EU to propose VAT exemption for small businesses after protests
Complex VAT regulations which came into force at the start of the year may be amended following a recent EU summit in Dublin.
The EU legislation changes the way sellers of digital services, such as ebooks, apps and online courses deal with VAT when selling to other European countries. It means that VAT is now charged in the country where the products are bought, rather than the country where the seller is located.
Last week, however, the European commission said it will propose a threshold to exempt smaller businesses from the VAT Mini One Stop Shop (VAT MOSS) rules.
The intention of the policy was to prevent large companies avoiding higher rates of VAT by claiming to be based in countries, such as Luxembourg, where rates are lower. However legislators appear to have underestimated the impact it would have on small businesses, some of whom have said they have had to stop trading in Europe.
Among them is Clare Josa, founder of Clare Josa Mentor, which has been selling courses and online materials such as e-books since 2002. However, Josa says she had to abandon all sales outside of the UK as a result of the new rules. “For me personally it has meant I’ve been unable to sell in the EU since January. If I sell one ebook to someone outside the UK then I would be subject to all the new rules and I cannot take that risk,” she says.
Josa says she hopes to restart trading towards the end of the year, but first has to undergo a major online overhaul which will cost her over £10,000 and a lot of time. She says small businesses such as hers are struggling or unable to meet with the data requirements of the EU law. To do this businesses need to collect at least two pieces of non-contradictory information which proves to audit standards where a sale was made.
But Josa says many basic e-commerce platforms are designed for this purpose. Furthermore, there are wide disparities on how VAT is calculated among the EU’s 28 members states and between 75 to 81 different rates of VAT.
“I’d have to know where someone is before I sell to them if I am to display the correct price. You also need to ask customers to fill in extra fields which leads to basket abandonment. Amazon has struggled with this, so someone selling knitting patterns online will not be able to cope. Legislation aimed at corporations is hitting kitchen tables in the UK,” says Josa.
Josa set up campaign group EU VAT Action and she and other business owners have been protesting about the law. She also attended the recent EU Fiscalis event in Dublin where finance ministers agreed that small businesses should be exempted. However, Josa says businesses cannot afford to wait for Brussels to act. “The legislation will not be debated until the end of next year and it could be two or three years more before it comes in. Meanwhile businesses are not trading in Europe or in some cases even starting up.”
Amanda Tickel, a tax partner at KPMG UK, says there’s no “light touch” for businesses on this issue and that all must comply with the law, or else they could face tax demands from overseas authorities. She says HMRC has made efforts to lessen the problem but ultimately it’s bound by the framework of the EU. “If you’re a massive organisation then you have the resources to be able to deal with this. However, many small businesses will have enough difficulty in paying their UK VAT correctly, never mind 27 other countries too,” she says.
Tickel says VAT law is highly complex and varies greatly from one country to another. She also says business owners in the UK find it easier to start up because it has a high threshold before VAT needs to be paid. “Business owners in the UK may feel particularly affected because they are used to having a high threshold of earnings – £82,000 – before they need to pay any VAT,” she says. “One way to avoid the problem would be to sell via another platform but this would impact on a company’s profit margins.”
Currently, UK small business owners selling to Europe need to register with the VAT MOSS system and submit quarterly VAT returns to HMRC. The UK tax authorities will then send the relevant information to the countries where trade has taken place on the business owners behalf.
Chris Bryce, chief executive of the Association of Independent Professionals and Self-Employed, said he was pleased the commission was planning to introduce an exemption for smaller businesses.
“Sadly it could be a long time before improvements to VAT MOSS pass through the European parliament. The commission should now consider what interim measures can be taken to reduce the burden on businesses that in all likelihood will be exempted in future.”
Vanessa Mock, European commission spokesperson on taxation, said almost all the complaints about VAT MOSS had been from the UK. “The UK was unusual in having a very high threshold, so companies do not have to register for VAT until they have £81 000 worth of sales,” she said. “In many other countries, all companies big or small have to register for VAT, such as Sweden, Spain, Netherlands. So for small businesses in many other EU countries, the changes were less dramatic.”