The New VAT Laws: Solutions for PDF Pattern Sellers

There is no doubt that if you sell digital patterns, you would have heard at least something about the European Union’s new VAT laws that come into effect on January 1st. I won’t go into the nitty-gritty details, as there are plenty of sources out there who do it much better than I ever could, but essentially it comes down to this:

If you sell any digital products, including patterns and e-books, to a consumer in the EU, you must now collect VAT for that sale at the rate of their resident country, and then report and pay the VAT to that country.

I have spent the past few days Googling and reading and thinking about how to address this new law. I don’t have massive pattern sales, but they’re significant enough to make sure I can keep selling them. And while the majority of those are from the US, this is still something that effects me. There is no tax-free threshold, so no one is exempt. You cannot simply manually email them the pattern as that is still a digital product/service/sale. You are also required to have 2 non-conflicting pieces of evidence of the consumer’s location, plus keep all VAT-related sales records for ten years which then brings into concern data security and privacy.

I can understand the need for such laws in today’s online world, especially in regards to the Big Companies that try to skirt tax laws *coughAmazoncough*. This kind of system is definitely the way of the future and I suspect other countries will soon be implementing similar laws. However, these kinds of no-threshold laws have severe consequences for thousands, if not millions, of tiny businesses like mine; the “ma-and-pa companies”, if you like. We may not make much money, but what we do make is an important, valuable part of our family’s income! Never mind how frustrating it will be for EU residents who can no longer access thousands of products because sellers simply cannot handle the cost and time of dealing with VAT!

Solutions

The best option is for the EU to implement a tax-free threshold like there currently is for physical products! In lieu of that, platforms like Craftsy and Etsy need to follow in Ravelry’s path and take on the responsibility of solving small pattern sellers’ VAT issues. Ravelry has essentially partnered with a distributor, so that designers “sell” their patterns to LoveKnitting and LoveKnitting then sells to the EU buyers. This means that LoveKnitting are responsible for the VAT, as they are the ones selling to the consumer. While there will be fees involved for the designers as of July, 20% + 25p per transaction, it is most definitely worth it!

I have contacted both Craftsy and Etsy to ask what their response is to the new laws and what they will be doing to help their sellers, and I will update if and when I hear back. But here’s what I have found so far:

Craftsy

Craftsy already collects VAT for supplies, so they have a system in place that could hopefully be adapted to cover pattern shops too. Even if it meant now having to pay a small fee to sell on Craftsy, it would be worth it! Otherwise, they would see a drastic closure of shops due to the inability to control who is able to buy your patterns. I would absolutely hate to do this as Craftsy is by far my biggest sales due to the fantastic marketplace there and it would make a huge dent in my sales. The least-favourable option in this case would be to add an option to not sell to EU countries for those (most) of the sellers who are not registered for VAT.

Etsy

Etsy does have a help page about VAT, but it’s not very helpful at all regarding these new laws. One option I have seen suggested by a seller is to make the patterns a “physical” product and therefore change back to the old system of emailing PDFs manually. This way, you can control which countries you “ship” to and exclude EU countries. Unless Etsy too implements and EU exclusion option for digital products.

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UPDATE 28/11/2014 – Here is the reply I received from Etsy later that day:

Thanks for writing to Etsy about this issue.

I completely understand your concern regarding this situation. Our policy and tax teams are aware of this upcoming change and have been working to determine the best way to help our sellers understand and prepare. 

At this time, we don’t have any specific information to share, but we hope to soon – we understand how important this is. 

We appreciate your patience. As always, please keep an eye on the blog for any news updates, or feel free to write back to see if there are any updates on this specific issue.

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Independent Shops

As for my blog shop, well, currently I will just no longer be able to sell my PDF patterns to EU customers. One day I hope to offer professionally printed patterns, which would thus be an option for EU customers! But until then… One potential option would be to offer a printed version from my own home printer for EU customers, so that the sale is a ‘physical product’ and thus exempt from the VAT on digital products. It wouldn’t be of professional quality, there’s only so much a $30 Canon printer can do! But it is one option that I will further look into. I have seen some people suggest USB sticks or even CD-ROMs as an alternative method of doing this!

Another option is to try and find an online store in the EU who is willing to sell your PDF patterns on your behalf. The normal deal is a wholesale scenario where it’s a 50/50 share of the sale price, but the addition of VAT may change this situation. This is a viable option as you are then selling to a business, and not a consumer, which is not included in these new laws.

So What Should We Do?

It would be lovely to dig our heads in the sand, do nothing and just pray that no one “busts” us. And while chances are very, very slim that they actually would, it is absolutely important that we maintain integrity and do the right thing! As painful and frustrating as it is, we do need to deal with it, no matter how many patterns you sell. I suggest you (nicely) contact Craftsy and contact Etsy (direct links), asking them what they are doing in response, and hopefully they will hear the message that we can’t do this without them!

Here’s some further links I have found very useful in helping me work out what to do:

The Official VAT information from the UK Government

They Didn’t Know – The Impact of VATMOSS On Really Small Businesses – from a knitting pattern designer’s perspective, but still applicable

A report from a phone call to HRMC by Handmade By Mrs H

Concise post about the new VAT laws and how they relate to pattern designers by Woolly Wormhead