Kickstarter Lesson #212: Calculating and Paying Value-Added Tax (VAT)

19 January 2017

Over 3 years ago, we introduced the idea (and the logo you see on many Kickstarter campaigns) of projects being “EU friendly.” I’m going to focus on the EU region today–specifically in terms of VAT–but you could feasibly replace the word “EU” with other regions and this information will still apply.

Before I begin, I need to emphasize that I am not an accountant or a tax expert by any means. Far from it. I’ve fulfilled 7 EU-friendly Kickstarter projects and I’ve talked extensively to various creators and accountants about VAT, but this is still second-hand information. Also, this information is subject to change over time, so if you see something here that is inaccurate or outdated, please comment so I can fix it.

What Is EU-Friendly Shipping?

A reward must meet one of the following qualifiers if it is to be called “EU friendly”:

  1. The total amount paid for the reward by a backer (including shipping) must by less than 22 Euros. If that is the case, it doesn’t matter where it’s shipped from. [Update: The €22 amount may vary by country. See comments by Nicolai and Nick.]
  2. The reward is freight shipped to a fulfillment center in Europe and fulfilled to European backers from there. If that is the case, the reward price doesn’t matter.

Why Does “Friendly” Shipping Matter?

“Friendly” shipping matters because if it’s not a possibility, the cost to the backer can be significant. Say that someone in the EU backs a $40 reward and pays $30 in shipping from the US to the EU (we’ll assume that the reward includes a built-in shipping subsidy of $10 so that the creator can say that there’s “free” US shipping). Legally, the declared value must be the reward price plus shipping.

When the courier delivers the package to the backer, the backer must pay VAT (~21%, depending on the country). So a $40 reward could end up costing the backer nearly $85. Sometimes there’s even an administrative fee on top of that.

With EU-friendly shipping, the shipping fee is lower in the first place and the creator pays for VAT when the goods enter the country. These two factors allow for a significantly lower price to European backers.

What Is “VAT”?

VAT stands for “value-added tax.” Specifically, for Kickstarter creators accepting pledges from European backers, it refers to an approximate 21% tax.

How Is VAT Calculated and Who Pays It?

If the creator ships the rewards in bulk to a fulfillment center in Europe, they will pay VAT on the declared value (reward and freight shipping cost) at port.

So if I have a $40 reward that costs $20 to ship from Gamesquest in the UK to Germany, accounting for a built-in shipping subsidy of $10, a German backer would pledge $50. Say that reward costs $2 to freight ship from my manufacturer to the UK. That puts the declared value at $52. With a 21% VAT, I would pay $10.92 when the reward enters the EU.

As Doug notes in the comments, some products (like books) interact differently with VAT and duties.

How will this change when the UK is no longer in the EU?

I have no idea. I’m guessing that the UK will have its own VAT, so creators will pay VAT twice if they use a fulfillment center in the UK to send to backers in the EU. If that’s correct, it will result in creators no longer using fulfillment centers in the UK. That’s unfortunate, because Gamesquest is awesome.

How Does VAT Affect Shipping Fees on Kickstarter?

Basically, like everything else, you need to budget for VAT. In the example above, you would add about $11 to your Germany shipping fee if you wanted to pass that fee on to the backer (which is a perfectly reasonable thing to do if you want to treat all backers equally. Otherwise your margins significantly change for a subset of backers).

What About Retail Backers?

You will need to issue a commercial invoice to retail backers in the EU that shows the 21% VAT included in the amount they paid. They’ll still have to charge VAT to rewards they sell to their customers, but the invoice gives them the opportunity to get a refund on the second VAT payment.

Are There Any Loopholes?

First, I should emphasize that whenever a backer asks you to mark a reward as a “gift” or list a lower declared value, they are asking you to break the law (even if they don’t realize it).

Second, according to Eurocrowd.org (credit to Jordan at Scofflaw Games for finding this) if your reward price is higher than the MSRP of the reward, you don’t have to pay VAT. I think that might be a typo, though, because I’m pretty sure that situation just allows you to charge VAT on the MSRP (i.e., if the MSRP is $30 but you charged the backer $40).

Third, you may have heard (including from me) that the declared value is based on the manufacturing cost of the product, not the reward price. This was once true, at least in the sense that it wasn’t clearly defined by any official organization. Remember, crowdfunding is a relatively new thing, and Kickstarter has always emphasized that they are not a store. Backers make “pledges” to assist with the creation of something, and that may result in them receiving a reward. However, despite this gray area between a donation and a purchase, governments around the world are starting to officially view pledges as sales transactions. So use such alternate calculations at your own risk.

If you want to dig deeper, I’d recommend reading the European Commission’s paper on the VAT treatment of crowdfunding (courtesy of Robert Zimmerman of Logistico).

Does the US Not Charge VAT?

There are very minimal import taxes for bringing goods into the US. Instead, the US uses a sales tax system, so US creators must charge sales tax to backers in the same state as your business. I don’t think non-US creators pay US sales tax.

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I hope this helps! If you have any questions or if you’d like to offer any clarifications, please do so in the comments.

Also read: Shipping and Fulfillment and (if you’re in the UK or EU) read Mateusz Rakowski’s detailed comment.

37 Comments on “Kickstarter Lesson #212: Calculating and Paying Value-Added Tax (VAT)

  1. *glances at paper*

    …I’m guessing that’s why I now get charged VAT on patreon pledges I make…

    It’s not the tax I object to for inporting stuff, that equates to what I’d be paying in VAT if I purchased from a UK store; it’s the £12.50 handling fee, which is flat rate and means that if I’m buying a $10 game with $20 shipping on Kickstarter that doesn’t have EU friendly shipping, I could wait and buy it from my FLGS for around… Assuming marked down by a little and it’s a bit more expensive in the UK due to our higher cost of living… Lets say £15+VAT for around £17 which works out to about $21… Or I could instead get it now, paying $30 plus that 20% VAT ($36) plus an £8 ($10 or so) handling fee for $46 – Around a 50% increase, ignoring the much higher rate due to shipping compared to waiting.

    …Not that I’d likely be willing to pay $20 shipping for a $10 purchase to start with… For a $100 purchase including shipping, that $10 handling is much less bothersome…

  2. Unfortunately the threshold of €22 is not entirely valid for Denmark.

    If the value of the item(s) sent is higher than DKK 80 (apr. €10.5) then you are required to pay VAT.

    I accept having to pay VAT. The big benefit for me in terms of EU-friendly shipping is that I can forego the DKK 160 (€21) fee to Danish Post.

  3. … and as for the UK leaving EU, then it will depend on the deal they strike wiht EU. If they remain a part of the Internal Market (http://ec.europa.eu/priorities/internal-market_en) they are good to go. That said, this is likely to be one of the hot topics and one that EU will most likely play hard to get.

    On the page given above, there is an interesting link to another topic called “Action Plan on VAT” – http://ec.europa.eu/taxation_customs/business/vat/action-plan-vat_en – which may or may not have an influence on things down the line.

  4. I remember the confusion I have run into for vat before, I was trying to research the rules for importation as a manufacturer, rather than as a creator, it seemed to point to it was based on the cost of materials, not the finished product. If anyone has an answer for that, I would love it.

  5. He Jamey

    It’s good to know this stuff.
    I’d like to add some info; however, I’m not a professional in this matter so double check it for your sake.

    I’ll write about VAT in the UK. Of course; there can be some differences in other EU countries, but generally should be quite similar.

    1. You don’t have to be VAT registered in EU even if you are EU based company.
    If you are UK based company, you don’t have to register to VAT. You only have to register if:
    – your VAT taxable turnover is more than £83,000 (the ‘threshold’) in a 12 month period
    – you expect to go over the threshold in a single 30 day period

    That means you don’t have to charge VAT on your products, but you still have to pay VAT when you are buying things! If you buy stuff in EU with VAT in the price, you have to pay it, and you won’t get a refund.

    2. How to minimise VAT
    To be honest, VAT is quite a nasty thing, and I was thinking how I can minimise bad consequences of this tax. Here’s my tip for EU-based companies (for those with registered VAT as well):

    If a company X is UK based business and it is VAT registered in the UK, the company have to sell their goods with 20% VAT (if you sell a game for £20 you have to add to the price £4 of VAT what makes £24 total) but only in the EU. But if you’re VAT registered, you can zero-rate the VAT on most goods you export to non-EU countries. So selling is not that bad actually.

    So when you have to pay VAT on production costs:

    – When you use UK based manufacturer, you have to pay 20% VAT on production costs.

    – When you print games abroad and then import the games to the EU territory, then you have to pay VAT as well.

    However, VAT can be refunded if you “collect” more VAT from your customers than you “paid” to others (like production costs); however, remember that you are collecting VAT from EU customers only.
    So why it’s not okay:
    – it’s an upfront cost you want to avoid
    – if you don’t sell enough games in EU with VAT added you would get a partial refund only.
    – if you are not VAT registered, you won’t get any VAT refund.

    Even if you are UK (or EU) based business, you pay VAT only if the product is in EU territory.

    So the plan to avoid VAT:

    a. Print games outside the EU

    b. Ship games straight to fulfilment centres over the world.

    c. Ship to the EU territory only games you going to sell in the EU.

    In this scenario, games don’t come to EU territories, so VAT doesn’t have to be paid on production costs and sales. Only VAT will be added to products delivered to EU fulfilment centre – then you will be charged VAT for manufacturing cost and then when you sell your games in EU you have to add VAT to the price.

    I am planning to write an article on that subject :)

    NOTE: please, remember that all info is for the EU countries. It doesn’t apply to businesses outside the EU. For example, I think that EU manufacturer doesn’t have to add VAT on manufacturing costs when the customer is from abroad.

    3. When finally UK leave EU there will be no problem with double VAT. There are agreements between countries, and there is no point of being afraid.

    4. “Second, according to Eurocrowd.org (credit to Jordan at Scofflaw Games for finding this) if your reward price is higher than the MSRP of the reward, you don’t have to pay VAT. I think that might be a typo, though, because I’m pretty sure that situation just allows you to charge VAT on the MSRP (i.e., if the MSRP is $30 but you charged the backer $40).”

    I would be extremely careful with that! Especially every country interprets the law differently, etc.

    Please, let me know if I got something wrong!
    Thanks Jamey!

    1. “However, VAT can be refunded if you “collect” more VAT from your customers than you “paid” to others (like production costs); however, remember that you are collecting VAT from EU customers only.”

      You have that the wrong way round, the VAT you collect from your customers is VAT that you must then pay to the government. The VAT you pay on your costs you can (generally) reclaim from the government, and to make things simple of course you can use that to reduce the amount you pay over, you are in effect a frontline tax collector.
      If you are getting a refund from the government of your VAT, you are either selling a lot of your goods outside the EU or to other VAT registered businesses as a genuine business to business transaction. If neither of these are the case, your costs are higher than your income and you won’t be in business long.

        1. I just realised an error in my reply, it should read “you are either selling a lot of your goods outside the EU or to other non-UK EU (or non-‘other EU’ country that is not the one you are trading in e.g. non-French if you are in France) VAT registered businesses as a genuine business to business transaction”
          Sorry, this language gets complicated, such is the nature of tax and governments

  6. Ah, the joys of VAT and customs charges. I’ve been hit by them a few times recently, and they seem to be constantly changing too.

    In the UK, how VAT is calculated is slightly different (and more complicated) from how you’ve described it: The VAT *threshold* is calculated based on the declared item value only *not including shipping*, and must be £15 or under to avoid VAT (so €22 used to be about that value, but post-Brexit-vote, £15 = around €17 now due to exchange rates). Once over that threshold though, VAT is calculated at 20% on the declared cost *including shipping*. So a £15 game that cost £50 in shipping would be free of VAT, but a £16 game that cost £50 shipping would incur £13.20 VAT, and you’d also get charged an £8 handling fee by Royal Mail or Parcelforce (whoever picks up the package from customs “on your behalf”). Often customs will waive items only just over the threshold, provided the shipping cost was low, but there’s obviously no guarantees there.

    It’s also worth noting that, even if you mark something as a gift, if it’s over £39 declared value (n/i shipping) you’ll get charged VAT anyway.

    And if the declared value is over £135 (and that *includes shipping*) you’re liable to be charged customs duty (at 2.5% of the total value incl shipping), if the customs duty ends up as being over £7. And this is AS WELL as paying VAT, and the VAT will THEN also include the charges for that additional customs duty too. So a £200 ‘gift’ with £80 shipping will cost you an extra £7 customs duty + £57 VAT + £8 handling fee = £432.

    And that’s if customs even calculate it correctly. Which, in my experience, they often don’t. And who knows what exchange rate they use for currency conversion.

    Confusing? Yep, sure is.

    1. Not sure your maths is right, think your total should be £352.
      Also, it should be noted that Customs Duty is not a flat 2.5% if the item (eg kickstarter reward) is not a gift, it then depends on the category of the goods as to the percentage of duty charged when the goods are not a gift and valued over £135. From memory (as they have removed the searchable list and seem to want to make you call them) games tended to fall in the 10% bracket.

      1. Oh yes, my math was wrong. :) Still a lot. And thanks for the note about customs duty. I just quoted pretty much verbatim from the government’s customs website so not surprised it’s not all correct – the rules seem to change every time i check it, and they never have complete information. Nightmare!

        1. The new Gov.uk website is information-lite, you really have to trawl through to get to the nuts and bolts. VAT is my day job and I find it a pain to get information from at times.
          Yeah, either which way round it is a lot of money.

      1. As can be seen from the above, VAT is a complicated tax and also an unforgiving tax. It is something you should talk to your accountant about BEFORE you do something, otherwise, the chances are you are stuck with whatever situation you have ended up in and facing a large tax bill which could have been avoided or mitigated if some planning had occurred beforehand.

  7. Long-time lurker, first-time poster.

    Thank you so much Jamey for your continued efforts to support the entire games industry (and others, really). I’m constantly in awe of your tireless dedication. You’re a marvel.

    This post is especially helpful. VAT and related fees are such an opaque topic, especially to Americans who aren’t used to the system. A quick and dirty tutorial has been direly needed for some time, and the links included here are incredible.

    Please keep up the great work!

  8. In the eurocrowd.org link, I suspect the statement Jamey thinks is a typo is in fact just an inaccurate summary of the actual rule.

    It’s possible what’s actually happening there is that only the reward – the value of the actual good being “purchased” – is subject to VAT. So if someone pledges $1k for a book + a bunch of non-tangible rewards, like a convention game and a character named after them – that only the cost of the book would be taxed.

    1. As I see this passage:

      “However,when the open market value of the good or service supplied by the project owner to the backer is lower than the financial contribution and the benefits deriving from such good or service are negligible or totally unrelated to the amount of the contribution, in this case the transaction can be treated as a donation and therefore not taxable.”

      It seems it’s more about “material thank yous”, like a bookmark or sticker from a charitable association and stuff like that, in which cases “the benefits deriving from such good or service are negligible or totally unrelated to the amount of the contribution”.

      I hope you are also right about the non-tangible rewards; it would be good to know if anyone ever had to pay VAT for those.

  9. Hi Jamey! Great primer on V.A.T. for your readers! As a licensed US customs broker and international trade advisor, AND someone who’s in the process of publishing their first game, it’s something that’s been on my mind quite a bit lately. I spend most of my days working with multi-billion dollar corporations on how to conduct international trade, and I spend my nights tinkering with tabletop games.

    Opinions and politics aside, there are some very serious implications about the future state of importing into the United States. While it is true that the US currently does not have a V.A.T. and all goods under HS heading 9504 (where games are classified) currently have no import tax into the US, this could very easily change under the US’s current administration. Right now, it’s important–especially for US-based publishers who have their games made in China–to understand the “what-if” scenarios. At the very least, my advice is to research the difference between tariffs and border adjustment taxes, what House Speaker Ryan’s proposed plan might mean for your income tax deductions, how the president’s proposed 5%, 10%, and even 35% or 45% across-the-board import taxes could affect your business costs and the prices you set for your games, and what could happen if a trade war suddenly erupts and you’ve got a shipment inbound from China, for instance. Quite literally any number of scenarios could happen in the US today, tomorrow, or a year down the road – all with varying degrees of check-and-balance from other other branches of government and the WTO.

    In a nutshell, it could–and likely will–become more expensive for US-based publishers to manufature in China. The problem right now is, there are so many potential policies being proposed that it’s difficult even for trade professionals to predict exactly what will wind up happening.

  10. Hi Jamey,

    As someone who is about to launch his first Kickstarter for The City of Kings, a 6kg~/13lb~ game this has been the toughest part to get right.

    I have spent weeks talking with shipping and fulfilment companies and have lined up EU/US/CA/AU friendly services but getting the correct numbers of taxes has been the biggest challenge.

    The scary thing for me is most companies don’t seem to mention them in their pricing and assume you will be aware of them.

    For instance I will get a quote saying $2 packing fee, $15 shipping, $3 storage after x days and we can arrange shipping for $3000 and that will be it. When I question are there any other fees they respond “no”. When I follow up with are there any taxes I need to be aware of they will then raise them.

    It concerns me that a lot of first time creators wont even know import taxes and VAT are a thing and I strongly urge anyone getting quotes to always ask for information on import taxes and VAT.

    With all my learnings building up to my KS I can’t stress enough how much people need to understand these taxes and not depend on others to tell them.

    1. Hi Frank, I hope you are doing well with your project! I agree that import taxes and VAT are one of the most stressful things and it’s vital to know all of them quite well! What I think is good to have a professional company doing all the shipping and clearing out all the import taxes etc.

      1. Hey Mateusz,

        I agree having companies sorting it can be great, my concern is often companies I talk to don’t mention them and they are left as after thoughts. To them they are very well known values in every day life whilst to us they are new things. So I strongly urge people to always ask for security.

        I’ve been following a similar model to Jamey looking at OTX for shipping and then Gamesquest, Starlit Citadel, Fun again games and Unicorn games. I’m still trying to confirm Asia but it’s coming together!

    2. Frank: Thanks for bringing up these concerns about getting accurate estimates from fulfillment companies. I think it’s probably because those companies view taxes as an external expense–they’re not generating tax, unlike postage, handling, etc. But I agree that it’s really important for creators to mention it early on in those conversations.

  11. Great article and great comments! Thanks for all the insight. It’s very helpful. I am currently in the process of creating a crowdfunding campaign with my partner and we will be based in Portugal. Crowdfunding in Portugal is not very known, so there is very little information that we can find in regard to sending shipments worldwide and how we can calculate the taxes, if any. Our products are papercraft kits that people get in paper pieces that are pre-cut and pre-machined so that they get to assemble the models themselves. It’s some kind of mix between origami, lego and puzzles. Anyways, our reward packages’ weight are from 0.2 to 2kg max and we will produce our designs in house. The thing is that we want to ship worldwide from Portugal, but we really can’t seem to find a lawyer or an accountant that can tell us how the crowdfunding is regulated and if we should include some kind of tax (like VAT) when we start shipping out the products after the campaign. This is important because we need to determine the pricing of rewards accordingly. Do we have to use a fulfillment company for this, or we can ship the packages on our own manually from the national post office (as a business)?

  12. US sales tax is interesting. My understanding (as a brit) is that it’s down to each individual in the US to declare all international and out-of-state purchases on their tax return and pay sales tax on them. And that absolutely no-one actually does this, and it’s just a huge tax loophole that everyone takes advantage of. And that equates for a large portion of the differences in European and US board game prices.

  13. Hey guys, Thanks for all the information. We are about to start shipping our game from China and it seems ALL the information I find on EU Vat Thresholds is different. Some say shipping DOES NOT count in the threshold and others say shipping DOES COUNT. Does anybody know if there is a website that gives the actual thresholds for the EU? I can find the VAT rates all over the place, but can’t seem to find any site where it lists the THRESHOLDS where VAT is NOT charged. Trying to figure this out is a NIGHTMARE!

    Thanks!!!

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