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Why the UK Government wants us to Airmail 1KB Text Files by CD

by Tom | 13th, June 2012

In the UK we have a tax called VAT (Value added tax), which Wikipedia describes as “a tax on the purchase price”. In other words, when you buy something, part of the price you pay goes to VAT instead of the company selling you the product. The standard VAT rate is currently 20% in the UK. This means if a UK company sells some software for £100, they have to pay £16.66 VAT on the sale (not £20 - because the price is really £83.33, which if you add 20% totals £100). Unfortunately, old-fashioned UK laws make this process ridiculous for modern software distribution.

VAT rates can vary depending on sector and with various schemes such as flat VAT. Startups in the UK don’t have to register for VAT immediately, but it deserves consideration since it is inevitable if the company does well. Being VAT registered also can allow you to claim VAT back on business expenses. However software startups like ours tend to sell a lot and buy relatively little, so this doesn’t favour us much at all.

Usually when you sell an item, you don’t have to pay VAT if the customer is outside the EU. However, as we distribute our Construct 2 licenses digitally, HMRC have decided we have to pay VAT on all our sales regardless of where the sale originated. We phoned up HMRC, who passed us on to their technical team, who then advised us to write in with our queries which we did to confirm all of this.

This is now where we get slapped round the face with the big moth-eaten tax rule book where the Internet has not yet been prophesised.

If we send a physical CD in the post with a Construct license on it, this would count as a physical good. We wouldn’t have to pay VAT on the sale if the customer is outside the EU. Thanks for buying Construct 2! We’ve followed AOL’s footsteps and decided to send it to you as a CD in the post!

If we were to send the license file in paper format, this could possibly also count as a physical good. Thanks for buying Construct 2, here’s your license certificate, please copy all 9 lines out to a text file without making any mistakes at all!

And if we simply send an email, we get charged significantly more tax.

Suppose it costs on average £4 to post said CDs and/or paper licenses to a customer in USA. Suppose we sell a business license there, currently £229. We could save £34 by sending a CD instead of emailing them. Not a bad saving for a few minutes work.

So we have a couple of options:

  • Email the licenses, pay the VAT and suck up a big loss
  • Send CDs and paper licenses to customers not in the EU

Option 1 is very expensive. Option 2 saves us a lot of money but has other downsides:

  • No one wants a stupid CD with 1kb text file on it (if it takes 2 weeks to deliver this it is an average data transfer rate of 1 bit every 2.5 minutes, it’d be quicker to beep at them down the phone)
  • No one wants a paper license certificate
  • It wastes our time
  • It wastes customers time
  • It could confuse customers (why am I entering my physical address to get an email? Why do I have both an email and a CD?)
  • We could actually lose sales, since customers might not want to enter their address (it shouldn’t be necessary after all)
  • It’s environmentally wasteful (an airmailed CD with a 1kb text file on it)
  • It’s ridiculous we’re put in this position by nonsensical laws

It’s not exactly an easy choice to make. The majority of our sales come from outside the EU. The second option is ridiculous, but could save enough money to hire someone. The first option is the most practical, but could cost us thousands of pounds.

HMRC failed to respond to a question about whether we’re allowed to email the customer a license file as a backup, in addition to posting them the CD. So there would still be a few details to iron out if we did decide to start mailing out CDs. It’s frustrating to figure out what we should do when HMRC themselves can’t tell us.

As two young and highly motivated founders, the option of moving our whole business to the US (where both culture and legislation are supportive of startups) is becoming increasingly tempting and actually seems like an exciting opportunity and adventure. New startup visas to the US are helping make the option increasingly viable.

Maybe this is why the UK is lacking well known software companies. It’s expensive, we have tax laws that desperately need updating, and HMRC don’t have all the answers (the ones they do imply silly tradeoffs). We hear a lot of noise from the UK government about how keen they are to help startups. But how can we stay competitive with US companies when we have to deal with all this, and they don’t?

This is my completely unqualified opinion and should not be treated as advice or as a reliable source of information. If you have your own businesses please do not act on anything I have written here without seeking professional advice!

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Lahyene 4,286 rep

Maybe just send a letter with the licence and a email with the serial. The customer with the email can use quickly the software and the letter is for administration :p They just need to know that you send a letter ^_^

And Bye Bye the VAT /o/ no?

Wednesday, June 13, 2012 at 5:27:01 PM
EnglishAcorn 16.7k rep

Interesting post.

I'm unsure of the legislation etc... but is there VAT added to monthly or yearly subscriptions. Or would that be too close to the same thing. In otherwords, to possibly get around the issue, having customers out site the EU subscribe for X period of time at X amount. Until something better comes about.

Alternatively if you don't want to move abroad. You could start up a second business which is located in a foreign land which distributes the licences, with your first business trading with them (I.e. First business sells the licences to the second, the second then distrubutes). Or something to that effect. Of course the result would also include a lot of pain, effort, frustration, Boris Johnson and tears.

Being from the UK, you've also got the options of Canada, Australia, NZ, Belize etc... Although US is probably more preferrable. Mostly likely when I get the chance I'll hope to move abroad especially since the EU is swollowing the UK.

Wednesday, June 13, 2012 at 5:27:22 PM
juantar 4,291 rep

Come to Florida! Good weather, no personal income taxes at the state level (income tax at federal level does apply) and because of the real state burst, there are many relatively cheap houses. We also have cheap FIOS :)

Wednesday, June 13, 2012 at 7:43:58 PM
newt 124.6k rep

Comment by juantar

Come to Florida! Good weather, no personal income taxes at the state level (income tax at federal level does apply) and because of the real state burst, there are many relatively cheap houses. We also have cheap FIOS :)
And only one reported zombie outbreak.
Seriously though a lot of states offer tax breaks, etc. Plus there's the fact that you don't actually have to live here. Digital age, blah, blah, blah.

Wednesday, June 13, 2012 at 8:35:46 PM
HowieRaisin 4,969 rep

Wow, what a dilemma. I hope someone reasonable can see how contrary this is to common sense and come up with a solution.

Wednesday, June 13, 2012 at 8:59:14 PM
Captain9Fingers 4,369 rep

Can't you register Scirra as a business in Jersey or some other offshore location?

Wednesday, June 13, 2012 at 9:22:44 PM
ludodesign 30.7k rep

Bizarre laws, too expensive, here in Brasil we don't have much laws about it, is a big problem here with steam, xboxlive, dlcs and this things. People don't know how tax this, and this way have a lot of laws projects, some abusives and other so strange and limited.

Wednesday, June 13, 2012 at 9:50:10 PM
yuquanzhou007 3,347 rep

need to think about it very very carefully

Wednesday, June 13, 2012 at 11:29:29 PM
shadowofpalms 2,958 rep

Wow, That is crazy. . . It's like the government had no idea the internet existed. lol. I agree, you should come here to Florida.

Wednesday, June 13, 2012 at 11:36:53 PM
Paradox 41.5k rep

Delaware corporations are popular all over the US for their laws and lack of taxes. I owned an Indiana Franchising company that was actually a Delaware Corp. (about the distance of London to Italy) So if you go anywhere in the US you can incorporate in any other state. (however I did have extremely expensive lawyers setting it up... still owed on that bill when I sold out.)

Wednesday, June 13, 2012 at 11:55:25 PM
Fimbul 6,903 rep

(Disclaimer: this is coming from a brazillian, not a canadian).

US is a bad choice. Land of ridiculous software patents and lack of freedom.
Why not choose Canada instead? You'll have an actual government that serves the population, as well as tons of benefits in the form of tax exemptions and other things (you'd have to look it up), as well as being a nation that is VERY interested in and supportive of games.

Seriously, consider Canada.

Thursday, June 14, 2012 at 12:35:01 AM
Wink 11.3k rep

Florida? That's deaths waiting room. lol

Seriously though, California is the place you want to be! Swimming pools, movie stars :D

If your going to do it you might as well do it right. Do some research. I would look at the San Francisco Bay Area. Silicon Valley to be exact.

Since your business is in the Tech industry you would be located right in the heart of it all. A place were every other person you meet either has a degree in Computer Science, or is a Venture Capitalists. Also the weather is nice most of the time. I really think you guys would like it there.

Thursday, June 14, 2012 at 12:59:37 AM
VampyricalCurse 8,340 rep

Ridiculous laws. You are better off basing yer business somewhere else.

Thursday, June 14, 2012 at 4:42:41 AM
tecbug 7,677 rep

How about sending paper certificate by post (only 1 page, so it's cheaper than sending CD) . You say that this is what you charge money for.
As addition to this certificate you email license by e-mail.

Thursday, June 14, 2012 at 8:06:05 AM
Schoening 8,463 rep

Yeah... Put more taxes on virtual goods..

We must all hope that the old gargoyles in some political offices soon die off imho

Thursday, June 14, 2012 at 10:06:00 AM

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