Here is where I explain VAT.

If you've been reading along for a while, you will have read about the EU VAT on my blog. If you have no clue what I'm talking about now, let me give you the TL;DR version of the whole thing.

When a business sells something to a customer, the amount paid includes a certain tax that we'll call the VAT (for Value Added Tax. The German word for it is Mehrwertsteuer*, and every EU country has their own term for it, but it functions just the same everywhere). The business then sends that tax money on to the state, who grins and takes it. You must pay VAT if your business is over a certain threshold of turnover (that is the money taken in and spent added up - so if you spend 20 € and get 20 €, your turnover is 40 €. Your winnings, however, is zero, so high turnover does not necessarily mean you're getting rich.); the threshold varies from country to country.

VAT is everywhere and it's on everything you buy, every day, everywhere. It thus shouldn't surprise you that the income from VAT makes for a huge chunk of the income that any EU country gets.** This tax is thus very important to any EU country. Accordingly, they feel rather strongly about their money, and they will afford you little slack for transgressions.

How much VAT is charged, however, and which rates apply to what kinds of goods, differs from country to country and is not always straightforward, or easy to understand. For instance, when I sell a book, I have to charge 7% VAT instead of 19%, because books have the reduced German VAT. When I get paid my royalty fees from my publishing house, however, they are charged at 19% VAT even though all that money is coming from selling books charged at 7% VAT!

Are you still with me? (I hope so!) Here's where it gets interesting. Each member state of the EU has this system, with their own issues and confusions about what gets charged what, and they all have different rates of VAT - as many as five rates in a single country, and 75 rates altogether in the 28 countries. There's a list online (German version here), so if you like numbers or would like to see how complicated the framework of all this is, go take a look. I'll wait here. Make sure you scroll down to at least page four to get an impression. Heck, just scroll through the whole thing once, you don't even need to read it to see how frazzled this all is.

Here's where it gets interesting. The rates. When you live in a country that charges high VAT, your customer effectively pays more money to you, so your prices have to be higher than they would need to be in a low-VAT country. That is the reason Amazon has its business centre in Luxembourg - lowest rate in the EU.

Essentially, the big players go where they don't pay as much VAT, helping them outprice the competition. This has two effects: firstly, the competition, especially local and small businesses, can't match that pricing and suffer, or have to fold. Secondly, the low-VAT state gets a lot of VAT money even though most of the goods are shipped out of the country.

Remember how I said that VAT is not where countries have a relaxed attitude?

So. There's money to be had, and the EU Commission realised that there might be some skew to the system. Enter a plan to make it all different. What if the business has to pay the VAT to the country they ship the goods to? Wouldn't that be fairer all around? The company pays VAT according to where they make their turnover, and the corresponding country gets the money. The customer does not notice any changes and always pays the same VAT rates at their home country rules (which few customers probably ever thought about, or care about).

Sounds good? Well. That's what the EU Commission thought, and they wrote a new law, and that would start with applying the new system (pay VAT based on the buyer's country) to digital goods and services - mp3s, ebooks, software, games, anything that is digital and downloaded via the 'Net. This rule came into force in January 2015.

Since then, countless small businesses have closed down, and many more startup plans have been laid into a shallow grave. Why? The rules are in effect for everyone, from the first penny or cent of turnover you have.

If I would sell a 1€ knitting pattern on pdf to one person in the UK in 2015, I'd be forced to register for VAT in the UK, do the VAT accounting (probably four times, once for every quarter of the year) and send the money over (which includes paying for any bank charges for currency conversion). For one single euro. Can you believe that? There's a threshold under which you have to pay no VAT in most countries for a reason, but there is no threshold at all for the new EU VAT. There's a thing called the Mini One-Stop Shop for small businesses where you can register once for all the EU countries, and which is supposed to make things easier, but it's not making it much easier, and it's not working really reliably yet. (This legislation is in effect since January, by the way. It's not working reliably yet, about 9 months in. That's enough time to make a human baby.)

So many businesses folded because they could not invest the time and money to make sure they can work with the new system, or they did not want to face this wall of bureaucracy that can bite you in the ass, hard, if you mess up. (That thing about no slack being cut.)

Now, for those who did not want to throw in the towel yet, the rules are so hard to follow that even the Big Players have huge trouble implementing it, and they have teams of software people and accounting people and law people. Small, single entrepreneurs? This regulation adds so much paperwork, consumes so much time, and costs so much money that trying to comply can make a business fold. (You can find out more about the impact, and the problems, here.)

Oh, and by the way, this is in effect world-wide. So if an US company (not in the EU) sells me a knitting pattern download, they have to charge me 19% VAT and send that VAT over to good ol' Germany, who will grin and take it.

That's not all, though. An extension to all goods and services is on the slate for 2016. All goods and services. So if you'd like to buy a spindle in the US? May well happen that the seller refuses to sell to you, because of the VAT paperwork that would entail. Things like this are already happening - sellers are blocking anyone from the EU and refuse to sell to them. (Even EU businesses though there are different rules for this, and they could sell to them no problem.)

This is, as you will hopefully agree, a Bad Thing - for many, many businesses as small as my own, or also quite a bit larger. It's impossible to comply with the legislation as it stands at the moment - but there's been a lot of complaints, and the EU commission is finally aware of the issues, and willing to do something against it, so there is still hope that this mess may be resolved.

And you can help - though in the interest of not boring you to tears with an insanely long blog post that nobody ever wants to read to the end, I'll tell you how tomorrow...



*Which lends itself wonderfully to being called "Märchensteuer", literally "fairy tale tax". The one little bit of humour this whole mess affords me is thinking "fairy tale tax" every time I say or write MwSt, or VAT. Also helps hoping for a fairy-tale-like happy ending.


** I had a phone call on Friday about this topic, and I think I remember being told "the biggest", but I don't want to misquote.