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.