24/04/2015 06:23 BST | Updated 22/06/2015 06:59 BST

VAT Moss or VAT Mess?

Imagine if you ran a lemonade stall outside your home just like the HSBC advertisement. You may have been successfully selling lemonade to your neighbourhood and paying your VAT like a good little taxpayer. What if the rules changed and now you had to ask each and every customer where they lived? Your street might charge VAT at 20% but Street A round the corner might have a VAT rate of 13% and Street C, two blocks away, charges 22.5%. The onus is on you to pay the correct amount to each street so you have to know where your customers are from. Not only that but if you store the data you also have a legal responsibility to store the data securely Confusing? You bet!

On 1st January 2015 new EU VAT rules came into effect on digital products. You see the bean counters at the EU were heartily sick of big companies basing themselves in countries with low VAT rates to avoid paying taxes. Fair enough - no one likes a tax dodger. But these new rules have been causing huge headaches and confusion for much smaller micro businesses. In 2013, just 15 months before the new regulations came into force an HMRC investigation estimated the number of non-VAT registered businesses that would be affected at just 5,000. A report by Enterprise Nation just recently has discovered that according to BIS the actual figure is closer to 340,000. VAT MOSS as it is called quickly became VAT MESS when designers and software developers took to the Twit and Blogisphere to proclaim their anger, confusion and frustration. Just search on Twitter #VATMESS and you can see what I mean.

The products affected by the new rules include things like ebooks, online courses and knitting and sewing patterns (now you can appreciate why I am interested).

Your average knitting pattern costs £3-4 and a huge number are sold by independent designers. Arguably they would have to sell a lot of patterns to reach the VAT threshold of £81,000 but bear with me. If people are buying a pdf knitting pattern it is extremely difficult to actually know where they come from because it is downloaded. And if you could work it out, you would certainly need the help of an accountant to ensure your return is executed properly - significant costs for such a small business. There is a good article on the Barclays website that explains the situation very clearly.

If a sole trader does decide to manage their own VAT, they can do so through VAT MOSS


One way round this tangle is to sell digital products or patterns through a marketplace. Most hand knit or crochet designers were selling their patterns through Ravelry but the new EU laws kind of snuck up on everyone, especially since Ravelry is US based. Our own UK-based Love Knitting stepped in to the breach as the saviour of independent designers and, as a result, they now have 30,00 patterns available for instant download. Although there are no fees until June (when I believe you can expect the number of patterns to decrease) there is quite a high fee structure of 20% commission plus 25p per pattern before the VAT is charged. So let's look at the maths. If a designer was previously charging £3.20 before VAT (£4 with VAT) and they want to absorb the charges the revenue per pattern will fall to around £2.50. But if they want to maintain their income the customer will be worse off by 50-90pence depending on the VAT to be charged. However the money designers pay to Love Knitting makes all the headaches go away plus they get the support and marketing of a large organisation with a global reach.

Now Ravelry have had a chance to catch up and have offered to take over VAT responsibilities with a more sympathetic pricing structure as you would expect of the heroes of the yarn world - a flat rate of 3.5% or around 11.5pence. While you don't get the benefit of marketing, Ravelry is the place where most knitters and crocheters go to find a pattern.

Such was the uproar among small businesses (not only in knitting) that sell digital products when the new rules came in that many petitioned their MEPs.

MEP Catherine Bearder's website informs us that she presented a letter co-signed by 32 fellow liberal MEPs from 16 countries outlining the problems with the new legislation for sole traders or micro businesses. Vice President Frans Timmermans

now says he is prepared to reconsider the impact. A fantastic result. While their intentions were good, to stop multinationals from diverting sales through low VAT regions, the unintentional impact on smaller businesses was not properly considered or calculated. It seems they are prepared to admit they may have got something wrong.

So at the end of the day this might all turn out to be a storm in a yarn basket but at least small business people are being listened to.....for once.

If you want to find out more you can find a dedicated Facebook page here