From The VATman Cometh, Destroying Businesses by Cheryl Morgan:
Except that the new rules coming in next year have a turnover threshold of zero for digital products. Yes, that’s right. If all you do is sell one ebook, or a few knitting patterns on Etsy, or a little app you made for fun, you are required to register for VAT and file VAT returns once a quarter. Even if the tax involved is only pennies.
The HMRC spokesperson says that most micro-businesses, such as developers of apps or digital downloads, trade through a third party platform or marketplace, like an app store.
“Where this happens it will be the responsibility of the marketplace operator to account for the VAT. As a result the vast majority of micro-businesses are unlikely to be affected by the changes,” adds the spokesperson.
It’s kind of amazing how hostile an environment for small digital service providers the EU is becoming.
None of these changes have too much of an effect on large corporations. Most of them already have the software to deal with this and the accountants to sort it out. But it has a devastating effect on small businesses and sole traders—exactly the kind of business that the web is otherwise enabling and giving massive leverage.
On the one hand this is a classic example of how our society favours larger corporations over small even when the small is more appropriate.
But on the other hand this also gives small publishers an incentive to change their strategy in ways that could make the rest of publishing very uncomfortable.
When you have two versions of the same product…
A physical version that is zero-rated (no VAT paid), commands a higher price, and lets you trade up to 80 000 or so pounds a year without too much regulatory hassle.
A digital version that has a next to zero marginal cost, substantial competitive price pressure, a high VAT in most countries, and imposes on you a lot of incredibly onerous taxation requirements.
… it makes sense for you to give the digital version away to increase sales of the physical version. Use outfits like Kickstarter and Blurb to increase the variety of your print offerings (i.e. adding more high end versions, collectors editions, etc.) and give away the digital version to promote them.
The other alternative is to stop selling ebooks directly, become entirely reliant on Amazon, Kobo, and iBooks for ebook sales, and give up on the opportunity to build a direct business relationship with your readers.
Of course, small EU-based software providers are screwed either way. Especially those offering web-based services. This will push a lot of desktop app developers who were fine with selling directly over to being exclusive to the app store. At least they have that option. Web services don’t have an app store.
Nominally, these changes are a part of a larger plan that’s supposed to even out the competitive landscape for large ecommerce providers. Amazon and Apple aren’t winning because they happen to be able to charge Luxembourg VAT while their UK competitors have to charge 20%. It gives them a slight leeway that others don’t have, sure, but they are winning because they both have huge platforms with a lot of users. Changing the VAT landscape won’t change that one jot.