More on small businesses and VAT

New Europe-wide rules for VAT came into force this month, having been debated and agreed by EU countries back in 2008.

Among other things, the rules introduce a requirement for EU businesses selling digital services to charge VAT to online customers in other European countries at the rate that applies in the buyer’s country, rather than the seller’s. The intention of this change was to remove one advantage that multinational corporations have over small, local businesses — namely, their ability to move their base of operations to wherever the tax regime is most favourable so they can pay (and charge) less tax. This trick is not an option for small businesses, who are thus undercut by the big companies.

So the principle behind the rules change is a good one, and Labour strongly supported it (although I personally wasn’t an MEP when the new rules were agreed).

But towards the end of last year, I was alerted by constituents to some damaging side-effects — especially for small traders. After doing some initial research with colleagues, I wrote a blog post in December (republished in January after a website hack) outlining these concerns and passing on some clarifications about the new rules.

However, all is not well. Several constituents have been in touch with me since December to raise further concerns or to point out that the situation is more complicated than my first post suggested. Other Labour MEPs around the UK have had similar representations from their own constituents, not to mention strong lobbying from campaign groups representing sole traders and micro-businesses. According to some accounts, a number of small businesses have had to stop trading due to the new rules. This is clearly very bad news indeed — something has gone wrong.

Among the various areas of concern, three big worries have come up time and again in conversations with constituents:

  • Many small businesses feel that these changes have been forced upon them at short notice, without enough thought about how they will be affected, and without any transitional help so that they can adapt. The changes apparently required to the e-commerce and administrative systems seem prohibitively complex, especially for businesses with small traders.
  • Communication from the UK government about the rule changes has come very late, and been of very poor quality. Many small businesses have not had access to good advice about what services are covered, how they are supposed to apply the rules, how to collect the customer information that the rules seem to imply, and how to register for the one-stop shop set up by HMRC supposedly to simplify the process. A helpline has been set up by HMRC, but many people have complained that they are unable to get through.
  • The lack of a threshold for charging VAT means that many businesses who previously did not charge VAT at all now have to implement systems to do so when selling to other EU countries (although the existing threshold still applies to UK sales). When Labour was in government, we requested a threshold, but this position has not been reflected in the current legislation.

I and other Labour MEPs have been raising these issue urgently over the past few weeks with the relevant authorities, both the UK government and the European Commission.

First, we have asked the government for emergency measures to aid small and micro-businesses attempting to navigate the new rules. Second, we have asked HMRC and the government urgently to improve the quality and quantity of information available in the UK, to eliminate confusion and make it clear exactly what businesses do and don’t have to do. And third, my colleague Neena Gill has asked the European Commission to review the legislation specifically to introduce a threshold to exempt businesses with small turnovers:

On 1 January 2015 the new EU VAT legislation came into force. It was designed to prevent Internet giants from avoiding tax, but will have a disproportionate effect on the smallest firms. The rule change will force small businesses, including those currently under the VAT turnover threshold, to register for VAT. This will increase the costs to SMEs as well as the administrative burden. Current estimates suggest that this will affect 264,000 early-stage businesses in the UK alone. The VAT MOSS (VAT Mini One-stop Shop) system is perceived as a disincentive to supplying consumers in other Member States and as going against the trend towards greater international trade, particularly over the Internet.

Is the Commission aware of these problems? How does this kind of legislation fit with the new Commission’s political priority of investing in the European economy with the digital economy as a centrepiece? Did the Commission analyse the potential impact of this legislation on SMEs? If so, what was its estimate of the negative impact of the measures on SMEs, and how would this be outweighed by potential positive effects?

If the Commission concludes that this legislation is disproportionate for a huge number of SMEs, will it propose a threshold under which small enterprises would be exempted from the VAT legislation?

Of course, any change to the rules on this cannot be simply imposed by the Commission, but have to be agreed by every member country.

As soon as we have anything to report on any of these fronts, I will share it here (and with those who have written to me directly).

In the meantime, I’ve also tried to find concrete answers to a number of factual questions from constituents and campaigners. These are below.

Questions and answers

What services are included under the new rules?

The changes apply to digital services. These are broadcasting, telecommunications and e-services that are electronically supplied.

An e-service includes:

  • images or text, such as photos, screensavers, e-books and other digitised documents e.g. pdf files
  • music, films and games, including games of chance and gambling games, and of programmes on demand
  • online magazines
  • website supply or web hosting services
  • distance maintenance of programmes and equipment
  • supplies of software and software updates
  • advertising space on a website

The following are not included:

  • supplies of goods, where the order and processing is done electronically
  • supplies of physical books, newsletters, newspapers or journals
  • services of lawyers and financial consultants who advise clients through email
  • booking services or tickets to entertainment events, hotel accommodation or car hire
  • educational or professional courses, where the content is delivered by a teacher over the internet or an electronic network (in other words, using a remote link)
  • offline physical repair services of computer equipment
  • advertising services in newspapers, on posters and on television

Who is responsible for sorting out the VAT liability if businesses sell through a third-party service such as Etsy or Folksy?

The third-party service is liable if it authorises the download or payment process, or if it sets terms and conditions.

What about Paypal?

Paypal provides a payment mechanism. It does not take part in the supply of services, so it is not responsible for accounting for VAT.

Is it true that there’s a glitch in the HMRC system that makes it impossible to register for EU VAT and not UK VAT?

HMRC are now saying that this is fixed (but the fact that it existed does seem to suggest that the UK government was not ready for the change).

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6 Comments

  1. Thanks for such a cohesive understanding of the issues. One point that really needs flagging up: SMEs are only 0.04% of small businesses in the UK: the other 99.6% are microbusinesses, many of whom are sole traders. When “SMEs” and “small businesses” are used interchangeably, the nature of and impact on microbusinesses is overlooked. As the ceiling for SMEs is a €2 million turnover and 20 employees, most of them are in fact far, far bigger than microbusinesses, who are the worst hit.

  2. Great blog post!

    There is also lack of clarity about whether or not micro-businesses need to register under the Data Protection Act. HMRC have said they do, but then they’re not the experts. The “wizard” on the Information Commissioner’s Office web page implies that as long as the customer’s data is used appropriately, there’s not need to register – but the lack of definitive guidance is another indication of how unprepared the government is for this change in the law.

    If a threshold isn’t possible, or can’t be implemented immediately, there are still some concessions that might make life tolerable. In particular:
    – It’s very difficult to get two non-conflicting country details from a customer. It would be nice if we could just use the customer address provided provided by Pay Pal. In other words, make the temporary concession permanent.
    – Micro businesses to have the option to treat B2B transactions as B2C transactions. In other words, to charge VAT on all sales and treat businesses in the same way as private customers. Under the rules, no VAT should be charged, but it’s really difficult to integrate this into a site that mainly sells to private customers. It would be much easier to always charge VAT and then business customers can reclaim that VAT on their next VAT return.
    – Micro businesses to have the option to charge the country’s standard VAT rate on all sales, and to ignore geographical and exceptional VAT rates in all sales. This will reduce the complexity from 70+ different rates down to just 27. If you’re selling a commodity which has reduced rates in some countries and not others, then it’s more difficult to keep track of the right rate. Using each country’s headline rate will make life a lot easier, if that’s what the seller chooses.
    – Reduction in the time that records must be stored and clarification on the need (or otherwise) to register under the data protection act.

    These won’t be anywhere near as good as getting a threshold, but they might make life a little less complex if a threshold isn’t possible.

    BTW. Are these lessons being learned for 2016 when this whole scheme rolls out for physical sales???

  3. I’ve had to stop doing business with Europe. (1) My Paypal “Buy” buttons would each need replacing with 20 buttons, one for each EU VAT region. (2) Paypal will not provide the two proofs of residence required. (3) My free open source shopping cart is incapable of charging at the point of purchase, and does not provide proof of residence. I’m aware of only one shopping cart that may work, costing £700 per website, plus cost to migrate existing data, plus installation costs. I do not less that £400 worth of business per year, so it is not cost effective. (4) Being way under the UK VAT threshold, my VAT requirements were nil. The new EU VAT requirements for digital goods, is too onerous, not technically possible, and costs too much, requires me to know the daily VAT rates in 26 EU regions, keep proof of residence for a decade, and file returns quarterly. (5) This is not one common market, but 26 different trading states.

  4. Hi Richard,

    On the EU Vat Facebook Action group (https://www.facebook.com/groups/euvataction/ ) we’re getting reports of small French organisations with “auto entrepreneur” status being denied VAT registration, and hence getting a de facto threshold, plus a number of reports that knitting pattern designers also being told that they don’t need to register for their equivalent of MOSS – although in the UK it appears that knitting/crochet patterns are very included in the scheme.

    I think it would also be really helpful to know just how much it’s going to cost HMRC to process thousands of quarterly returns of under 50 quid a throw. I just can’t believe it’s ever going to be cost effective to process such small amounts.

  5. Thanks for looking into this further. This situation highlights that decision makers are often unaware of the realities of every day life for many people and so unintended consequences can make life unnessarily difficult for them. I hope this encourages more research into future decisions and more consultation with the people who will be affected, not just the people who are expected to be affected.

    I know that other MEPs of other parties have expressed concern over EU VAT as well so I hope that all concerned can work together to achieve a positive outcome.

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