VAT rules are complex – cross-border sales even more so – and for musicians, agents and record labels alike, understanding the VAT rules that apply to digital music sales outside of the UK is far from easy. That’s why we’ll try to provide some clarity on the topic now.

This is a hot topic for the creative types involved with running indie record labels here in the North West, many of whom tell me there’s a lot of conflicting information in the answers they get from various so-called experts.

That’s not really surprising when you consider the way in which we access our favourite tunes has changed. Almost all major record stores have gone to the wall and people either subscribe to an app like Spotify to stream their music or use digital marketplaces like Amazon to buy their music.

There’s no doubt indie record labels can access a much more global market in 2021. Cross-border VAT rules on digital music sales have changed to reflect both this digital transition and our exit from the European Union.

How does VAT work for digital music?

Starting with the basics, VAT is collected by businesses on behalf of the Government on the sale of goods or services. In the UK, there’s a turnover threshold for businesses to register which stands at £85,000 in 2021/22.

The sale of recorded music is standard-rated, which means you’ll need to charge VAT at 20% on the music you sell, and you can reclaim any VAT you pay on purchases.

This is the case for both goods and services, but different rules can apply depending on which of these things you’re selling.

HMRC views the sales of tangible items like vinyl records or CDs as goods, whereas digital music is treated as a service.

More specifically, it counts as a ‘digital service’, which puts it in scope of some complex changes to VAT regulation that have taken place in the last few years.

Changes to VAT for digital services

Before 1 January 2015, cross-border sales of digital products were subject to VAT based on the location of the business selling them – the “place of supply”.

The problem with this was different European countries have their own rates of VAT that differ to the UK – so companies were basing their operations for digital downloads in countries with low VAT rates, such as Luxembourg, as a way of lowering their prices.

In 2015, the EU changed the rules so that VAT for digital services is determined based on the customer’s location, not that of the business.

This means all downloads bought by UK customers must have UK VAT added at the standard rate, while downloads bought by customers in other EU member states must have VAT at the appropriate rate for that country.

There was previously no threshold for these types of sales, meaning businesses of any size would have to account for VAT.

An exemption threshold of €10,000, or the equivalent in pound sterling, came in from 1 January 2019, meaning businesses are only subject to the VAT rules of their home country if their sales of this kind fall below this threshold in a year.

At the same time, it became possible for non-EU businesses that are registered for VAT for other purposes to use the VAT mini one-stop shop (MOSS) to account for the sales of digital services to EU member states.

This second point was important because since the Brexit transition period ended on 1 January 2021, UK-based businesses can no longer join the union VAT MOSS that they were able to sign up to before.

How can record labels account for VAT on cross-border sales?

Under these rules, you effectively have two choices: register for VAT in every EU member state where you supply digital services to consumers, or register for the non-union VAT MOSS scheme in one EU member state.

There’s further guidance about what you need to do – including advice if you’re under the VAT threshold and the evidence you need to gather to prove the location of your customers – in the HMRC guidance ‘VAT: supplying digital services to private consumers’.

Practically speaking, most record label owners won’t want to handle this side of things themselves. It’s fiddly, complicated, and takes your time away from the interesting parts of running an indie label.

Instead, you can use specialist accounting software to deal with tax on music sales – software like Eddy or a distributor with accounting features like Label-engine should give you the tools you need.

Most importantly, you should work with an accountant like me who understands this area inside out, and can give you advice specific to your sector.

Get in touch for advice on VAT for music sales.