Quick Guide to VAT

As of January 1 2015, sellers are required to pay VAT on all “automated digital services” – that is to say, any online digital sales of patterns, e-books, etc, unless it is a custom order.

These new rules apply to all sellers, even if you aren’t in the EU. There is also no threshold for reporting. If you sell even $1 to any customer in the EU, you have to collect VAT on that sale and send it to the appropriate authority.

It sounds really daunting, and the information on the web can be pretty confusing. Most of it is written for EU residents, so how do you untangle the steps if you live in the US?

Before I get too far, I want to make all the usual disclaimers – I’m not a tax professional, lawyer, or anyone with any authority on this topic. PLEASE do your own research as you move through these steps.

1. Register with a MOSS (Mini-One-Stop-Shop) in any EU country.  You only need to set up an account with one country, no matter how many EU countries your buyers are from.  Through the MOSS, you file a single return and make a single payment.

While you can choose any country, I’d recommend the UK or Ireland, for the simple reason that they are English-speaking countries. Personally, I chose the UK, and so I registered with the HMRC MOSS.

The pertinent part of both sites is that you are registering for the non-union scheme, because your business operates outside the European Union. There’s a whole bunch of info the UK site, but just scroll down to the the part that says “Register for Non-Union VAT MOSS” and you’ll get to the correct links.

Deadlines: you must register for VAT MOSS by the 10th day of the month after your first digital service sale. For example, if your first sale of digital services is on January 8, 2016, you must register by February 10, 2016.

2. Calculate and collect VAT. My shop is set up on WordPress with WooCommerce. I use the WooCommerce EU VAT Compliance plugin, which is free.

The following information assumes you’re using the WooCommerce plugin. If you’re not using WooCommerce, check your shopping cart software to see how they record, collect, and report VAT. You’ll most likely find something similar.  

This plugin calculates the VAT rate and makes sure you collect it for each sale. It also generates a quarterly report that lists all your sales broken out by EU state, with their VAT rates and the totals for the VAT collected. You’ll need these numbers to submit your VAT returns.

When an EU customer visits your shop, they see the VAT rate right away, because the plugin checks their IP address as well as their payment address when they check out. If they are making a purchase in the EU, you will be collecting VAT.

3. Set up your reporting currency. The plugin makes this simple. There’s one drop down box for the currency (pounds sterling) and a second for the exchange rate provider (HMRC, for the UK).

The plug in will get the exchange rate at the time of the sale from HRMC, and use it to charge the sales rate and VAT rates. It records that information as it was at the time of sale, even if exchange rates change in the meantime.

4. Make sure you’re collecting VAT appropriately.

I needed to set up a new tax category, which I called Digital Goods.  This plug in automatically filled in the current VAT rates for EU member states with the click of a single button labeled “Add/Update EU VAT Rates.” One click, and all the tax rates were in place.

You’ll want to add your local tax rate to the same table, as well as the tax rates for any other locations for which you must collect sales tax.

Make sure that all digital items use the Digital Goods tax category you set up. If it is set up correctly, you will collect VAT on all EU sales, as well as sales tax to buyers in the US, where applicable.

5. File your returns. Returns are due quarterly, on the 20th of the month. They send me a helpful email reminder, but I’d also suggest scheduling a calendar reminder just to be sure.

Go to your shopping cart software and get your quarterly report. My plugin has a tab called VAT Reports, with tabs on that page for each quarter. I don’t need to do anything else to run the report.

Go to your MOSS account and file a return. The HMRC account page has a link to File or Amend a return for a particular quarter. You enter each member state, as well as the VAT rate, total sales, and VAT due. You’ll repeat this for each EU member state listed in your report. Then click submit, and you should get a confirmation in email.

6. Finally, pay your VAT bill. This is the trickiest part of the process.

HMRC lists a whole bunch of ways to pay your VAT bill. Unfortunately, most of them only work if you’re in the UK.

Even though they list a credit card payment option, it doesn’t currently work for people in the US. The payments will get rejected because your card was not issued in the UK.

NOTE – I only tried with a US-issued Debit/Credit card. I did not try with an actual credit card. You can try it and see what happens.

The only payment method I found that works is to make a bank transfer from your account to HMRC. Scroll down to the Non-Union VAT MOSS account details.

Also unfortunately, wire transfers are common in the UK, but expensive in the US. My bank charges $45 – ouch! How do you get around this?

Sign up with a company like XE Trade.  They will require rigorous documentation that you own your business and are an authorized financial signer for the business before they will accept any trades. This takes some time, so be ready for it.

Since they have accounts in multiple countries, they can move the money from your bank, to their US bank, to their UK bank, to the HMRC – for FREE.

You can choose between an EFT (Electronic Funds Transfer) or a bank draft (physical check). They also offer a wire transfer for $20 US.

What’s the difference?

A wire transfer is fastest, and there is a payment reference area to put your account # when you sent the money.

An EFT takes a little longer, and they can’t guarantee that the payment reference won’t be truncated during processing. The EFT will show your business name, however, and you can call in and ask for a reference number to be added. There is also a box to show the reason for the transaction. Since it wasn’t Goods, Payroll, Expenses, or Savings, I entered Other, and this also allowed me a reference box.

The bank draft is slowest, but also allows the use of a payment reference number. If you file early and pay promptly, this is a good option.

7. Retain proof of your payment. If they HMRC doesn’t see your payment, they will email you.

This happened with my first return, when I panicked because I couldn’t submit a credit card payment and didn’t know about XE Trade yet. I had a friend in the UK pay with her credit card, and even though she put in my account number, it didn’t get matched up properly. I forwarded the email receipt of payment, and it was cleared up quickly.

Once you have everything set up, it should only take a few minutes each quarter to access your VAT report, enter the information into your VAT return, and schedule a trade for your payment. I’d say 15-20 minutes, and probably faster once you’re used to the steps.

Good luck!