Reticularium

There is an update for this article

Yesterday I received an email message from Rackspace:

“Dear Igor Simonov,

The Rackspace Cloud would like to inform you of an important change to our billing system that will enable us to correctly handle VAT invoicing for our European customers.

As an existing Rackspace Cloud customer, you will need to enter your VAT registration number in your control panel prior to January 1, 2010 to avoid being charged the 17.5% tax for VAT. If you do not have a VAT ID number, or choose not to supply one, The Rackspace Cloud will begin charging you the 17.5% VAT tax on all invoices after January 1, 2010.

I got stuck for a little. From what I know about VAT nothing can result in any price difference for customers are they VAT payers or not. So I have come up to conclusion that Rackspace billing guys just don’t understand what VAT is and how it works. They might have been confused by necessity to enter it in invoices as a separate line, and they obviously missed the point: if I am not a VAT payer, it’s me who don’t include VAT in my invoices, and it’s my clients who pay VAT instead of me. It’s me who is a client for Rackspace, not vice versa.

Here’s a simplified example:

1. Rackspace produces a service from scratch and sells it to me for 10 dollars.
2. I produce my service based on a service provided by Rackspace and sell it for 20 dollars.
3. My client offers a service based on my service for 30 dollars.

If there is no VAT at all (e.g. if these three entities all are in USA), everything is clear. Each participant makes 10 dollars and pays taxes calculated on this basis. Income tax, corporate tax, whatever.

If there is VAT and each side is registered as a VAT payer, it looks like this:

1. Rackspace supplies their service to me for 10 dollars and pays VAT tax based on 10 dollars
2. I receive their service and supply my service for 20 dollars. From their invoice I get their VAT and claim that the service I’ve received had VAT included in its price, so I pay VAT based only on my 10 dollars earnings, i.e. same amount as Rackspace.
3. My client supplies his service for 30 dollars, but like me he pays only VAT based on 10 dollars, because his cost basis has already VAT included.

Total VAT calculated on basis of the final service price is exactly the same as the sum of VATs paid by all participants of this chain together, but each pays the own part.

Well, this is simple. Now where has Rackspace mistaken.

If Rackspace is a VAT payer, I am not a VAT payer and my client is a VAT payer, how it should be:

1. Like in the previous case, Rackspace supplies their service to me for 10 dollars and pays VAT tax based on 10 dollars
2. I am not a VAT payer and therefore I cannot deduct Rackspace’s VAT from my VAT, but I don’t need this – I am not a VAT payer! I still should receive the same service from Rackspace for the same price, the only difference is that I don’t care if they enter their VAT in invoice or not.
3. Now, if my client receive my service for the same 10 dollars price, it’s no good: I cannot show VAT in my invoices, so my client will pay VAT based on the whole price, i.e. on basis of 30 dollars. Apparently this cannot affect Rackspace at all, they already have gotten their money. For me personally being or not a VAT payer doesn’t make much difference, because:

• my services are not being re-sold
• my prices are lower by (at least) VAT percentage – because I don’t have to pay it.
• 95% of my clients are from USA anyway

Note: to make for my clients possible to pay VAT I don’t supply my service for 20 dollars. My actual price is 10 + 10 / 117.5 * 100 = 18.51, so my clients still can supply their service for 30 dollars and make same money as if I was a VAT payer.

How it looks like if Rackspace doesn’t change their decision (I hope they do):

1. They simply supply their service for higher price to non-corporate users. And they will have to pay VAT based on 10 dollars plus VAT based on additional 17.5% dollars that they call VAT but in fact it is just a higher price.
2. I can’t supply my service for $18.51 anymore, I want to keep my earnings unchanged, so my clients can’t supply their services for $30 for the same reason, they have to pay my VAT too, and I can’t compensate it, because the compensation is paid to Rackspace, but it should be paid to the treasury! This is very very wrong.

So in this scenario I make less money, my clients make less money, treasury gets same taxes, Rackspace is the only one who gets more money. Well, probably this is the real reason..

To make this even more idiotic I have to mention that my VAT, if I paid it (Czech Republic) would be 19%, not 17.5% :)