WWW: VATMOSS and what it means for knitters

If you’re on Twitter, or if you participate in some of the designer and shopkeeper forums on Ravelry, you might have encountered references to something going on in the EU: VATMOSS.

At first blush it seems like a dull business detail, something of concern only to those in the EU. Sadly, it’s not. The impact is large and broad-reaching.

(Note that I’m not a tax expert; this is designed to be a high-level summary only. I strongly recommend doing more research if you are selling patterns.)

VAT is the European sales tax (effectively).

It used to be that sellers based in Europe would charge VAT according to the rules and regulations for their own country, no matter the location of the purchaser. If a knitter based in the US bought a pattern from a designer in the UK, the designer would charge according to the UK VAT rules. And, most designers wouldn’t even have to worry about VAT, as there is a threshold of £81,000 (approx. USD$127,000). If you sell less than that value of products in a year, then no VAT needs to be collected or reported.

Two changes go into effect January 1st 2015.

1) Sellers will have to charge VAT based on the location of the purchaser.

2) The threshold has been removed for sellers of digital products. (For example, knitting patterns, books and software.)

Here’s what the means: Anyone selling digital products into Europe now has to be able to identify the location of the purchase to charge appropriate VAT on that. A US-based purchaser doesn’t have to pay anything; a purchaser in the UK pays according to UK law; a purchaser in Germany pays according to German law; a purchaser in France pays according to French law, and so forth.

And this applies to sellers outside the EU, too. So even though I’m in Canada I’m still affected by this law. And even if I only sell a single pattern to a knitter in any EU country, I’m still responsible and liable for the VAT collection and payment.

This increases the complexity of selling online enormously: a seller now has to be able to identify where the purchaser is, and has to be up to date with the regulations in the country where the purchaser it based, and has to report and file taxes in all countries they have sold to. And it’s not just an accounting problem: the laws around data storage are onerous.

Designers both in and outside the EU are worried about this. See this flowchart published by UK tax agency HMRC that lays it out, very simply.

But knitters should be worried, too. Since these regulations are complex and costly to implement and manage, many designers feel that their only choice is to stop selling online. If they do keep selling online, you’re likely to see prices go up to reflect that they now have to charge VAT, and to help them cover the overhead of managing these new rules.

Note that online pattern store Patternfish does take care of the tax for you, but not every designer is on Patternfish.   As of this morning, Ravelry has announced that they have partnered with  UK distributor LoveKnitting to provide a solution for buyers in the EU, and for designers wanting to sell into the EU. (More info on LoveKnitting here.)

This is very helpful, and we’re grateful to both sites for this, but there are still two major limitations:

Designers will have to be reliant on these third-party pattern selling sites, rather than being able to sell directly themselves. For many designers, direct sales – a shopping cart solution on their own website – has been their preferred solution, and this option seems near-impossible under the current rules.

And for those selling something other than patterns – how-to books that don’t have patterns (my upcoming one, for example), and knitting software (StitchMastery, for example) – Ravelry and Patternfish aren’t options.

The fear is that these new rules may kill a lot of small businesses.

For the quick and dirty summary, this post by a self-publishing author is helpful.

Designer Woolly Wormhead has provided a most excellent detailed discussion of the situation on her blog.

Other reading here and here.