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VAT MOSS Rule Threat to UK SMEs

A ruling european uniondesigned to challenge the world’s digital marketing giants could prove the death knell for a legion of UK micro businesses. That is the fear emanating from the latest incidence of unhelpful EU regulation hitting British industry.

From New Years Day 2015, small businesses that trade their wares online will face paying VAT on digital products based on the tax regime in the place of purchase rather than the place of supply.

The amendment had been designed to prevent multinational digital behemoths like Amazon and Google from diverting their EU sales through low VAT rated countries.

In typical EU fashion however the unwitting impact is that small business face an escalation in costs under the new ruling.

Any business selling digital services such as ebooks, e-courses, recorded training videos, music and audio downloads will be exposed to the VAT rate payable in the source country. This not only expected to lead to additional cost exposure for small businesses but also will driven competitive variances between countries and a challenging workload in predicting margin and costs as well as an inevitable increase in complication and paperwork.

The new arrangements mean whenever such a service or product is sold:

  • the seller is liable for VAT in the original purchasing location.
  • the seller must waive their UK “de minimis” threshold
  • the seller must apply VAT to everything they sell, not just the digital services.

This leaves such businesses with two options:

  • Register for VAT in every EU member state where they have customers
  • Set up a ‘Mini One Stop Shop’ (MOSS) by registering for VAT in the UK.

Currently there is no requirement to collect UK VAT if a business’s turnover is less than £81,000. Indeed of the of the UK’s 5.2m registered businesses, only 2m collect VAT.

However the EU VAT ‘MOSS’ changes mean that all companies selling digital products in the EU will have to file VAT returns, regardless of turnover, and identify the location of customers and in so doing requiring the business to split sales between those to EU and those to UK customers.

The matter is compounded by the UK being one of the few EU countries that operate any sort of VAT exemption and as a result are most exposed to the change from a cost and administration perspective.

Such is the fear that 6,000 small businesses have signed a petition calling on Business Secretary Vince Cable to “uphold the existing VAT Exemption Threshold for businesses supplying digital products”.

In typical buck passing style, Cable claimed the issue was actually under the remit of HMRC with a spokesman saying:

“New EU rules were brought in to remove unfair competition between online traders registered in EU states with very low VAT rates and traders based in member states like the UK with higher standard VAT rates.

“The new rules mean that digital service companies selling to EU consumers will be taxed where the consumer lives, rather than where the supplier is based. This means that businesses have to register for VAT in each member state where they have customers.

“To make it easier for the UK’s smallest businesses to comply with the new regulations, we have set up the VAT Mini One Stop Shop (VAT MOSS). Businesses can register for this new service, which does the hard work of registering for VAT in each member state so that small business don’t have to do this themselves.

“UK consumers of these services will pay UK VAT, no matter where in the EU the supplier belongs, which means levelling the playing-field for all businesses selling to UK consumers, wherever they are based.

“If a business uses an online portal or e-marketplace, then the e-marketplace is responsible for accounting for the VAT. We are aware that a great many micro-businesses do this already and are unaffected by the changes.”

John Allan, National Chairman of the Federation of Small Businesses claimed:

“Although these changes are an important part of the battle to make large companies pay their fair share of tax, they are proving a shock for some small firms who are trying to build exporting digital businesses. We are already hearing from members who are very worried and want to know what to do about it.

“Those not already registered for UK VAT will face hassle and extra costs. It’s important the burdens of the new arrangements are minimised and firms are given the support and advice they need to weather the changes successfully.”

Emma Jones, founder of small business network Enterprise Nation, added:

“We’ve been busy supporting record numbers of start-ups to build and grow a solid business trading globally as well as in the EU, only for them to be knocked sideways by MOSS.

“Manning up to this new and significant level of bureaucracy will be destructive for micro firms and mean many never get off the ground. The current VAT threshold exists for a reason – to protect firms when they are small. We’d like to see the Government pause, review and assess the impact before they go ahead.”

Whilst hardened Euro-sceptics need no excuse to denigrate the federalist state this typical lack of nuance and diligence in introducing new legislation is exactly what is wrong with the EU.

Blindly implementing policy that simply increases the competitive dominance of larger players is something even the most critical EU observer would have doubted the EU would have been silly enough to legislate.

But then again, nobody is surprised at the EU’s folly any more are they?