in all the details and hit submit.

The next screen throws up a message saying that my IP address says I am in Germany not the UK. Well yes! I’m at a conference – how annoying!

The least horrible scenario here is that I can self-certify with a checkbox that confirms I live in the UK. Slightly less horrible is being able to start the payment process, and as long as Stripe or PayPal return a country code of my card that matches the address I entered I can proceed. The worst scenario is that I am asked to upload some actual proof of my location. Sorry, I don’t have a scanner in my hotel room.

If I’m in a grumpy mood maybe I bail as soon as my location is queried, it seems intrusive. Perhaps I complain on Twitter about how this business want all this information and they lost my sale. Perhaps I go to a competitor who has a signup process that just needs me to give an email address and pay by Stripe.

Who was consulted on this?

With all of the fuss made over high growth startups by the UK government, surely someone from that world could have been consulted on how technically feasible this all was? I understand this is an EU issue not an HMRC one, but HMRC have known about this for a long long time. Even VAT Registered businesses like mine have had very little information.

We need concrete information from HMRC about what is allowable and what is not. The government keep saying they are trying to help and encourage small businesses and startups. It is time they stood up and offered help to existing businesses trying to mitigate the damage this will cause. Currently there are a bunch of us trying our best to help other other, trying our best to just figure out what to do. We don’t have the information. We’re having to do the work to build this into our systems before the end of the year. We’re having to do that in fear that it won’t be enough. That we’ll fall foul of misinterpreting legislation that appears to have been created with no consultation in terms of the reality of selling online.

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Ashley on the 30 Nov 2014 at 19:32:16:

The are two ways around this. The first is for the shopping cart providers to include a manual authorise option, so buyers in the EU will have to wait longer. By doing so it’s no longer considered an e-service because there is manual involvement from the seller.

The second step is to vote for politicians and parties who do not support the EU and want to take us out.

Heather Burns on the 01 Dec 2014 at 09:04:54:

Three years ago we were all sitting here reading the specs for the cookie law wondering why people who pay secretaries to use computers for them were legislating specific uses of web code.

Here we are today wondering why people who pay secretaries to do their online shopping for them are legislating specific uses of web code.

It’s like Groundhog Day.

Milos Stojanovic on the 01 Dec 2014 at 15:32:40:

I switched to digital goods reseller based in the US. They charge 10% for their service (selling my goods) but they handle everything VAT/TAX related. This way I am no longer a “seller” pushing all the mess off my shoulders. I used to sell my digital products trough the card processor but I was still the “seller” so this was a far better choice.

Hope this helps someone.

Jibs on the 02 Dec 2014 at 15:38:48:

I work for an organisation that can afford to build the IT system required and we are still struggling. we are also stuck on proof of customer location where billing and IP countries conflict. our tax advisers have said customer certification won’t be classed as proof so we are considering using country code of telephone number, which is probably just as bad. we’ll collect the 3 and only proceed with EU customers who provide matching evidence for 2. Non of the presumptions apply to us, our tax advisers can’t suggest any other evidence and our payment company can’t provide any information until after the sales.

Terry Freedman on the 02 Dec 2014 at 20:29:19:

Useful post, Rachel, thanks.
Milos, what is the name of your US-based reseller? Thanks

Felix Schwarz on the 06 Dec 2014 at 13:21:34:

Even before #VATMOSS we needed to distinguish these cases to apply VAT correctly:

1) sales to Germany (where we’re based, and apply VAT)
2) sales to consumers in EU countries (and apply VAT)
3) sales to businesses in EU countries (and require a VAT ID, apply NO VAT)
4) sales to countries not in the EU (and apply NO VAT)

And then be able to proof to the tax authorities that we picked the right category for every purchase. At least that’s my personal understanding/interpretation of VAT law even prior to #VATMOSS.

We achieved this by:
1) requiring customers to enter their address
2) requiring the method of payment to match the country supplied with the address:
- So that f.ex. someone couldn’t enter his (valid) German address, but pick Switzerland as country to work around paying VAT. In which case we’d still be liable for paying VAT.
- You really want to do this to prevent fraudulent purchases with stolen identities, anyway. Enforcing this rule on credit card payments brought down our chargeback rate to 0.

In over 10 years, the share of people where address and method of payment didn’t match was way below 1% – and caught mostly people who wanted to avoid paying VAT (possibly illegally, and at our expense). So, if our experience is any indicator, this is not something to worry about too much. (I’ve linked our store – which should not need any changes to its design to comply with #VATMOSS – for this blog post. I’ve invested months to make it as simple and customer friendly as possible.)

What really worries me is:
- how to keep track of VAT rates (the best resource I’ve found so far is which lists VAT rates for 2015 – and should also list upcoming changes)

- different requirements towards the design of an invoice – or whether an invoice is even needs to be issued (

- the complete lack of dependable resources. The EU Commission sold this as “simplification” and “leveling the playing field” – both of which strike me as wrong. If they wanted to make things simple and level the playing field, they should have agreed to a small, easy to understand set of rules to apply to these sort of transactions. Instead they now expose every merchant to the VAT laws of 28 countries – and expect them to master them from day 1.

Kattar on the 13 Dec 2014 at 06:22:45:

Terry – I just checked Milos site. He is using ClickBank

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