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Rachel Andrew on the Business of Web Dev

The Challenge for the Tiny Global Business

We track various metrics for our product Perch. One of those is the percentage of sales to the UK (where we’re based) versus the rest of Europe and the rest of the world. At the time of writing, about 50 percent of license sales are to the UK and 20 percent are to non-UK European countries, with the remaining 30 percent to the rest of the world. Almost half of our business is outside of our own country. We are an export business.

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In the traditional business paradigm, companies begin to export after a period of growth that has allowed them to add resources for trading on the international market. They do well in their home market, then start to explore outside that region, increasing their turnover by selling overseas. For Perch, some of our very first customers were in America; we were an export business from Day 1. From cultural to legal and tax issues, exporting raises challenges that the majority of tiny businesses are not well placed to deal with. As governments scramble to create legislation for this new global marketplace, I am afraid that laws created to prevent tax avoidance by multinationals will force small traders directly into their arms.

When tax is very taxing

At one point HM Revenue and Customs in the UK ran adverts with the slogan, “Tax doesn’t have to be taxing.” When you run an export business, tax can be very taxing indeed. You may already be aware of the changes in VAT legislation in Europe, which have implications on digital businesses worldwide. Worse news is that other countries are looking at what the European Union (EU) are doing and considering implementing their own regime of adding tax on digital goods and services sold to citizens of their country.

As of January 1, our systems have to be able to do the following for every purchase of our software:

  • If the customer is in the UK, sell the product with VAT added at 20 percent.
  • If the customer is in any other EU country but gives us a VAT number (which identifies that they are registered for VAT), validate the VAT number and allow them to buy without adding VAT.
  • If the customer is in another EU country but does not have a VAT number, treat them as a consumer and charge them VAT at the rate in their country. We need to make sure we know which country they are resident in to charge the right amount of VAT, as we then have to pay that VAT via a central system to the correct EU Member State.
  • If the customer is outside the EU then VAT doesn’t apply, so we don’t add VAT to the price of the product.
  • We also have to store two pieces of non-contradictory evidence as to where our customer is located. In the event of an audit we have to be able to prove we charged the right amount of VAT and paid it to the right country!

Many digital micro-businesses have found that their small business accountants are ill-equipped to deal with the complexities of these VAT rules. We end up being more expert in international taxation issues than the people who are supposed to be advising us!

Multiple currencies

Until recently, if you wanted to take payments in multiple currencies, your only option other than PayPal was to have a multi-currency merchant account, plus a payment processor that could cope with taking payment in your chosen currencies. With the advent of Stripe this is getting easier and less expensive to do. That said, you still tend to swallow a fairly expensive exchange rate. Larger companies with bank accounts in each currency are able to maintain balances in the currency they accept and wait to transfer money at favorable rates. This usually isn’t so possible for the tiny business.

Even with accepting currency becoming easier, dealing with these different currencies through your accounting system adds extra complexity. Large companies have accounting departments to deal with these issues. In our case we lean heavily on our accounting software Xero to help us do the various calculations and keep track of exchange rates.

Our laws, your expectations

As a UK company, we have to comply with the laws of the United Kingdom. Our software license is drawn up in respect of those laws. Our UK lawyer has checked that we are doing all of the right things in terms of the UK and European legislation we have to comply with. We try very hard to use plain English in any legal documents. However, we sometimes get questions from customers outside of the UK who are puzzled by some of the wording.

In addition, we sometimes have to comply with things that baffle and annoy customers from elsewhere in the world. If you have been asked whether you agree to have cookies placed on your computer recently, it’s likely that the website was in Europe and trying to comply with the “cookie law.” This privacy legislation requires websites to get consent from visitors to store or retrieve information from cookies.

Information that you are required legally, or for taxation purposes, to collect in your own country might seem like an invasion of privacy in another. As a small company you are left to navigate these waters yourself. It’s time-consuming and not straightforward unless you happen to have a background in international business.

When it comes to business insurance for digital products and services, insurers tend to assume small means “this country only.” Policies designed for global sales are offered to multinational companies, and are not suited to tiny single-founder operations.

Our part to play in the future

Something that has become very clear as I have tried to help people navigate the EU VAT issue is that the people writing the legislation are out of touch with the reality of modern, digital business. For the VAT situation, there was an assumption that small businesses were all selling via a larger company—that all independent publishers were selling ebooks via Amazon, for example. It was taken for granted that these companies, not the small players, would be handling the complexity.

Due to the difficulties in dealing with these international issues, I believe that many founders avoid the issues until they come knocking on our door. However, I would encourage people to engage with the tricky issues of being a truly global, small business. Only by pushing for legislation that works with our businesses, insurance that makes sense, and banking and payment systems that take into account modern business practice will we be able to ensure our future as independent businesses.

If legislation is passed that makes it ever-harder for us to run these start-ups and small businesses, you can be sure that the big players will be happy to step in and offer us a “solution.” That solution is likely to leave us placing much of our profit—and our ability to make business decisions—in the hands of huge enterprises. As the founder of an independent business, as a person who wants to use and support independent businesses—that is a path I fear heading down.

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