VAT regulations and how to avoid them

In the previous millennium, there was a clear line between goods and services. Goods consist of atoms and anything else that can be sold are services. Companies started out by selling their goods or services close to where they were based. Japanese companies sold in Japan, American companies sold in the US and Belgian companies sold in Belgium. Only as your company started to grow, you might want to think of international business. The fact that selling abroad causes so much paperwork was fine, since only "big" companies bothered with international trade.

Fast forward to 2010. The world is a village. High-tech start-ups want to sell to as many villagers as possible. My company sells a very specific niche product: our software helps electrical engineers make digital chips. If we'd have 100% market penetration in our own country (Belgium) we would go out of business. We need to tap in to the global market from day one. Which we did.

But we are still stuck with value added taxes, a system that was introduced in the early seventies. For those of you lucky enough not to know VAT, let me explain. For (almost) all services and goods that a company sells, it has to charge VAT. The question if you should charge VAT and the VAT rate depend on a lot of factors:

• if you sell goods or services,
• the exact type of goods or services,
• your turnover for the customer's country,
• the type of customer (business customer or consumer),
• the fact that your customer has a valid VAT number (which you should check)
• the destination of the goods,
• the country in which the customer is located,
• and the phase of the moon.

(Sadly enough, only that last bullet was a joke.)

We did not find a nicely packaged web service that offers us on-line payments, taking all VAT rules into account. Again, when the world was younger and the animals talked, only big companies would think of selling abroad. Big companies can afford to do this right and pay a consultant to build an online sales platform.

PayPal is really nice, but is built with American-style sales taxes in mind. You only need to know where your customer lives and then you know the tax rate.

I do not understand why the government does not provide such a PayPal-like platform, with full VAT support, for all companies to use. It would allow all of us to increase sales without upfront investment in an online VAT module. This way more customers would buy our cool stuff, we'd make more money and the government would raise more taxes. Everybody happy.

Enough complaining. Here is how we have solved the problem: we ignore VAT.

All of our customers get to see the same PayPal "pay now" button, and all customers pay the same amount of money (€499). Putting a "pay now" button on your website is trivial, thanks to PayPal. After we receive the money, we email a new license key to the customer so that our software will continue working.

After that, we go through the whole VAT mumbo-jumbo, in a mechanical Turk way (that is: by hand). If it turns out that the customer did not need to pay VAT, we're happy. The full €499 is revenue for us. If it turns out we did in fact need to charge VAT, we're still happy. We give the customer a €86.60 discount: €499 - discount + 21% VAT = €499.

It turns out that in our business very few customers will ever have to pay VAT: only Belgian customers (small market) and consumers (we have a B2B product). If ever we decide that we lose too much money on these discounts, we can always pay somebody to build a system that charges VAT the proper way.

By all means, feel free to try our purchase form and payment mechanism. I'll send you an invoice and a software license key!