Tag Archives: avangate

VAT basics for software vendors

The dreaded VAT. Ugh. Value Added Tax (VAT) is the European equivalent of sales tax and it is a Royal Pain In The Arse. However, if you are running a business that makes sales in Europe you need to understand VAT. In particular it has important implications for your choice of payment processor, even if you are based outside the EU or below VAT registration thresholds. I have put together a few pointers here in the hope that it will help someone grappling with the complexities of VAT. But please note:

  • I am not an accountant. If you need proper advice, talk to a proper accountant.
  • The VAT rules are complex and may be interpreted differently by different people.
  • The rules may be different in different countries.
  • The rules change over time.

Only VAT registered businesses have to charge VAT. You have to register for VAT once your sales reach a certain threshold. At the time of writing,  UK-based businesses have to register for VAT if their EU sales exceed £77k in a 12 month period (technically it is UK sales, but the ‘place of supply’ for EU consumers is classified as the country of the seller). You can also choose to register for VAT before you reach the threshold. But it usually isn’t worth it, unless perhaps you think having a VAT number is essential for your credibility. Personally I waited until I couldn’t avoid it any longer.

Even if your business is not based in the EU, the EU still expect you to pay VAT on any sales inside the EU once you reach a threshold. This is controversial and it isn’t clear to me exactly what the EU can do to enforce this if you are based outside the EU. Talk to your accountant.

The VAT rate varies between countries. At the time of writing it is 20% in the UK and 19% in the Netherlands. It also varies over time, it used to be 17.5% in the UK.

The UK also has a simplified flat rate VAT scheme with a lower VAT rate. But you can’t claim back VAT on purchases. Worse still, it appears that you will effectively be paying VAT on sales outside the EU. So that doesn’t seem at all attractive.

The VAT rules are complex and depend on:

  • where you are based
  • where your customer is based
  • whether your customer is a business or a consumer
  • whether you are selling goods or services

Technically you do not have to charge VAT to an EU business, even if they aren’t registered for VAT. Apparently they are then responsible for “self-charging” the VAT. However the burden of proof is on you to show that the customer is a business. So most vendors require a VAT number as proof of business status.

There also seem to be disagreements over whether software is goods or services. What if you ship a CD?

Here is a simplified summary in pseudo-code of whether a seller needs to charge VAT on software as I understand it:

paysVAT()
{
    if ( seller registered for VAT)
        if ( customer in EU )
            if ( customer is a business )
                if ( customer in same country as you )
                    return TRUE;
                else
                    return FALSE;
            else
                return TRUE;
        else
            return FALSE;
    else
        return FALSE;
}

Except that people in Norway and Switzerland (which aren’t in the EU) pay VAT in some circumstances. Don’t ask me why. Also you don’t pay VAT on some items, e.g. postage. And outside the scope of VAT (O), not rated for VAT (N) and zero rated for VAT (Z) are all different VAT codes meaning no VAT is payable. As I said, it’s complicated. Not complicated and interesting like quantum mechanics or the love lives of celebrities. Just complicated.

The only upside of being registered for VAT is that you can claim back the VAT you pay on any purchases you have made (make sure you get a VAT receipt). Or, if you are buying from another EU country, you can tell them your VAT ID and they shouldn’t charge VAT (see above). So any equipment you buy in the EU is now 20% cheaper. This is small recompense for the giving 20% of your sales in the EU to the VAT man. Try not to think about that. Instead give yourself a pat on the back for having reached the VAT threshold. A lot of businesses never do.

Note that when you register for VAT you may be able to claim back the VAT of products purchased before you registered. When I registered I could claim back VAT paid on goods purchased within the last 3 years and services purchases within the last 6 months. So keep your VAT receipts.

Congratulations on making it this far. Here is the important bit. How you process payments has important implications for VAT. When someone pays you via a payment processor, such as PayPal, legally they are buying from you and the payment processor is just handling the payment on your behalf (like a bank cashing a cheque). So you are responsible for collecting what VAT is due and paying it to the appropriate government. This can be a major headache if you are selling hundreds or thousands of licences per month.

When you use a reseller, such as Avangate or Fastspring, legally you are selling your licence to the reseller and the reseller is then reselling it to the customer. The reseller is then responsible for deciding what VAT is due, collecting the VAT and doing the paperwork. They then pay you net of the VAT and their commission. Leaving you to sort out the VAT for their one payment to you per month.

Using a reseller is a big win if you are registered for VAT. I am registered for VAT and use Avangate as my payment processor. They do the heavy lifting in terms of calculating, collecting and paying the VAT on my sales. But if you aren’t registered for VAT be wary of using a VAT registered reseller – approximately 20% of your sales will be disappearing in VAT (which the VAT registered reseller has to charge) which you could be keeping if the customer bought from you direct. So if you aren’t registered for VAT, a reseller such as Avangate or Fastspring may not be the best solution for you. Check out e-junkie.

VAT admin is fairly straightforward. To keep the VAT man happy I have to file:

  • an EC sales list every month
  • a VAT return every quarter

My Quickbooks accounting package generates the numbers for these. It only takes a few minutes to file reports online once all the transactions and VAT codes are entered correctly into QuickBooks. The VAT man then debits (or credits) the appropriate amount from my business account each quarter. It is not too bad, as long as I don’t think about the wheelbarrow loads of cash Avangate keeps to pay the VAT man. Maybe they roll around naked in it on the last day of every quarter. I probably would.

When I first registered for VAT I tried adding the VAT onto my existing prices. But I found that sales dropped more than 20%. So I ended up keeping the gross price (including VAT) the same, whether the customer pays VAT or not (Avangate gives you this option). Whatever you do, make sure it is clear whether any prices you quote include VAT. EU consumer expect to be quoted prices inclusive of VAT and won’t appreciate it if you try to sneak on an extra 20% at the end of the purchase process. You may be legally required to quote the price including VAT in some countries.

A final note of warning. The VAT man has a lot of powers. I understand the UK VAT man can kick your door in and seize your equipment without needing even a warrant. He might not be impressed to find out that the computer you reclaimed the VAT for is an XBox. Do not mess with the VAT man.

If I have made any mistakes, missed anything out or if the rules are substantially different in your country, please add a comment.

Thanks to Marcus Tettmar of Macro Scheduler automation software for checking this through and advising me on some of the finer points.

A survey of ecommerce providers for software vendors

Overview

The choice of ecommerce provider is probably one of the more important ones you make as a software vendor. It isn’t too hard to compare providers by feature set or price. But what about other vital attributes, such as support, reliability, ease of set-up and how they treat your customers? It isn’t realistic to try every provider, so this major decision is often made on the basis of haphazard anecdotal evidence from forums. I created a survey in an attempt to gather some systematic data on the ecommerce providers most commonly used by small software vendors. I present the results below without fear or favour. Skip ahead to ‘Overall ranking’ if you are in a hurry.

Methodology

I posted a request for survey responses on this blog and on a few forums frequented by microISVs and small software companies. Any vendor of software (desktop or web based) not directly affiliated with an ecommerce provider was eligible to take part. Software vendors were invited to fill out a survey form on wufoo.com for each ecommerce provider they had used in the last 2 years. They had to supply their product URL and an email address from the same domain so that I could verify their identity. They also had to check a box proclaiming:

I am a software vendor and I have used this Ecommerce provider in the last 2 years. I have no commercial interest beyond being a customer. (If you have affiliate links to the Ecommerce provider, that isn’t a problem.)

They then had to reply to an automated email from wufoo to the email supplied confirming it was them that had completed the form. If they didn’t reply to the automated email I followed up with a few more emails. Although tedious for me, I felt this was an important safeguard to avoid any possibility of fraudulent entries. I also checked for duplicate entries, duplicate IP addresses and other suspicious patterns. The survey was open from the 5th to the 8th October. Any responses not validated by 10th October were removed from the data.

The data

202 survey responses were received from 166 different software vendors. 9 responses were rejected as I could not verify their identity (they didn’t respond to several emails). 1 response was rejected due to a possible conflict of interest raised by the software vendor (they had done paid work for one of the providers). This left 192 valid responses. I saw no evidence of any attempt to rig the results.

You can download the raw data. It has been stripped of any personal identifying information. Feel free to do your own analysis or check my results.

Providers

The survey listed 14 of the major ecommerce providers, plus an ‘other’ box for providers not listed. Valid responses were received for 25 different ecommerce providers, as shown below:

responses

Note that ‘e-junkie+PayPal/GoogleCheckout/2Checkout’ has been shortened to ‘e-junkie’ for brevity.

Questions

Below I show the average (mean) score per ecommerce provider by survey question. The providers are sorted by score. Providers with less than 3 responses weren’t considered statistically valid and are not shown here (see the raw data for all responses).

Features

“How do you rate the range of features offered, e.g. coupons, support for multiple currencies, CD shipping, affiliate tracking, handling of tax etc.”

5=”Excellent”, 4=”Good”, 3=”Satisfactory”, 2= “Unsatisfactory”, 1=”Dismal”

features

Ease of use

“How easy is their system to set-up, manage and modify?”

5=”Excellent”, 4=”Good”, 3=”Satisfactory”, 2= “Unsatisfactory”, 1=”Dismal”

ease_of_use

Reliability

“How reliable is their service? Does their server ever go down?”

5=”Excellent”, 4=”Good”, 3=”Satisfactory”, 2= “Unsatisfactory”, 1=”Dismal”

reliability

Support

“How good is their support? Do they respond in a timely manner? Are their staff helpful and knowledgeable?”

5=”Excellent”, 4=”Good”, 3=”Satisfactory”, 2= “Unsatisfactory”, 1=”Dismal”

support

Fraud protection

“How well do they protect you from chargebacks and false positives (i.e. valid cards declined)?”

5=”Excellent”, 4=”Good”, 3=”Satisfactory”, 2= “Unsatisfactory”, 1=”Dismal”

fraud_protection

Ethics

“Does this service disrespect you (e.g. by paying you late) or your customer (e.g. by spamming them, adding unwanted items into their cart or making hidden charges)?”

5=”Excellent”, 4=”Good”, 3=”Satisfactory”, 2= “Unsatisfactory”, 1=”Dismal”

ethics

Value for money

“How do you rate their service compared to the cost?”

5=”Excellent”, 4=”Good”, 3=”Satisfactory”, 2= “Unsatisfactory”, 1=”Dismal”

value_for_money

Future

“What is the probability you will still be using this service in 12 months time?”

5= “>95%”, 4= “>75%”, 3= “>50%”, 2= “>25%”, 1= “<25%”

futureThe average score and standard deviation for each question across all providers is shown below:

question_analysis

From the averages software vendors are most happy with reliability and least happy with ease of use. From the standard deviation the least variation is in fraud protection and the greatest variation is in support.

The correlation (R squared) between the likelihood of staying with a provider and the answers to the other 6 questions is shown below:

correlation

Perhaps providers should be concentrating more on ease of use and support to differentiate themselves from the competition.

Providers

Below I show the average (mean) score per question by ecommerce provider. The providers are shown in alphabetical order. The standard deviation is also shown to give an idea of how consistent the responses were (the larger the standard deviation the more variation there was in responses). Providers with less than 3 responses weren’t considered statistically valid and are not shown here (see the raw data for all responses).

avangate

bmt_micro

e-junkie

esellerate

fastspring

kagi

paypal

plimus

regnow

shareit

swreg

Overall ranking

The average (mean) score and overall ranking for providers with at least 3 responses is shown below.

overall

The chart below shows the score broken down by question (click to enlarge):

overall_detailed

The chart below compares the 4 top performers by question:

top_performers

Avangate, Fastspring, BMT Micro and e-junkie all did well. The difference between the Avangate and Fastspring score (approx 0.3%) is probably too small to be statistically significant, but the survey shows significant differences between the best and worst providers. SWREG trails in last place by quite a margin, managing to place last or second to last in an impressive 7 out of 8 questions. It is also noticeable that the providers owned by industry heavyweight Digital River fill 4 out of the bottom 5 places in the ranking. This rather begs the question of how they got to be the industry heavyweight in the first place.

Note that the ranking does not show who the ‘best’ ecommerce provider is, for the following reasons:

  • ‘Best’ depends on your requirements. All the questions have been equally weighted here. If you decide (for example) that good support should be weighted higher than ease of use you might come up with a quite different ranking.
  • The assignment of numerical values to responses (e.g. Excellent=5, Good=4 etc) was done for easier analysis, but is entirely arbitrary. Different values might have resulted in a different ranking.
  • We aren’t comparing like with like. Software vendors using ‘lightweight’ e-commerce providers such as PayPal or e-junkie might have lower expectations than software vendors using ‘fully featured’ e-commerce providers .
  • e-junkie, SWREG, BMT Micro and RegNow had respectively only 8, 7, 5 and 3 responses. They are therefore vulnerable to statistical fluctuations.

That said, the ranking does correlate fairly well with the many comments I see about ecommerce providers on various forums. I don’t think I would want to use any of the providers in the bottom half of the ranking.

Conclusion

While one shouldn’t take the overall ranking too seriously, it is clear that there are major differences in the performance of ecommerce providers in important areas other than pricing and features. I hope these results will allow software vendors (myself included) to make a better informed choice of ecommerce provider. Hopefully this will, in turn, improve ecommerce services overall by rewarding the good companies at the expense of the poorer performers. It would be interesting to run this survey in another year or two and find out what has changed. Thank you to everyone that took part.

Disclosure: I use e-junkie+PayPal/GoogleCheckout/2Checkout as my payment provider for my Perfect Table Plan software. I have an affiliate link to them in another article on this blog which brings me a few dollars a month. I have no other commercial relationship with any of the other ecommerce providers.

BMT Micro
e-junkie
eSellerate
Fastspring
Kagi
PayPal
Plimus
RegNow
ShareIt
SWREG