On a fairly regular basis, I see questions from designers (and backers) about VAT and how to handle it. Whilst I am not a tax expert, I have done quite a lot of reading and I’m familiar with compliance and legal terms, so I thought it would be useful to share as much as possible in a single article.
This article will be relevant for anyone involved with selling to (or buying in) the UK and countries in the EU, but specifically I will focus on sellers (and particularly Kickstarter) from outside those countries (since sellers inside are probably somewhat familiar). A quick reminder here that though the UK and EU (and indeed each member state) have VAT laws that follow similar purposes, they are applied differently, and I’ll be calling out differences in the UK and EU situation where relevant.
I will try and break down the article logically in the flow that most sellers would normally encounter steps, with a Glossary section at the end for reference:
- What is VAT?
- 0. Registration
- 1. Funds Collected
- 2. Products Shipped to Country
- 3. Products Shipped to Backers
Note: This article may be updated in future with further clarifications
What is VAT?
VAT stands for Value Added Tax. To think about it most simply, the tax is only on the value that has been added at each stage of a production process.
As an example, a manufacturer buys £100 of wood from a supplier that is VAT registered, which charges £120 (at the UK VAT rate of 20%) and sends £20 to the UK tax authority in its tax return. The manufacturer makes 10 toys worth £20 each out of the goods and charges customers £24 each for a total of £240. Since it collected £40 of VAT from customers it sends that to the tax authority, however it is also able to reclaim the £20 that it paid out in VAT (which the wood supplier sent). The total tax that the manufacturer pays is £20 – in other words it is a tax of 20% on the value added from £100 of wood to £200 of toys. The tax authority essentially gets a tax of whatever the value of the final product was (which is £40, if you remember that it has received £20+£40 and issued a refund of £20).
VAT typically has a standard rate to cover most items, which is around 20% but varies by country, and may have various reduced rates for certain items. Board games do not usually qualify for a reduced rate.
How is VAT charged to customers?
Sellers that are VAT registered in a particular country must charge VAT on their products sold in or to customers in that country. Conversely, sellers that are not VAT registered cannot charge VAT in that country, nor can they reclaim any VAT that has been charged to them on purchases. (Note that whether VAT registration is required will be covered in the next section).
Sellers that are VAT registered essentially act as collection agents for the tax authority by adding an additional charge to their goods and services. The tax they have collected is remitted in their regular VAT returns, and any tax they have paid out to another seller is reclaimed and refunded.
How do I pay VAT?
There isn’t a direct channel to pay VAT to the tax authorities on each purchase or sale. As mentioned above, with sellers acting as collection agents, any VAT owed is paid by submitting VAT returns to the relevant tax authority (Her Majesty’s Revenue and Customs, HMRC, in the UK, and other local authorities in each EU country). This VAT return is handled separately from other local taxes like a sales tax, income tax, corporation tax etc.
In the UK these VAT returns are required to be submitted every 3 months, though after a period of correctly completing submissions (‘good behaviour’) this can be reduced to yearly. In the EU this requirement can vary by country, but for the IOSS (which is the solution for sellers shipping into the EU) this is required on a monthly basis.
- UK – Quarterly (or yearly) returns
- EU IOSS – Monthly returns
- EU OSS – Depends on country
It is worth clearing up a common misconception here – VAT registration for non-resident (i.e. abroad) sellers is not mandatory, and there are no ‘fines’ as such for non-compliance. This is because VAT will still be charged, with the liability passed onto the customer and the courier acting as the collection agent (and usually charging an exorbitant additional ‘admin’ fee). Aside from avoiding the negative customer experience of a surprise charge there are some good reasons for a seller to register for VAT, which are covered below.
The registration for VAT, as far as we are concerned for delivering games to backers, takes two (or three) steps:
- Register for VAT in the appropriate country
- Apply for an EORI number
- Apply for IOSS and/or OSS (EU only)
Applying for VAT allows (or requires) you to collect VAT on taxable sales, and to remit that to the tax authority. It also allows you to reclaim any spent VAT on purchases. An EORI number is the Economic Operator Registration and Identification number, and is used to uniquely identify you for any goods you import. IOSS is the Import One Stop Shop, launched on July 1 2021, and simplifies the process of collecting and remitting VAT in the EU. This is not to be confused with the One Stop Shop (OSS) which allows for VAT registration in a single EU member state for coverage of the whole Union (rather than registration in each individual member state).
For step 1 in the UK you will be applying for VAT registration as an ‘overseas seller’ (definition here). You can register online here and I found the process to be fairly simple and completed it myself (with guidance here), though you can also appoint a professional to do it if you’re not comfortable or want to save your time. You may not have to apply if you are based in the UK and have a low turnover, but it can be worthwhile to do so anyway.
For step 1 in the EU, you only need to apply for VAT in a single member state (when using the OSS or IOSS). Commonly this is done in Germany, France or Italy due to ease of registration or simplified reporting requirements, but any EU member state would do. One big challenge here, aside from language differences, is that registering for VAT and consequently the IOSS, requires you to have a registered presence in the EU. If you do not (which I am assuming in this article) you require an EU resident intermediary to do this on your behalf. So unlike the UK registration where you may want an expert to help you navigate, it is essentially mandatory to use a tax specialist (like SimplyVat or Avalara) to handle this for the EU. This is not cheap, with registration costing several hundred (for steps 1 and 2 above charged separately) and then monthly submission requirements also costing over a hundred. The process of registration and monthly reporting can cost around €3000+ for a year.
Once your VAT registration is complete, you can apply for an EORI number in the UK here, and in the EU via your tax specialist.
Why register for VAT if I don’t have to?
Countries typically have revenue thresholds for which VAT registration is mandatory (for example in the UK it is £85,000) but these typically only apply to business in the country in question. So why register if you don’t have to?
The primary reason for registering is to be able to deliver products to customers with no extra charges (though there are a few alternatives available discussed in the article). So let’s assume we want to have happy customers receiving their games, why else might registering be a good thing?
Since registering for VAT requires you to charge VAT on sales, and allows you to reclaim any spent VAT on purchases, there are often financial benefits if your purchases come from within the country (including any import VAT charges on goods shipped from outside the country). Being able to reclaim any VAT added by service providers, shipping materials, or even any manufacturing you do in-country. As an example, for the Micro Dojo campaign I shipped goods in bulk to the UK, paying (and reclaiming) import VAT, and then fulfilled to customers worldwide (also reclaiming VAT spent on shipping materials). If you’re importing goods to a country, which may include a fulfilment centre, it may still be worthwhile to register for VAT.
Note: There is an alternative in the UK called the flat-rate scheme, however this is only available to sellers that have been registered for 2 years and is best evaluated by a finance professional for your specific situation rather than in this article.
What other options are there?
Your first option is the simplest – don’t register and collect VAT. It’s also probably the least attractive option as it leads to a negative experience for backers. Your goods will arrive at their door with an extra administration charge to pay on top of the VAT cost (further discussed in section 3). I put this option in the same category as not offering sales to UK and/or EU – not advisable unless you have no alternative.
The EU allows for marketplaces to register for IOSS. This means that for registered marketplaces like Amazon or Etsy, they are responsible for calculating, charging, invoicing and remitting VAT. As long as your sales are under €150 and you use a registered marketplace, then there is no need for you to register for VAT – you simply affix the marketplace’s IOSS number to the package.
In the UK, there is a similar scheme for sales of £135 or less, however the registration is a little different (and the definition of an online marketplace means they have to handle delivery as well) so you are less likely to find a registered marketplace for UK sales. Fulfilment and distribution partners like Spiral Galaxy Games may be able to act as an online marketplace. You are technically making a sale to the online marketplace at a zero-rated supply, and if this is the only method of sales to UK customers you can apply for exemption from VAT registration.
Kickstarter does not see itself as a marketplace, and has no role in calculating, collecting and remitting VAT. To bridge the gap between individual creators and VAT services, some pledge managers are looking into IOSS registration to allow them to handle VAT for campaigns. I know that Gamefound is looking into this, and I’d be surprised if other pledge managers are not as well. In future I expect we will see less and less individual creators registering for VAT and using pledge managers and fulfilment partners to handle tax collection.
A final note on a commonly asked question. I believe that there is still a duty free allowance for items declared as personal gifts up to €45 (though in practice it’s inconsistently applied). So it’s often asked “can’t I just send items and declare them as a lower value gift?”. Misrepresenting the value of goods on a customs declaration is customs fraud, and can be met with severe financial penalties. Don’t do it.
1. Funds Collected
When selling (i.e. offering and shipping rewards) to customers in the UK and EU a chargeable event has occurred – how that tax gets collected and remitted to the tax authority is covered elsewhere in the article, but as a creator you need to know how to charge backers correctly first.
Kickstarter does not collect tax through it’s platform, nor does it offer an easy way to do it (since backer location is not known until the post-campaign survey). So as a creator your first decision is set prior to the campaign launch, and you have a few options which I’ve ordered from (generally) best to worst:
- Charge VAT post-campaign via a pledge manager
- Add VAT to shipping costs for each region in Kickstarter
- Create different pledge options with different prices for backers to choose from
- Don’t collect VAT from backers, and:
- Require backers to pay the VAT on delivery
- Pay VAT directly to the tax authority (‘eating the cost’)
- Don’t offer rewards to backers from UK or EU
The merits of each option could be discussed in a whole article, but for now I strongly suggest pursuing option 1 (or option 4.1 for very small campaigns).
Receiving Funds from Kickstarter
A few weeks after the campaign is completed, Kickstarter will send you the funds from all backers (minus it’s administration and payment processing fees). Unless you have followed options 2-5 above, you will still need a way to collect VAT in addition to the funds sent from Kickstarter (which is usually through the pledge manager).
There is an important myth to clear up here:
Kickstarter claims that it is not selling a product in its terms and conditions, stating “backers must understand that they’re not buying something when they back a project – they’re helping to create something new, not ordering something that already exists.” However, this is not the view of the tax authorities, which ultimately are the ones that decide whether VAT should be charged. In the UK, there is a publication called VATFIN5550 which covers the ‘Reward model’ type of funding Kickstarter follows, and determines that a pledge is taxable for VAT purposes. I am not aware of the precise law that exists in the EU, but I highly suspect that is has a similar effect.
The amount of VAT to charge to the customer will depend on the country, details of which can be found here.
Payment to tax authority
Kickstarter campaigns have a couple of complications when it comes to VAT collection:
- Funds are often collected long in advance of delivery
- Backer location (and hence VAT jurisdiction) is not known at the time of funds being collected, only post-survey.
In the UK, a tax point (or ‘time of supply’) is defined for a product as “the date they’re sent, collected or made available”. Some fulfilment companies I spoke to suggested that, in the EU also, the taxable event occurs upon on delivery in the same way.
This appears to take care of both problems above, however note that you may end up claiming VAT refunds in one period (e.g. for import VAT, see section 2) and then submitting VAT payments in a future period, so take this into account when managing cash flow. In the recent Micro Dojo campaign I both collected funds and delivered to backers in the same 3-month reporting period which made for one easy VAT return.
Actual payments to the tax authority are made after submitting your monthly, quarterly or yearly return and the total tax owed (or refunded) has been calculated. I found the UK system quite simple to navigate, however the calculations required to be able to complete the submission correctly can have its own complexities (for example, the difference between reporting VAT zero-rated and VAT exempt) and I do recommend procuring professional financial services for this. As mentioned above these regular submissions can be quite costly if using a professional, especially when required monthly for the EU.
One small note on this – depending on the options you’ve taken above your accounting could be quite different. Take a pledge of £10. In option 1, you submit whatever VAT was charged and collected through the pledge manager (e.g. you would have charged backers 20% of £10, which is £2 extra) , however for option 4.2 the tax authority considers that the £10 total already includes VAT (which is £8.33 + £1.67 VAT for a total of £10). Options 2 and 3 (adjusting prices in Kickstarter) might lead to some slight tax differences if the tax authority doesn’t recognise that the higher amount charged is intended to include VAT, but it is worth getting professional advice on this if you intend to follow that route.
2. Products Shipped to Country
For goods arriving into either the UK or EU (for onward fulfilment in region) import VAT is calculated and levied by the customs authority on arrival. If you are VAT registered you will want to include your EORI number on the customs declaration (which will allow you to later reclaim the VAT paid). If you are not VAT registered then the declaration and payment will be handled either by your courier or fulfilment centre, however you’ll be liable for those costs (one reason you might want to register for VAT).
Import VAT includes the cost of the product plus the cost of shipping. In the UK the declared value of the goods is typically the price paid to the supplier plus the cost of shipping (including any onward shipping), and a more recent update to guidance on calculating the VAT cost also includes any duties payable in the calculation of VAT.
It’s worth noting here that, with the introduction of the OSS and IOSS, the main reason to use an EU fulfilment centre is to reduce shipping costs for EU customers by having them ship from closer to their destination. The VAT benefits of using an EU fulfilment centre have been closed with the changes since July 1st that require sellers to account for sales within the EU via the OSS. The concept of free circulation still exists, where import duties are handled so that goods can be sold like any product made in the EU, and is handled via the OSS.
3. Products Shipped to Backers
What are my options for shipping to customers?
Essentially, goods can be shipped to backers in one of two ways:
- Ship from outside the country
- Ship from within country/region
When shipping from outside the country, this will fall into one of 3 categories:
- Under IOSS (for EU)
- DDP – Delivered Duty Paid
- DDU/DAP – Delivered Duty Unpaid/Delivered At Place
The IOSS applies to goods shipped to the EU from outside the EU only, and for goods valued under €150. The customs declaration will still include your EORI number and also your IOSS number, allowing it to pass through customs.
In the DDP model, the seller pays (or accounts for) any duties, via the courier paying duties and passing on this charge to the seller. Often couriers charge for this service, and it may not be cost effective for lower cost items (which luckily is where the IOSS comes in for the EU) however it doesn’t require VAT registration since the courier acts on your behalf. For shipping high value items (over €150) to the EU, this will also require accounting in the OSS and VAT return but may be handled by your fulfilment partner in special cases (see below).
DDU or DAP is the least desirable option as it is used for consignments where duty is not handled by the seller (either via IOSS or DDP). This means that when the goods arrive to the customer, they will need to pay the VAT owed. The issue with this method is that additional charges will be levied by the courier that collects the payment, which can be significant, leading to extra cost for customers.
Finally, if shipping from within country or region, the application of VAT may be different. When shipping from within the UK to UK customers there is no need for a customs declaration – if VAT registered, the seller will simply account for sales in their regular VAT returns. If using a fulfilment partner as an online marketplace there is guidance for the parts they will be responsible for, which includes calculating and charging VAT at point-of-sale.
For shipping within the EU, for example from a fulfilment centre, then VAT registration is required for the country in which the goods reside and OSS registration will allow for goods to be shipped within the EU in free circulation.
What about UK/EU Friendly Shipping?
You might have seen badges on Kickstarter projects like EU Friendly Shipping (below). All this means is that backers will not be charged import VAT when receiving the package – it does not mean there are no VAT charges at all. This is because VAT will be collected by the seller (see section 1) and remitted to the tax authority.
The EU Friendly Shipping badge has always meant that backers will not be charged VAT on delivery. Previously items could be shipped from an EU fulfilment centre with the creator usually absorbing the one-time import VAT charge on the (lower) manufacturing cost, or because items were shipped from outside the EU and declared under the low-value consignment relief (LVCR) value of ~€23. Since July 1st 2021 the LVCR has been removed and requirements for registering for the OSS (for sales above €10,000) have been introduced.
What alternatives are there if I’m not VAT registered?
If you’re using a fulfilment partner that’s able to act as an intermediary, you may be able to proceed without VAT registration and still deliver to backers without charges. If the fulfilment partner is within the region, you will have to bear the costs of the import VAT on the goods – if you’re using a model where MSRP is 5x landed cost, then you are looking at losing approximately 4% cost (20% of 20%) on all your sales for that region. If the fulfilment partner is not in region but is acting as an intermediary for the IOSS/OSS, you will likely incur a small charge for them to handle the administration and VAT liability on your behalf. Spiral Galaxy charges 5% of the payable VAT, so at an approximate 1% of EU sales that makes it cheaper than registration (unless you have very large consignments to the EU).
There is a solution for UK providers shipping to the EU called Taxamo Assure, which also act as an intermediary and charges a flat rate of £2 per parcel (plus any VAT required to be paid) and provides an IOSS number to be used for shipping. It integrates with Royal Mail’s shipping solution Click&Drop, however it is also required to be integrated with the marketplace so it’s more suitable for those making sales via their own website than Kickstarter or a pledge manager. I suspect similar solutions may be available in the US to enable shipping to the EU.
How about shipping to retailers?
A final note on shipping to retailers (and distributors). Typically, as the retailer or distributor will be VAT registered in their country, you will be putting their EORI on the customs declaration and they will be the importer of record. The invoice (and packing list) will include the quantity of the goods at whatever price you sold them at, not the MSRP.
If you are VAT registered for goods sent to a retailer in the UK or EU, you may need to charge VAT on the sale and account for this in the invoice.
There’s a lot to take in in this article, and the specifics of your situation may call for different approaches. In general I found UK registration and VAT reporting to be easier (and cheaper) than the EU, but if you are not as comfortable with any of parts of this then you will need a finance professional
You will almost certainly need partners to handle VAT for customers. Luckily these are probably partners you are already working with. A pledge manager is the first priority simply to allow you to charge VAT appropriately for each country. A fulfilment partner can ease the burden of customs, and shipping if they are able to act as an intermediary for you. Finally, whilst the cost of VAT registration can be high for small publishers, if you are already engaging a finance professional to help with regular VAT reporting it may make sense for them to handle registration in addition.
Selling to customers in the UK and EU may seem intimidating, but it is absolutely worth offering games to these markets, which are some of the largest behind the US, in exchange for some extra work when it comes to fulfilment.
- VAT – Value Added tax
- DDP – Delivered Duty Paid
- DDU/DAP – Delivered Duty Unpaid (Delivered at Place)
- EORI – Economic Operator Registration and Identification
- IoR – Importer of Record.
- OSS – One Stop Shop
- IOSS – Import One Stop Shop
- HMRC – Her Majesty’s Revenue and Customs, the UK tax authority
- LVCR – Low Value Consignment Relief.
- Return – The reporting of your VAT liability to the tax authority in a given period
- Remittance – Sending payment for owed VAT to the tax authority
- Free circulation – Goods that have had import formalities completed so that they can be sold in the Union like others goods made in the EU.