Why #VATMOSS is a #DRM Issue

Another day, another set of confusing and contradictory messages about what will and will not be allowed from January 1st. There is, for example, this article in the Telegraph, which claims a victory for campaigners but is actually nothing but HMRC spin, presumably fed to the Telegraph by them. Firstly, any solution that requires micro businesses to register for VAT is a disaster. Only having to do so for sales into the rest of the EU is no help. Also, when we had the Twitter seminar on Monday, HMRC insisted that, in order to split reporting in the way that the Telegraph article suggests, the two parts of the company would have to be legally separate entities. You can’t do that if you are a sole trader, so at least one part of the company would have to be separately registered as a company. Yet more expensive red tape that people won’t have the time to deal with before January 1st.

What I want to talk about here, however, is a fundamental question that lies at the heart of the whole debate: whether digital products are “goods” or “services”. It is important because the EU has very generous revenue thresholds for selling “goods”, below which registration for VAT is not necessary. In contrast the revenue thresholds for selling “services” are zero, so everyone who sells them has to register.

At first sight it would seem crazy to suggest that an ebook, and MP3 of a song, or a jpeg of a photo, is a “service”. The physical products are very clearly goods. How does digitizing the product transform something from a “good” to a “service”? HMRC is getting itself tied in knots trying to establish how an ebook becomes a “service”. If you put it on a CD and mail it then is definitely isn’t a “service”. If you manually attach it to an email and send it then it may or may not be (HMRC people seemingly can’t agree amongst themselves on that one). But if you download it from a website then it is definitely a “service”.

Then again, for some time now, large corporations have been intent on establishing that digital products are indeed “services”. That’s because they are desperate to move us from a world in which we are able to own products — books, record, and so on — to a world in which we only ever rent a license to use products. They have been moving us from buying “goods” to buying “services”.

The way in which publishing companies distinguish between a “good” and a “service” is party with DRM (and partly by the terms and conditions under which the product is sold). By applying DRM to a book a publisher is saying, “this is not something you own and can copy or give away, it is something we own, and are renting to you”.

That’s not the way I publish my books. When I sell you a book I am still selling you a product. When you buy that file from me, you own it (though you don’t own the creative content as that’s covered by copyright). I am by no means the only publisher to operate in this way.

Logically, DRM free books ought to be goods. But can you imagine the chaos it would cause if a book with DRM was subject to VAT, but a DRM-free book was not? Not only would the DRM-free book be better value, but it would be cheaper too. It would be political dynamite for any country to make that distinction. So instead they have settled for the simple option of classing all ebooks as “services”. And now that they want to apply Place of Supply rules to VAT charged for those “services” they have got themselves into this ridiculous mess.

It is possible that this is a way out for me, in that I can argue a case whereby my books don’t become “services” until they are sold to the consumer. Therefore, if I only sell through VAT-compliant marketplaces such as Amazon, I don’t have to register for VAT. But I have no idea whether HMRC will accept such an argument, nor do I have any faith in their willingness to even consider the question. And without any assurance that I’m operating legally, I’ll need to take steps to move the business outside of that law.

Furthermore, there are all sorts of good reasons why digital microbusinesses might not want to sell solely through Amazon and its ilk. They might have products that such platforms aren’t set up to sell. They might not want huge corporations to have control over what they sell and how they sell it. In practice what HMRC is doing is the equivalent of saying to a small farmer that she can’t sell her crops at a market stall, she has to sell them through Tesco or a similar supermarket. What we need is a revenue threshold below which microbusinesses don’t have to register for VAT, regardless of what they are selling. Anything less (Telegraph please note) is a defeat.

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3 Responses to Why #VATMOSS is a #DRM Issue

  1. Mary Branscombe says:

    HMRC has said if you sell through a marketplace, that store handles the VAT. It’s on their otherwise unhelpful FAQ.

    • Cheryl says:

      It’s fairly clear than an individual author is OK if she sells only through approved marketplaces. I’ve not seen anything that applies specifically to a small press.

      Also HMRC isn’t prepared to say which marketplaces are safe to sell through, or to issue any guidance on things like crowd funding and patronage.

  2. Pingback: Small, micro, nano… | tiintax

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