How the New Value-Added Tax Guidelines for Selling Digital Goods Affect Your Online Store

Jan 23, 2015 by Kathy Bricaud, Ecwid Team
Posted Jan 23, 2015 by Kathy Bricaud, Ecwid Team

If you sell digital goods, you may be painfully aware of the new EU Value-Added Tax (VAT) changes that are now in effect as of January 1, 2015. As a merchant, it’s important for you to understand what this means and how to adjust accordingly — and Ecwid has the right tools to make sure you’re covered.

The New EU VAT Rule — What is it about?

Before we dive into what’s new with EU VAT, let’s start with the basics.

VAT

The Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. If your business is based in the EU or UK and you sell to other consumers within the EU, then you probably have a VAT ID and file your VAT return to the country where your business is registered. If your business is based anywhere outside of the EU or UK, then you may not have a VAT ID. If you fall into the latter category and sell digital goods (or plan to) to customers based in the EU, then the rule changes also apply to you (and we’ll get into mechanics of registering in the sections below).

The New EU VAT Rule

Now, a closer look at the new EU VAT rule on digital goods — according to the new rules, if consumers from EU countries purchase digital goods from your online store, you must pay VAT. The VAT rate based on the EU country where the buyer is established regardless of from where you sell.

More Details

Please see this page for more information about the EU VAT changes: Key Facts About The New EU VAT Rules

How this Affects You

Conditions

Basically, you are affected by the new rules if the following are true:
1. You sell downloadable digital goods or services including eBooks, hosting services, e-courses, recorded training videos, music or audio downloads etc. See also: What counts as an digital good?
2. You sell to customers in EU countries (regardless of whether or not you sell from within an EU member state)

Requirements

Here are the requirements to comply with the new rules:

  • Identify the location of your customer
  • Calculate the correct VAT rates basing on the customer location
  • Save your customer’s location with two pieces of non-conflicting evidence such as a billing address and matching IP address — you’ll need to retain information for 10 years
  • Submit a quarterly VAT return to each EU state, or use a MOSS (Mini-One-Stop-Shop), which reports to each EU state on your behalf

As a small business owner, the new rules present you with some difficult challenges that we’re prepared to help you navigate and comply.

How to Comply With the New Rules

Change is always hard, but here’s what you’ll need to do in order to continue selling digital e-goods to your consumers in EU countries:

  • Register for MOSS and get VAT ID. As a merchant, to comply with the new rules, register for the mini One Stop Shop Scheme, or MOSS. If your business is based in an EU country, then you may already have a VAT ID and can easily register for MOSS. If you don’t have a VAT ID and operate your business from outside the EU, then you can choose any EU country to be your Member State of identification. Note, for UK merchants with a UK VAT ID, you can register for MOSS through the HMRC.
  • Report quarterly. Each quarter, a merchant is required to submit, by electronic means, a MOSS VAT return, whether or not you have actually supplied e-goods. Where no supplies in the EU have been carried out for that quarter, a “nil return” is submitted. The MOSS VAT return (and accompanying payment) is required to be submitted within 20 days of the end of the period covered by the return. This document describes the matter in more details: Guide to the VAT mini One Stop Shop

How to Set Up your Ecwid Store to Work in Accordance with the New Rules

  • euvat_taxratesCharge VAT on your products. If you’re a European-based merchant, then you know that Ecwid has supported setup for VAT rates for a long time. However, if you haven’t setup VAT rates before, it can easily be done through the Ecwid Control Panel. Read this article in the Knowledge Base for details.
  • Collect customer location. Ecwid already has capability to ask for customer country built-in. All you need to do is to enable billing address form at checkout in your store: navigate to System settings > General > Cart > Checkout settings in your Ecwid Control Panel and tick the “Ask for billing address during checkout” checkbox. What is also important, Ecwid detects customer location as soon as they open your store and shows product prices including VAT even before the customer goes to checkout
  • Validate customer location by IP.ip_warnEcwid by default automatically detects a customer IP address. This is saved in the order details and displayed in the Control Panel. If there’s an instance when a customer’s IP address doesn’t match the billing addressed entered at checkout, then Ecwid displays a warning message on the order details page to let you know there is an issue. According to the law requirements, in this case you should contact the customer and ask them to reconcile the discrepancy between the two sources of information. Check out section 5 of the HMRC requirements for a good explanation of how this works.
  • Store customer location information for 10 years. The information in your Ecwid Control Panel is stored for as long as you want. No action is required from your side.

Behind the Scenes — Ecwid’s Plans to Make Things Easier for You

As a global company, we understand the challenges you face and we’re dedicated to providing you with the tools to operate your store and comply with the laws around the world. We are already working on providing merchants with the ability to ask for a customer VAT ID at checkout to apply zero tax. Also, we are looking at ways to make VAT reporting easier for Ecwid users. So stay tuned.

FAQ

Am I affected by the new EU VAT rules from January 1, 2015 ?
In short: you do, if you sell digital goods to European customers. See the article above for the details.

Can I set up VAT rates in Ecwid to charge VAT appropriately in each European country?
Absolutely. Please see this article for instructions on how to set up VAT rates.

Ecwid stores my customer information. What about data protection required by HMRC?
HMRC requires a data protection to be in place if the seller store customer information. However, since Ecwid is SaaS and your store data is fully hosted with us, we’re responsible for the data protection and take care of this. You can rest assured we take all necessary measures to protect your customer information. Additionally, Ecwid is PCI-DSS Level 1 Service Provider certified, which is the gold standard for e-commerce solutions worldwide and ensures a high level of security.

I want to restrict sales to Europe. Is that possible?
We do not recommend doing so, as Europe is a huge market. It’s better to try to comply with the rules. If your business is based in the UK, then you may be aware of the “light touch” approach the HMRC is taking — in particular a six month “transitional period” to give businesses time to comply. You should check with your VAT ID home country to be certain if the same transitional period applies to you. . In the meantime, if you feel strongly about restricting sales to Europe, you can find a workaround on our forums — read more to learn how.

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We’d love to hear from you — please let us know if you have any questions!

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