New EU VAT Rules: Is Your Shopping Cart Compatible?

New EU VAT Rules: Is Your Shopping Cart Compatible?

From January 1st 2015 new EU VAT rules are coming into effect that look like a major headache for many businesses. Will your e-commerce platform support the new rules?

How are the EU VAT Rules Changing?

In case you’re not yet familiar with what’s changing, the new rules say that if your business sells digital products or services to consumers in other countries of the EU then you’ll need to capture information about the country from which each such purchase is happening and charge the appropriate rate of VAT for that country. (Here’s a guide to whether the EU VAT rule changes apply to you.)

Businesses will need to capture and record a minimum of two non-contradictory pieces of evidence identifying the country of the consumer. HMRC provide examples of various types of evidence that could be acceptable:

  • the billing address of the customer
  • the Internet Protocol (IP) address of the device used by the customer
  • location of the bank
  • the country code of SIM card used by the customer
  • the location of the customer’s fixed land line through which the service is supplied to him
  • other commercially relevant information (for example, product coding information which electronically links the sale to a particular jurisdiction)

How Will Your Business Identify a Buyer’s Country?

What information will your business need to capture? And how will this fit into your checkout flow?

For many e-commerce businesses, the IP address will be an obvious choice to use. It’s quite straightforward for most websites or shopping cart software to determine the IP address of any given website visitor, though making use of it will need changes to the software. There are services available that can lookup the country for any given IP address. Unfortunately, these services are not 100% reliable, so the lookups will occasionally give the wrong result.

The billing address is another piece of data that many e-commerce businesses will already be asking for during checkout, so this is likely to be another popular type of evidence for businesses to use.

In cases where a business doesn’t already collect a billing address or where the billing address and IP address give contradictory country information, businesses may need to consider the customer’s credit card number prefix or add an extra step where they ask the customer to confirm their country from one or two options.

By this point the business should have two non-contradictory pieces of evidence about the customer’s country of location and will now need to determine the appropriate rate of VAT to apply.

If the customer proceeds with the purchase, the business will need to record the country evidence for 10 years according to the EU VAT rules.

How Will all This Work in Practice?

Exactly how businesses are going to deal with these new rules will only become clear over time, however here are four possible approaches:

Approach 1: Hosted E-Commerce Adds Support for You

If you’re using a hosted e-commerce shopping cart such as Shopify or BigCommerce, you’ll want to check with them about how they’re handling this. With luck they’ll be on top of the issue and will be introducing support for the new VAT rules so that they’ll figure out which country the consumer is in, charge the appropriate rate of VAT, and record the necessary information. Some businesses may want to switch shopping carts specifically to get the necessary support.

Approach 2: Upgrade Your Self-Hosted E-Commerce Site

If you’re running a self-hosted e-commerce platform like Magento or WooCommerce, you’ll need to get your site modified to capture the new country information and to charge appropriate amounts of VAT. It’s unclear exactly how people will do this. Hopefully the platforms themselves will add support for the new VAT rules and it’ll be something you’ll get out of the box. Another possibility is that some payment gateway plugins and extensions will be enhanced or developed from scratch to include this new functionality. It’s likely that extensions for the most popular payment gateways will be the ones developed first. Lastly, a plugin or extension from a service such as Taxamo that is focused on the EU VAT rule changes may do what you need.

Approach 3: Sell Through a Marketplace Instead of Directly

Stop selling digital products directly and instead sell through a marketplace that becomes the legal ‘seller’ on your behalf. This is what is already happening with marketplaces such as the Apple App Store and the Google Play marketplace. The advantage of this is that the marketplace deals with all the VAT issues and legally you’re just selling to them.

Approach 4: Stop Selling Digital Products

Sadly, for some businesses the most sensible option may be to simply stop selling digital products altogether. If your sales of digital products are small, then the extra admin worries may not be worth the trouble.


What are you planning to do about these new rules? What will they mean for your business?

Matt Collins

Matt's the founder of PaymentBrain. He enjoys helping business owners navigate the confusing world of payment processing.

3 thoughts on “New EU VAT Rules: Is Your Shopping Cart Compatible?

  1. I have to say – it seems like it shouldn’t actually be legal for the EU to unilaterally impose onerous tax restrictions on every single person and company in the entire world. Or, in some cases, even effectively force individuals or companies outside of the EU to go out of business because they can’t meet some EU requirements within any reasonable cost.

    It’s just not clear to me that everyone in the world should be subject to EU jurisdiction.

    Yes, I know that because someone from the EU bought your product, that establishes a tenuous connection between you and the EU. But given that there’s no truly effective way to *not* sell to citizens of EU companies, that’s not an acceptable basis. In some sense, it seems that what we’re seeing is that the attempt to extend legal precedents based on *national* law to global ecommerce doesn’t work. It produces logical impossibilities.

    To extend the logical impossibility, imaging if every other country follows suit. It would mean that anyone selling anything on line, even a stay-at-home mom with ebooks, would be requires to track and submit tax remittances to thousands of tax jurisdictions world wide.

    In face, we can extend it even further. Why not just extend this to non-digital goods? So a street vendor in Vietnam who sells a soda to an EU citizen now owes the EU some VAT tax payment. (And owes the same tax payment to any of thousands of other national and subnational tax jurisdictions).

    None of this makes any legal sense, nor is it legally sustainable as a tax practice if extended commonly to all countries.

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