EU Digital VAT
If you’re setting up a membership website or online course, there are lots of options. Third-party services, such as Teachable and Kajabi can handle the whole thing for you but often come with a hefty monthly fee.
For WordPress website owners, another popular option is to install a plugin that can handle content restriction and payments. Many of these plugins are feature-rich, but there’s one thing almost none of these plugins account for: EU Digital VAT.
I should caveat the remainder of this article with a reminder that I’m not an accountant or legal expert. The below is not tax advice – I’d encourage you to speak to a professional if you think your business needs to comply with these laws.
It’s not unreasonable to think that, if you don’t meet the UK’s turnover threshold for VAT registration, the EU Digital VAT laws wouldn’t apply to you. Unfortunately, if you’re selling digital products, they almost certainly will.
EU Digital VAT was introduced to help combat big corporations (Amazon, Google, etc) selling digital products and registering their offices in tax-havens. The idea is that if you sell a digital product to a customer in the EU, the VAT should be paid to the country where the customer lives.
These rules apply to any business-to-customer digital product where there’s no “live” element (such as a webinar). For the purposes of automating sales, a “business” would be classed as having a VAT number. It may be possible to prove that the customer is a business another way, but the onus is on the seller to prove that a transaction is exempt from the VAT.
Where VAT should be applied to a sale, the customer has to be shown and charged the correct rate of VAT for their country of residence. Yes, that means keeping on top of many VAT rates.
On top of that, you have to collect two pieces of non-conflicting data (i.e. IP address, billing address, etc) to prove the customer’s location. This should be used to determine the rate of VAT to apply.
This data then has to be stored it for ten years. GDPR nightmare.
It’s worth noting that even if VAT doesn’t need to be applied to a sale, you may still need to collect and store data to prove that the sales were exempt from the tax.
Fortunately, each EU member state has a facility where business owners can pay the tax owed in a single transaction, rather than having to pay it to each country individually. This service is called the VAT Mini One Stop Shop (VATMOSS) and it makes distributing the collected VAT much easier.
How to comply
This law is complex and not easy for micro/small businesses to comply with. A threshold of around £8,000/€10,000 was introduced so that businesses with limited online sales could avoid the administrative burden of this new law.
However, this threshold will not be available to UK businesses as soon as we leave the EU, so it’s worth planning ahead for this change.
As I mentioned, most membership and course plugins have no facility to handle the EU Digital VAT aspect of payments. But, if your membership platform can use WooCommerce to process payments, there are plugins that can help you comply.
Alternatively, platforms such as Gumroad take care of the whole thing. Their fee is more substantial, somewhere around 9%, but it relieves you of needing to deal with this law at all.
Incidentally, I’m using Gumroad to handle the payments on my CSS For Designers course. I’d been put off creating an online course when this law was introduced, but Gumroad provides a straightforward method of complying.
The last option is to offer an interactive element so that your course or membership isn’t considered to be an exclusively digital product. Webinars are a popular way to comply, but there are plenty of options.
What’s your setup?
This law is a few years old now, so it’s interesting that it’s not more widely recognised by course/membership plugin providers. This might partly explain why many business owners aren’t aware of these laws until they start researching the requirements for setting up their product.
I’d be interested to hear how others are complying with these laws. If you have a different setup or found something that’s particularly straightforward to work with, I’d love to hear from you.
Update: December 2020
For the latest guidance on how EU Digital VAT will work post-Brexit, see GOV.UK.
I’ve also published a comparison of Gumroad and Payhip over on my personal site.