A furore has broken out among small micro businesses in Europe over plans to change the treatment of VAT on digital products sold to consumers. So what is the fuss all about and is it as bad as it sounds?
Background:
The EU is attempting to clamp down on major corporates minimising their tax liabilities by locating in the most tax friendly EU states while selling to consumers in neighbouring states. One of their actions has been a change to the treatment of VAT (value added tax aka sales tax), starting with digital products. This change comes into effect on 1st January 2015.
Until now vat has been charged and accounted for in the country of the seller. From 1st January this will change to the country of the buyer. The result will be that the product seller has to charge vat at the rate prevailing in the country of the buyer and also to declare and pay that vat to the tax authorities of the buyer.
The Unintended Consequences for Small Businesses
These changes mean that any business selling digital products to EU countries beyond their own may be caused to effectively multiply their vat administrative burden by the number of EU countries where their buyers are located.
Furthermore, they will have to provide multiple items of evidence of their buyers’ locations, evidence which digital sellers often do not have.
While it may be reasonable to expect multi-national corporations with millions or billions of revenues to accommodate this additional workload, it is totally unreasonable to expect small, micro or sole traders businesses to absorb such an additional burden. It is simply not cost effective for businesses with only a handful of customers in neighbouring countries to deal with multiple foreign tax authorities. They will simply have to restrict their trade to their own country which is impractical in the case of online digital suppliers.
Their Fears and Worries
Most of the complaints from smaller businesses fall into the following areas:
In UK and some other countries, many small businesses trade below the vat threshold level and are able to ignore the issue of vat altogether. These businesses will now have to set up vat accounting systems and deal with those EU countries that have low or zero thresholds.
The difficulty of determining the location of their customers and providing the necessary evidence. Keep in mind that digital products are not delivered to a physical address but via email or website download.
Many of these businesses use PayPal or similar payment processors who don’t provide the necessary customer location data. One of PayPal’s attractions to buyers is the degree of anonimity and data protection this gives them.
The potential need to separately register with the tax authority of every single EU country.
The need to separately account for transactions according to customer location and make separate vat returns to every one. (once registered they have to make a return for every accounting period even if they have no sales for that country in that period!)
The potential requirement to account for vat in different currencies when they have previously relied on their payment provider to deal with currency exchange.
The need to deal with multiple rates of vat, sometimes several in each country.
The short notice of the change which gives them insufficient time to set up the far more complex accounting processes and of course the huge cost of doing so.
The fact that the various tax authorities differ on their definitions of digital products.
The very high risk of accidentally and unknowingly falling foul of the relevant law in differing countries and possibly facing prosecution and the cost of defence in foreign countries.
These are but a few of the problems faced by small digital traders, many of them tiny home based businesses, caught up in a war between national government and the tax machinations of corporate businesses.
Are Their Fears Justified?
Well, yes and no!
In the UK the government and tax authorities have tried to mitigate most of the burden by the provision of a ‘Mini One Stop Shop’ (MOSS) which will avoid the need for registration, accounting and payment to multiple authorities. HMRC will effectively deal with these on behalf of UK businesses who register with the MOSS.
Although this will deal with a large part of the problem, it will not deal with all issues.
Identifying and proving customer location could still be a problem. As could the differing views on what is a digital product. It is still not clear what will happen to businesses that get it wrong through no fault of their own. Will HMRC deal with it, or will businesses have to answer to foreign judicial process?
The availability of the Mini One Stop Shop will reduce a massive bureaucratic responsibility to manageable proportions, but it will not eliminate it. Businesses that currently do not need to register for vat as they trade below the threshold will still need to register with MOSS and make relevant tax returns where they have buyers in other EU countries. Though it seems they won’t have to account for vat on sales to UK customers, until they reach the vat threshold.
The result of this extra red tape and the resulting additional workload will deter many from starting a digital business, while existing businesses are already stating that they will probably have to close down their businesses.
JUST WHEN EUROPE NEEDS MORE NEW BUSINESSES, NOT LESS!
However, I would urge any UK business thinking of closing down to study the planned operation of the MOSS rather than listen to the chorus of information on social media, some of which is misleading. This applies also to anyone who has been planning to start a digital business. My own experience in business suggests that things are often not as bad as they at first seem. As a B2B (business to business) concern, selling digital services to EU businesses, we had to submit an EU return covering these transactions and it is really a very simple affair.
Also, it’s possible (if they want to grow their business in Europe) that payment providers will hurry to build compliance support into their services. I’ve just had a notification from one of them (JVZoo.com) that they have already incorporated the ability to apply vat and gather the necessary sales data and are looking at ways to integrate with MOSS. I understand another provider, Zaxaa, are also in the process of doing something similar.
So maybe look upon this as an opportunity, some of your potential competitors may be among those being scared off, leaving a huge market wide open 🙂
Petitions and Protests
In addition, please be aware that representations are being made to relevant EU commissioners and are being listened to.
There is also a petition to exempt micro businesses and sole traders from this legislation here:
Other information sources:
HMRC:
https://www.gov.uk/government/publications/vat-supplying-digital-services-to-private-consumers
See also:
https://www.gov.uk/vat-on-digital-services-in-the-eu
https://www.gov.uk/vat-how-to-work-out-your-place-of-supply-of-services
https://www.gov.uk/register-and-use-the-vat-mini-one-stop-shop
And from the trenches, a blogpost comment quoting a reply from a UK MEP to the commenter:
Finally don’t forget that, although the rules come into force on 1st January, your first return for January to March is not due into HMRC until mid April. So you and your payment providers have time to get organised. However, you will need to register earlier. See https://www.gov.uk/register-and-use-the-vat-mini-one-stop-shop for more information on when.
Good Luck!
This article was prepared using information from a variety of sources and is for UK small businesses. It is intended to raise awareness of the issue and provide resources for further reading and cannot be guaranteed as either accurate or complete. Nothing in this article constitutes any form of advice and no liability will be accepted. Please carry out your own research and take professional advice before taking action.
