European Union VAT rules, in general, can be quite complicated and confusing, especially since there have been changes in EU tax law over the last few years. These changes have influenced how online courses, or offline for that matter, should be taxed.
The way of applying the EU VAT rules also influences the technical requirements an LMS (Learning Management System) or course site software should be able to handle. When I talk about LMSs, think Teachable, Kajabi, a WordPress LMS plugin such as LearnDash combined with WooCommerce…
Confusing information from LMS software providers made me dive into this, and although I am not a fiscal expert, after an interview with the Dutch Tax Authority, the rules are clear to me, and I would like to share them.
A word of warning, though. I am not a fiscal expert, and in ALL cases, you should check with your accountant and/or local tax authority how the law applies to your situation.
I will discuss the questions you will have to answer yourself in order to determine if these EU VAT Rules are relevant to your business.
Why is this important?
First of all, as a business, you should want to do the ethical and socially responsible thing. Adhering to the law is the consequence of that.
Secondly, this influences the functional requirements you need when selecting an LMS (Learning Management System), a.k.a. the course software for your knowledge commerce business. You want to automate the process as much as possible, which means that the shopping cart and checkout system should calculate the correct VAT. Not every LMS does that.
What is VAT?
VAT stands for “Value-Added Tax.” It is the tax that is added to all goods and services in any shape or form. Shown prices for consumers always include the VAT. In B2B, the price is always mentioned without VAT which is added separately on the invoice.
As a business owner, you collect the VAT your clients – consumers or organizations – pay you. When filing your quarterly or monthly VAT returns, you can subtract the VAT that you as a business paid when purchasing products or services from the VAT that was paid to you. When your earnings are higher than your cost, you will have to pay VAT to the national tax authorities. When you are just starting out, you may still get the surplus of VAT paid back because you are investing more than you are earning.
When do EU VAT Rules apply to your business situation?
EU VAT applies when you are doing business in any of the EU countries. Made simple:
- Your business is located in an EU country and registered in one of these countries for taxes.
- Your business is NOT located in an EU country but is selling to EU customers. In this case, your business should register for EU VAT. An excellent article that explains how to do this was written by Quaderno.
Reality teaches that many small non-EU businesses do not apply this, but it is the law nonetheless. Check with your accountant on how to do this right.
Can a business be exempt from EU VAT?
In general, formal educational institutions like elementary schools, high schools, vocational education, and universities are exempt from applying VAT to their pricing. They do not have to apply for exemption status. This also means that when they pay VAT on products or services they purchase, they cannot claim it back.
If a business provides (vocational) education, it can apply for a VAT exemption status. Each EU country has its own rules and procedures for this, so always check with the tax authorities of the particular country you are in.
Beware: I have seen claims on the websites of LMS providers that claim that every educational entrepreneur is exempt from VAT, but this is simply not true. If you want to be sure, please check with your accountant and/or national tax authorities.
When does it make sense to apply for a VAT exemption status? This is only interesting if your clients are consumers. Not having to add VAT lowers the price tag of the education for them.
The disadvantage is that as a business, you can not claim back the VAT that your business pays when purchasing services from a marketing agency, for instance.
When your education business is selling to other businesses, it makes less sense to apply for this VAT exemption. After all, your clients are able to claim the paid VAT back anyway, so to them, it makes no difference if you charge the VAT or not. And you will still be able to subtract the VAT you paid from the VAT you charged your clients.
How does Reverse Charge VAT work?
Before we go into which tax rates apply to which situation, let me first explain the concept of Reverse Charge VAT.
In the VAT process, each business plays a role in collecting Value-Added Taxes from customers. And every quarter (or in some cases, every month), a business files the VAT return with the national tax authorities.
You can imagine that if your business is in Germany and is selling products to customers in Portugal, Spain, and Italy, it can be quite a hassle having to file VAT returns in Germany, Portugal, Spain, and Italy. Having to deal with different institutions in other languages with their own rules, in my opinion, could become an experience resembling hell.
To make things easier for cross-border trade within the EU, the Reverse Charge process was created when the EU VAT system was reformed for the launch of the single market in 1993.
The Reverse Charge process means that the responsibility for the recording of a VAT transaction moves from the seller to the buyer. This circumvents that sellers need to register for VAT in every EU country they sell to.
There is a difference between selling to consumers or other businesses in other EU countries here. If the customer is a consumer, the VAT should be added. If the customer is a business, the Reverse Charge principle applies.
There are some exceptions for certain types of products and services (live events and immovable property), so always check with your accountant. A brief explanation is given here: https://www.avalara.com/vatlive/en/eu-vat-rules/eu-vat-returns/reverse-charge-on-eu-vat.html
The business buyer should have an EU VAT number that is eligible for trade within the EU. An EU VAT number can be validated here. https://ec.europa.eu/taxation_customs/vies/.
Not every country gives out VAT numbers that are automatically eligible for EU trade, so always check your customers’ VAT numbers in the VIES database. https://ec.europa.eu/taxation_customs/vies/.
Let’s explain through some examples.
A German company sells consulting services to businesses in other EU countries. They check the VAT numbers of their clients in the VIES database, and when they are approved, the VAT is reversed. This shows on the invoice as the VAT as zero with the text Reverse Charge VAT. The buyer does not pay VAT but will have to report the Reverse Charge VAT when filing the VAT returns.
A Dutch company sells products to consumers in other EU countries. The VAT is NOT reversed but charged as usual.
What this means for an LMS is that as a course site owner, you will have to provide your B2B buyer with the option to supply their EU VAT number. The checkout system should then automatically check the supplied VAT number with the VIES database and Reverse Charge the VAT. That way, the business buyer in another EU country does not have to pay VAT.
In September of 2021, I built a course site in SamCart only to realize that they did not offer the option for businesses to fill out their EU VAT number on checkout. (Even though they claimed their system was EU VAT rules ready.) That was an absolute deal breaker, so I switched to another LMS.
Are there different types of courses?
This is where it can get a little confusing, and it is where many LMSs go wrong. Many LMSs see a course as a digital product and have set up their system for that, but there are nuances.
First of all, a digital course is a course where every aspect of it is digital. There is no teaching interaction between student and instructor in the form of live calls, Facebook group interaction, 1-on-1 teaching emails, etcetera. This also applies to the staff of the instructor. Obviously, a question to the billing or customer service department is not covered by this.
When a course is hybrid, meaning part is digital and part is student-instructor interaction, it is no longer completely digital, and as such different rules apply.
Beware: Many of the LMSs that claim they are EU VAT compliant do not cover the option of a hybrid course. To them, a course is ALWAYS a digital product. The result is that the incorrect VAT rate will be applied by the system if you sell hybrid courses. And whatever you do, don’t make mistakes in your VAT declaration. Getting into trouble with your national tax authorities will cause its own level of hurt.
How does EU VAT apply to a completely digital course?
These rules changed on July 1, 2021. You can find the simplified explanation here: https://ec.europa.eu/taxation_customs/business/vat/vat-e-commerce_en
The EU VAT tax rule for digital products is as follows:
- For the first € 10.000, the VAT rate of the country where the seller is located is used.
- After the € 10.000 threshold has been passed, the VAT of the country where the buyer is located should be applied.
- If subsequently, in a following year, a business concludes that in the previous book year, the threshold of € 10.000 has not been reached, they can start charging their country’s VAT rate again or choose to keep on applying the buyer’s local tax rate.
For an overview of applicable VAT rates per country, click here: https://ec.europa.eu/taxation_customs/business/vat/telecommunications-broadcasting-electronic-services/vat-rates_en
A Dutch business sells less than € 10.000 per year and sells a digital course to a Hungarian consumer. The VAT rate that applies is 21%, the Dutch rate.
A Dutch business sells less than € 10.000 per year and sells a digital course to a Hungarian business. The VAT number of the Hungarian business is approved, and the VAT is reversed.
A Dutch business has passed the threshold of € 10.000 in sales and sells a digital course to a Hungarian consumer. The VAT rate that applies is 27%, the Hungarian rate.
Beware: This last option is what many LMSs do automatically, and it is incorrect because it automatically assumes a threshold but also doesn’t account for a hybrid course.
Remember this is not fiscal advice, so always check with your accountant and/or national tax authorities.
The consequences for an LMS are that you should be able to set the VAT rate rule that applies to your product. The system needs to be able to recognize the different products and the type of client (consumer or business), and it needs to signal if the threshold for digital products has been exceeded or not and adjust the tax rate accordingly.
How does EU VAT apply to a hybrid course which is partly digital, partly human interaction?
A hybrid course is a course where there is a digital component, but students also interact directly with the instructor or the instructor’s staff when it comes to teaching. Examples of that are live group calls, live 1-on-1 calls, group interaction in an online community like Facebook, or individual chats in Slack or emails back and forth between the instructor(‘s staff) and the student on the content of the course. Again, customer service questions are not part of this.
During my interview with the Dutch Tax Authority, they mentioned the option that the digital part of the course had to be taxed differently than the interaction part. They also said that they are not allowed to judge that. This is good because this could get quite complicated in the checkout system. Consult with your accountant before you launch a hybrid course product!
The VAT rate that applies here is the rate of the country of the seller.
A Dutch business sells a hybrid course to a Hungarian consumer. The VAT rate that applies is 21%, the Dutch rate.
A Dutch business sells a hybrid course to a Hungarian business. The VAT number of the Hungarian business is approved, and the VAT is reversed.
The consequences for an LMS are that you should be able to set the VAT rate rule that applies to your hybrid course.
What does this all mean for the choice of an LMS?
It is clear that there are a lot of rules and regulations and that any checkout system of the Learning Management System for your course site should be able to handle this. Unfortunately, most aren’t able to handle all these rules.
This is where the danger lies. Many LMSs claim to be EU VAT proof, but in reality, they are not and only apply the Digital Product VAT rate and, in that case, not even according to the € 10.000 threshold rule.
When not done right, you may be in a lot of trouble with the tax authorities in your EU country and run the risk of having to pay the VAT your clients should have paid out of your own pocket. That is a loss in anyone’s books.
Quaderno offers a great solution that integrates with many LMSs. Check out their Integrations Page . The list on their website is not complete, though, so do reach out to them if you are using an LMS that is not on the list. At Fluks, we use LearnDash that does integrate with Quaderno.
Disclaimer: As mentioned several times above, we are not accountants or fiscal advisors, so do not see this blog post as legal advice. It is purely a starting point for you to start thinking about this topic in relation to your course business. Ask your accountant for advice on your situation.