A furore has broken out among small micro businesses in Europe over plans to change the treatment of VAT on digital products sold to consumers. So what is the fuss all about and is it as bad as it sounds?


The EU is attempting to clamp down on major corporates minimising their tax liabilities by locating in the most tax friendly EU states while selling to consumers in neighbouring states. One of their actions has been a change to the treatment of VAT (value added tax aka sales tax), starting with digital products. This change comes into effect on 1st January 2015.

Until now vat has been charged and accounted for in the country of the seller. From 1st January this will change to the country of the buyer. The result will be that the product seller has to charge vat at the rate prevailing in the country of the buyer and also to declare and pay that vat to the tax authorities of the buyer.

The Unintended Consequences for Small Businesses

These changes mean that any business selling digital products to EU countries beyond their own may be caused to effectively multiply their vat administrative burden by the number of EU countries where their buyers are located.

Furthermore, they will have to provide multiple items of evidence of their buyers’ locations, evidence which digital sellers often do not have.

While it may be reasonable to expect multi-national corporations with millions or billions of revenues to accommodate this additional workload, it is totally unreasonable to expect small, micro or sole traders businesses to absorb such an additional burden. It is simply not cost effective for businesses with only a handful of customers in neighbouring countries to deal with multiple foreign tax authorities. They will simply have to restrict their trade to their own country which is impractical in the case of online digital suppliers.

Their Fears and Worries

Most of the complaints from smaller businesses fall into the following areas:

In UK and some other countries, many small businesses trade below the vat threshold level and are able to ignore the issue of vat altogether. These businesses will now have to set up vat accounting systems and deal with those EU countries that have low or zero thresholds.

The difficulty of determining the location of their customers and providing the necessary evidence. Keep in mind that digital products are not delivered to a physical address but via email or website download.

Many of these businesses use PayPal or similar payment processors who don’t provide the necessary customer location data. One of PayPal’s attractions to buyers is the degree of anonimity and data protection this gives them.

The potential need to separately register with the tax authority of every single EU country.

The need to separately account for transactions according to customer location and make separate vat returns to every one. (once registered they have to make a return for every accounting period even if they have no sales for that country in that period!)

The potential requirement to account for vat in different currencies when they have previously relied on their payment provider to deal with currency exchange.

The need to deal with multiple rates of vat, sometimes several in each country.

The short notice of the change which gives them insufficient time to set up the far more complex accounting processes and of course the huge cost of doing so.

The fact that the various tax authorities differ on their definitions of digital products.

The very high risk of accidentally and unknowingly falling foul of the relevant law in differing countries and possibly facing prosecution and the cost of defence in foreign countries.

These are but a few of the problems faced by small digital traders, many of them tiny home based businesses, caught up in a war between national government and the tax machinations of corporate businesses.

Are Their Fears Justified?

Well, yes and no!

In the UK the government and tax authorities have tried to mitigate most of the burden by the provision of a ‘Mini One Stop Shop’ (MOSS) which will avoid the need for registration, accounting and payment to multiple authorities. HMRC will effectively deal with these on behalf of UK businesses who register with the MOSS.

Although this will deal with a large part of the problem, it will not deal with all issues.

Identifying and proving customer location could still be a problem. As could the differing views on what is a digital product. It is still not clear what will happen to businesses that get it wrong through no fault of their own. Will HMRC deal with it, or will businesses have to answer to foreign judicial process?

The availability of the Mini One Stop Shop will reduce a massive bureaucratic responsibility to manageable proportions, but it will not eliminate it. Businesses that currently do not need to register for vat as they trade below the threshold will still need to register with MOSS and make relevant tax returns where they have buyers in other EU countries. Though it seems they won’t have to account for vat on sales to UK customers, until they reach the vat threshold.

The result of this extra red tape and the resulting additional workload will deter many from starting a digital business, while existing businesses are already stating that they will probably have to close down their businesses.


However, I would urge any UK business thinking of closing down to study the planned operation of the MOSS rather than listen to the chorus of information on social media, some of which is misleading. This applies also to anyone who has been planning to start a digital business. My own experience in business suggests that things are often not as bad as they at first seem. As a B2B (business to business) concern, selling digital services to EU businesses, we had to submit an EU return covering these transactions and it is really a very simple affair.

Also, it’s possible (if they want to grow their business in Europe) that payment providers will hurry to build compliance support into their services. I’ve just had a notification from one of them ( that they have already incorporated the ability to apply vat and gather the necessary sales data and are looking at ways to integrate with MOSS. I understand another provider, Zaxaa, are also in the process of doing something similar.

So maybe look upon this as an opportunity, some of your potential competitors may be among those being scared off, leaving a huge market wide open 🙂

Petitions and Protests

In addition, please be aware that representations are being made to relevant EU commissioners and are being listened to.

There is also a petition to exempt micro businesses and sole traders from this legislation here:

Other information sources:


See also:

And from the trenches, a blogpost comment quoting a reply from a UK MEP to the commenter:

Finally don’t forget that, although the rules come into force on 1st January, your first return for January to March is not due into HMRC until mid April. So you and your payment providers have time to get organised. However, you will need to register earlier. See for more information on when.

Good Luck!


This article was prepared using information from a variety of sources and is for UK small businesses. It is intended to raise awareness of the issue and provide resources for further reading and cannot be guaranteed as either accurate or complete. Nothing in this article constitutes any form of advice and no liability will be accepted. Please carry out your own research and take professional advice before taking action.

Sales Commission Abolished

Before all sales people, associates and affiliates panic let me explain that the above headline applies only to Financial Services Products in UK.

The UK Financial Services Authority have had concerns for some time that financial services products are too often recommended by unscrupulous financial advisers on the basis of the amount of commission they receive rather than being the best product for the client.

The majority of professional financial advisers in UK, and elsewhere, take pains to provide clients with the best advice they can but there has been a persistent band of rogue advisers who think only of themselves.

If your business is in financial services you will probably have seen this coming. But read on as I shall be coming back to you later…

If you are not in financial services then this doesn’t affect you, does it?

Well, yes it does! Especially if you have been used to getting your financial advice for free. Or apparently for free…

Most people in UK don’t pay an adviser for recommending life insurance, investments, pensions etc. because the adviser has been remunerated by the life, investment or pension company by way of commission on the sale. Obviously the companies paying this commission have to make it back in some way and that is by some form of management charge built into the product. This means that the client is actually paying this commission indirectly.

Under the new system, the client (you) will be expected to pay the adviser a fee for the financial advice given. This should mean that the product should be better value for money as there are no commission charges to account for and your adviser has no reason not to recommend the best product for your needs.

However, if you take financial advice but take no action on that advice you will still have to pay the adviser’s fee. Unlike in the commission situation where you can just walk away leaving the adviser with nothing.

Now, back to the financial advisers out there.

The good thing about this change is that you will always be able to get paid for financial advice you give regardless of whether the client takes that advice or not. You will be free to advise the client on any course of action you feel is appropriate to their financial circumstances without any concerns about likely remuneration.

Your only problems, if you have not been charging on a fees basis up until now, is one of educating the client in the new ways of financial services and setting up the appropriate contracts and procedures to handle the new regime.

I’ve been talking to a very senior financial adviser about this as he has operated a fees based financial service for over twenty years now. He certainly understands the problems facing commission based financial advisers over the next couple of years.

In fact he has been helping many financial advisers move over to a fees based system for the last ten years or so.

His name is Terence P O’Halloran, ‘ Terry’ to his friends, and he has been a major player in the industry for well over thirty years. Terry first unveiled his Fee-Pac product for financial advisers over ten years ago and has steadfastly kept it up to date, improved, evolved and expanded it over the years into a major package suitable for any fees based profession.

Fee-Pac now includes a full video training seminar on setting up a fees based business, complete client and adviser documentation as well as all the admin files needed to set up a successful fees based practice. This is an extremely professional piece of kit.

If you are a financial adviser or thinking of getting into that business then check out Fee-Pac here. I can’t believe how little he is charging for it considering its potential value to you in the coming months.

Interesting times ahead!

Sales – Costs = PROFIT!

Time for a little simple finance. One of the biggest stumbling blocks for new business owners is understanding business finance. This is probably responsible for more business failures than any other single factor. Here are some fundamentals that you need to understand:

  • Sales are not income unless you sell for immediate cash. If you sell on credit, you have to collect the money according to your credit terms. Even payment by cheque or credit card can take time to become available in your bank account.
  • Income or Revenue is not profit. The costs of producing, marketing and delivering the product or service, the costs of running the business, paying staff and other ancilliary costs have to be taken out first.
  • Profit is not yours to take out and spend! Some may be needed to repay loans, some will almost certainly be needed to pay taxes and some should be invested back into the business to help it grow.
  • Money in the bank may not be yours to spend either! Goods and services you pay for on credit have to be paid for eventually, as does accrued taxes etc.
  • Debtors are people who owe money to you, creditors are people who you owe money to. The two should roughly balance out. The difference will have an impact on how you use the money in the bank.
  • Cashflow is the flow of real money into and out of your business bank account. It is not always the same as sales, revenue or costs which can often be purely paper transactions involving some form of credit or delayed/deferred payment.
  • Assets are those things that have a tangible value to the business such as property, equipment or cash – as well as money owed to you from customers.
  • Liabilities are those things that will ultimately drain money from the business, such as loans, money owed to suppliers, compensation to disatisfied customers, accumulated charges for utilities etc. or potential legal costs of not complying with business and trading laws.
  • CASH is KING – especially in difficult times such as recession or other poor trading conditions. Other assets take time to turn into cash and may not materialise in time to deal with any unexpected crisis. Keep some spare cash on deposit for emergencies.
  • Growth is good as long as you can finance it. Growing too fast can mean you run out of money at some point and come to a grinding halt, possibly even ending up with business debts that cannot be paid on time. This is known as OVERTRADING and will often be fatal to what appeasr to be a successful business.

An understanding of the above will ensure you run your business in a sensible manner and reduce the risk of failure. Make sure you keep full financial and trading records so that you can keep track of the important financial areas of the business.

Watch the Numbers

It is very easy to focus on developing products, getting new customers and making more sales and forget to watch the numbers. Many apparently successful businesses have gone broke as a result of simply running out of money!

We have a business saying here in England “You’ve got to make a margin”. This simply means that, the price you charge for your product has to cover the cost of producing and delivering it, the costs of running the business and paying taxes, the salaries of your staff and YOURSELF, enough to repay any business loans PLUS a bit left over to invest in growing the business.

You not only have to make sure that sales values exceed all costs above, but also be aware of timing. There always needs to be at least enough cash coming in to cover the amount of cash going out. YOU need to be paid on time to be sure that you can pay YOUR bills on time.