You may have heard some fuss over the last few days around something called VATMOSS – or VATmess, as it was not-so-affectionately dubbed on Twitter. Essentially, there’s a new piece of European Union legislation coming into effect on January 1st that changes the tax laws, and it turns out it could have a significant impact on the UK’s indie developers (as well as everybody else who sells digital things online). It involves complying with a lot of new, complicated rules, and after speaking to HMRC (the UK’s tax authority) as well as two different accountants about the implications of these new rules, I don’t think it’s an exaggeration to say it could force some small, independent developers out of business unless they significantly change the way they sell their games online.
Here’s what the VAT MOSS legislation is, essentially: up until now, if you sold something online, you paid tax on it at the rate set by your own country. Now, you must pay tax at the rate set by the buyer’s country. That means 28 different tax rates in 28 different countries. Right now, the law only applies to “telecommunications, broadcasting and electronic services”. That covers a surprisingly huge variety of things: music, digital comics, e-books, on-demand video, knitting prints and, yes, digitally downloadable video games. (The plan is for it to expand to physical goods by January 2016.)
Okay so illustrating a feature about tax is difficult.
What the law is designed to do is prevent giant companies like Amazon and Apple from basing themselves in Luxembourg, which has the lowest VAT (value-added tax, or sales tax) rate in the European Union, and selling to everyone else in the EU without paying the appropriate tax in each country. It’s designed to make things fairer. But the actual implications of the new law are seemingly disastrous for small businesses that sell their own stuff.
You see, in the UK we have a rather sensible exemption on VAT for businesses that earn under £81,000 a year. This allows people to run small businesses - like making and selling games in your spare time, for instance - without the administrative nightmare of registering as a business and paying VAT on sales. Unfortunately, none of the other EU member states had an exemption like this, so when the new legislation was being put together, there was no exemption factored in. That means that if someone makes even £1 from selling something digital to another person in another EU country, they now have to be VAT registered in the UK AND they have to pay tax on that sale at whatever rate the buyer’s country of residence has set. That could be 25% in Sweden, 21% in the Netherlands, and so on.
How will this affect independent game developers in the UK? Depending on the scale of the business, the implications could be very significant indeed. If you sell through a storefront - like Apple’s iTunes store, or Steam, or even many of the smaller distribution platforms - then you’re OK; those companies are the ones who have to deal with the VAT mess caused by 28 different EU member states with different VAT rates.
But if you earn any money at all from selling directly to people in the EU - say, if you sell your own games on your own website through a shop front, or through Paypal - then not only have you now got to actually pay the VAT on those sales, at whatever rate the buyer’s country charges, you’ve got to be VAT-registered in the UK in order to do so. The amount of admin, data collection and paperwork required to do this is extremely intimidating.
HMRC's definition of "e-services"
In order to pay all this tax without registering as a company in every individual EU member state, people who sell things online will have to sign up to HMRC’s VAT MOSS service - that stands for Mini One-Stop Shop. This service lets you pay all the tax due in all the EU nations without registering as a business in every single one of them. Problem is, in order to use this service, you have to be VAT registered in the UK. So even if you’re only earning a few hundred quid a year from selling your own games via PayPal, you’re now going to have to become a VAT-registered business. At the very least, you’re going to need a new accountant to handle this for you. As well as paying this extra tax on EU sales, you’re also going to have to pay for accounting services, unless you fancy figuring all of this out yourself.
An even bigger inconvenience is that indie developers selling their own games will now have to collect data on every single one of their customers in order to prove how much tax they should be paying on sales. This means asking customers for a billing address and a country of residence, and then obtaining the following evidence to prove it: their IP address, the location of the customer’s bank, and/or the country code of the SIM card the customer used. You’ll have to ask for this information from Paypal, or whichever other payment system you use. You must then keep those records for 10 years in case of investigation by HMRC.
There’s one piece of good news: even though anyone who sells digital stuff now has to be VAT-registered in the UK, they don’t actually have to pay VAT on sales to people in the UK if they earn less than £81,000 from it. (This concession was achieved earlier this month after extensive lobbying.) But they’ll still have to submit what’s called a “nil-return”, which is essentially a tax return with nothing on it, every quarter in order to use the VAT MOSS service. That’s a lot of paperwork.
Selling through Steam, iTunes or another storefront helps avoid the new rules, but comes with its own problems.
To summarise: before, small developers selling their own games online in the UK had to pay no sales tax and did not have to VAT-register with HMRC, the UK’s tax authority. After January 1st, not only will they have to pay VAT on sales made in Europe, they will also have to VAT-register, file quarterly reports and keep detailed records on all their sales for a period of 10 years. For someone making a little money on the side from selling games (or digital comics, or e-books), it’s just not worth the cost and hassle. Many independent creators have already said they are being forced to choose between breaking the law and stopping selling digital things on the Internet in the New Year. It’s not worth the cost of compliance.
Once again: this applies even if you only make a couple of hundred pounds’ worth from selling digital things a year. I confirmed this multiple times with HMRC.
One of the accountants I spoke to for this article - Matthew Creed of Pomfrey (who is actually my own accountant) - suggested some workarounds that might help developers affected by this legislation. Firstly, and most simply, you could stop selling direct. This forces you towards Steam, the iTunes store or another distributor, but it also gets you out of this mess entirely. Secondly, you could stop selling to people within the EU and only sell to British and non-European customers - obviously not an ideal solution, and given that the entire point of the EU is to facilitate trade between European nations, it’s also rather ironic.
The other potential workaround is a little more complicated. “The only other get-out clause that you might try to use is that you’re not carrying out a trade - ie, it’s a hobby,” he says. “For example we’ve got a client who runs a website and effectively takes donations to support running it - I’m sure someone from the EU would love to come and call that a digital service, but so far we’ve managed to make the case to HMRC that they are just providing a website and they receive donations in order to meet their costs, and that’s all. so if someone was going to say, just take donations towards my software, that might be an out; if you don’t carry out a trade, you can’t make what we call ‘taxable supplies’.” (It’s worth noting that you’d probably still need an accountant to make this argument for you.)
A humorous-if-depressing take on the matter from cartoonist Dave Walker.
There’s an elephant in the room here: could you just… not comply? Not VAT-register, not use the MOSS service, just keep on doing what you’re doing at a low level?
“I imagine most people will not comply, either by choice or out of ignorance,” says Matthew. “If I was making less than £20k’s worth of sales, I’d chance it and wait for them to come and look at me… It’s completely unenforceable, is the ultimate headline. There will be 100 million people worldwide selling stuff into the EU. It’s not in the interest of the taxpayer to investigate someone over a tiny amount of unpaid tax. Say you owe £6.50 of unpaid tax, the worst they could do as a penalty would be to double it.”
So: you’d be breaking the law if you don’t comply, but the implication is that they’re never going to bother to track you down for tiny amounts of money. That’s a hell of a decision to force people into making - break the law, or go through all this to keep your tiny business in operation.
Say you’re an independent developer who doesn’t want to sell through a store like Steam and doesn’t want to break the law by not complying. What exact steps would you have to take to comply with these new regulations? Creed explains:
“You need to fill out a VAT-1, then you need to wait for your VAT registration number to come through. When that appears, you will register online with HMRC’s government gateway, then you’ll be able to access the MOSS. You’re going to need to rethink your pricing structure, because you’ll have to build in VAT at the worst possible rate to every single sale [if you can’t calculate the tax dynamically], in the knowledge that when you sell something to Luxembourg you’ll make more money and when you sell to, say, Hungary you’ll make less. You’ve got to redesign your website so you’re capturing the information that you need.”
HMRC on registering for VAT MOSS.
For many independent developers in the UK, the consequences of VAT MOSS will be minimal - they’ll be selling games through Steam, iTunes, or another storefront, or they’ll be large enough to have in-house lawyers and accountants to deal with this. But everyone in the UK who makes and sells games online, no matter how small the operation, should know about how this could affect them. If that’s you, you should speak to your accountant - and if you don’t have one, in light of these new rules, the unfortunate reality is that you’ll almost certainly have to get one.
More resources: HMRC's VAT MOSS guidance (also here), EU VAT Action (an organisation trying to combat this legislation), the European Commission's explanation of the new rules, 2015's VAT Rates in all the EU countries, PayPal's (limited) guidance.
Top image from Shutterstock. Sorry he is not an actual indie developer.