VAT changes: discussions with the Commission

I wrote a detailed blog post in January on the issue of VAT changes and how they affect small and micro-businesses, and I promised to follow up with details of further developments as Labour MEPs kept up the pressure.

In recent weeks, Labour MEPs — including myself and Anneliese Dodds, who leads for us on this subject — have been speaking to many small businesses to see what could be done. As we thought, it’s clear that many of the problems faced by British businesses have arisen because of the way the change has been implemented in Britain. But, as MEPs, we’ve also been looking at what can be done at European level to try and help.

Anneliese met with the new European Commissioner Andrus Ansip for a discussion of the most pressing issues. Mr Ansip’s portfolio covers the Digital Single Market, so he is responsible for overseeing the implementation of such rules across the EU.

  • The European Commission cannot act autonomously on tax matters. It is the national governments of EU countries who decide on any common rules. It is they who threw out the previous EU rules and introduced these new ones.
  • The question of a minimum threshold for small businesses had been one of the main battlegrounds when this legislation was first discussed. Labour, who were in government at the time, had pushed for a UK threshold to be applied across Europe. According to the Commissioner, the current UK government have not raised this issue.
  • The question of a threshold is a difficult one. The UK’s internal threshold (£81,000 of sales per year) is significantly higher than that of other European countries. Some have a threshold of around €10,000, while others have no threshold at all. If such countries were to introduce a threshold, it would lead to a loss of tax revenue for them. If they don’t introduce a threshold, firms from countries that do will essentially be competing tax-free with their own taxpaying companies, and unsurprisingly, they don’t like that. This is what makes it difficult to get the agreement of every other EU country — which is what would be required for a further rules change.
  • Worldwide it’s standard practice that sales taxes and VAT are paid in the buyer’s country, at the rate set by that country. The previous EU system of allowing VAT to be charged at the rate of the seller’s country, often at a lower rate — or even tax-free, if it was below that country’s threshold — was a special exception from international practice. In the end, most national governments decided this EU system caused them loss of revenue because it allowed big companies to invoice their sales from Luxembourg or other low-tax jurisdictions in order to avoid taxes — hence the change.

We knew much of this already, of course. What about the details of implementation and its effect on small businesses? On this, there were some positives from the Commissioner. We gave him a detailed briefing, covering all the issues that have been flagged up by constituents, and Mr Ansip undertook to look into these and get back to us in the coming weeks. He was particularly interested in looking into how existing online payment platforms can be adapted so they can automatically calculate and pay VAT. So, once again, watch this space.

Labour MEPs will keep pressing the Commission on the issue. But it remains the case that many practical problems have been caused or amplified by the way the rules change was introduced in Britain. This is an issue on which we will continue to press the UK government — as will, I’m sure, many small businesses!

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  1. Please see the latest report on the devastating impact of this legislation on micro businesses:

    The practical problems – as the data from the quantitative survey in this report confirm – are not UK-specific, contrary to your assertion. It is very disappointing to hear you imply that may be so.

    This legislation is crippling thousands of British and other EU Member States’ micro businesses and many of them have had to close, because they cannot comply with the new rules and didn’t want to break the law.

    Despite the MOSS system, the issue for us is that we don’t have access to the legally required data to prove place of supply. In addition, our sales systems are very simple and they cannot handle 81 different rates of VAT.

    Whilst we have negotiated interim concessions with HMRC’s ‘light touch’ launch, the situation for these businesses remains dire.
    With fewer than 7000 MOSS registrations EU-wide, from over 1 million affected SMEs and micro businesses / sole traders, awareness levels are still shockingly low.

    Of those who are aware of the new rules, 60%+ are taking actions that will damage their business, such as excluding non-domestic EU sales, dropping digital goods and even cancelling digital launches. They are at a huge competitive disadvantage, compared to those who are not yet aware. And MS governments are taking near-zero action to publicise the new rules. So a very unfair situation has been created.

    The USA is also hinting strongly that it will not be enforcing the rules, so US businesses are now officially ignoring it and have gained a huge competitive advantage over EU micro businesses, who are trying hard to comply and are damaging their businesses, as a result.

    The cost of compliance is massively disproportionate for the smallest businesses and the unintended consequences are so severe that they are forcing businesses to close their doors. We cannot legally comply.
    This legislation was intended to catch the likes of Amazon and Apple, not single mothers at their kitchen tables. Indeed, the impact assessments officially excluded considering the effect on micro businesses, because it was assumed that we didn’t export digital products and we only sold through 3rd party platforms – neither of which is the case.

    We need an emergency worldwide derogation for micro businesses, to allow them to keep trading by reverting to their domestic VAT rules.

    I only pray that Anneliese Dodds was better informed than your article implies when she briefed Andrus Ansip, otherwise she will have massively set back the huge progress our campaign has made so far in briefing Mr. Ansip.

    Richard: we have offered repeatedly to work with you on this, so that you can be better informed and help to make a difference. Please would you finally take us up on the offer to work together? Then you can save yourself looking silly, as this article makes you look.

    With hope,
    Clare Josa & the EU VAT Action Team

    Note: This comment has been edited by a moderator to remove a reference to a named individual, at the request of that individual.

    • Clare — thanks for your further comment. We have in fact drawn quite heavily on the information you’ve provided, as well as direct conversations with constituents, when discussing this issue to date. I don’t think what you’ve said here contradicts the point I was making in my post; I certainly wouldn’t suggest that all the difficulties are unique to the UK. Indeed, the fact that some of these issues are Europe-wide is the very reason MEPs have a role to play in resolving them! As to your further points about the practicalities of compliance, I will write to the Commissioner to raise these specifically, and let you know his reply. In the meantime I continue to be very happy to work with you.

  2. Thanks for this update. The news is unwelcome but let’s not shoot the messenger!

    Instead, I’d like to make some observations:

    1. My previous micro business in its busiest quarter would have paid about £35 in VAT, distributed to 10 different EU countries. I would therefore have remitted £35 to HRMC who would have taken their cut of about £10 and distributed an average of £2.50 to each country. Is this REALLY a cost effective way for a government to work? Even with computers and automation, can HRMC really handle 1000s of businesses each remitting these trivial sums and not have it end up costing more than it earns? I think it highly unlikely that HMRC can handle these payments without making a loss, and I doubt that any other EU equivalent tax collector can do any better. So we have a system that penalises and discourages small businesses, and instead of generating revenue it ACTUALLY RUNS AT A LOSS. Little wonder people accuse the EU of “bureaucracy gone mad”!

    2. If you’re unfortunate and collide your car with another, then most insurance companies work on a knock-for-knock principle. Your insurance pays to fix your car and the other party’s insurance fixes their car. This is the principle that could apply for EU VAT. Below an internationally agreed micro business threshold, each country collects VAT on international sales at its own rates and keeps it all. Under the “knock for knock” principle, a country can enforce whatever VAT rate it likes on its own businesses, and can put in any national threshold if it so chooses, provided the company is trading below the internationally agreed level. The advantage is that system is sleeker, more efficient, less burdensome and more likely to run at a profit.

    3. If Luxembourg and Amazon are the villains in this scenario, why have you put into place a system that penalises everyone else? Surely, the system should penalise them?

  3. 20% VAT due to austerity. When that goes back to pre-austerity levels then I’ll take it as a sign of recovery. I’m not holding my breath. Why aren’t lots of bankers in jail yet ?

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