Tax campaigners challenge EC officials over digital VAT rules

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Small businesses are meeting European Commission officials in Dublin today (7 September) to lobby for changes to the VAT rules on the supply of digital products in the European Union.

Since 1 January, businesses supplying broadcasting, telecommunications and digital services to consumers have to charge customers VAT at the rate of the country where the customer buys the service from, rather than where the supplier is under the previous rules.

The new rules hope to stop companies such as Amazon basing their European headquarters in countries such as Luxembourg where VAT rates are much lower than the UK. But small business groups argue that the rules are difficult and expensive to comply with and hinder online commerce.

HMRC attempted to help businesses comply with the new rules businesses by introducing an online VAT registration system − called the VAT Mini One Stop Shop (MOSS). It lets businesses register once with HMRC for VAT in every EU country they supply electronic services to.

But small businesses complain that the VAT MOSS system is still overly complex, particularly for traders who turn over less than the UK VAT registration threshold of £82,000. There are more than 80 different VAT rules in the 27 member states in the European Union, experts say. Proving where customers are when they download the product isn’t easy, they also say.

Critics of the new VAT rules, including accountants, claim that some businesses have collapsed because of the rules or have stopped selling electronic products, such as e-books and apps, in the European Union.

“We have until that conference to convince the Finance Ministries that this current system is damaging for all businesses and unworkable for those who simply cannot meet the administrative burdens and costs of compliance necessary to sign up for VAT MOSS,” says EU VAT Action, an association of businesses that’s campaigning to make it easier and cheaper to comply with the VAT rules on digital products. “Otherwise there is no realistic prospect of seeing meaningful changes to this destructive legislation before 2017/2018.”

It claims that the VAT rules mean that businesses:

  • Incur hundreds, often thousands of pounds/euros in costs and weeks of lost productivity to restructure your business to offer a compliant shopping cart
  • Add additional steps into your existing payment system to request location data from your customers, increasing your lost sales (cart abandonment rates)
  • Display your prices without VAT (even though that’s technically illegal in many European countries) and add varying rates of VAT at the check-out, increasing your lost sales (cart abandonment rates)
  • Raise your prices to offset the VAT you’ll be paying, thus sacrificing competitiveness, or pay the VAT out of your existing profit margin, thus sacrificing income

EU VAT Action didn’t respond to a request for an interview.

Paul Soper, a tax lecturer and AccountingWEB contributor, said the EU should introduce a minimum turnover threshold businesses must exceed before they have to register for VAT on digital services.

He also said the requirement for businesses to keep customer data relating to VAT transactions on digital products was excessive and should be reduced for small businesses.

But are campaigners exaggerating the problems caused by the new VAT rules? VAT expert Les Howard, thinks so.

In any case, small accounting firms are unlikely to be too interested in the new VAT rules because advising business on them is too much hassle and not profitable enough, he told AccountingWEB.

About Nick Huber

Nick Huber profile image

I’m a specialist business journalist and have a particular interest in tax and technology. 

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07th Sep 2015 10:18

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I think HMRC published the number of sign ups recently. It was tiny.

Most of our affected clients having been explained the options, ie do this with the certainty of time and cost, but doing it right, or wait and see what happens if they dont, ie risk the uncertainty of enforcement action, have chosen the latter as the sums have been small. 

The real action on this will be in 2-3 years time when we know what - if any - compliance action there will be on the legislation. 

If none, then it will be another voluntary rule which is widely flouted to add to the many other widely flouted rules that exist. 

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07th Sep 2015 12:36

Yep 3 options

1, Ignore - there is no enforcement anyway - there is general non compliance in most other areas anyway.

2, Don't trade with europe - that seems to be what the government want.

3, try and comply, fail miserably incur massive accountancy fees and horrendous IT fees then mahoosive tax penalties. (ltd company then bust will work very well here)

If they wanted to stop amazon they should have a size criteria for these complicated rules otherwise it's only the likes of amazon that can afford it. A bit of extra tax for amazon will be good if it takes out all the competition and the government will still provide tax efficient distribution centres for them in the UK.

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07th Sep 2015 14:56

Hold it a minute

I was asked for comments by Nick on Friday 4 September and gave him details of the facebook pages of the EU VAT action campaign.  I have just discovered that he has posted this piece including the statement "EU VAT Action didn’t respond to a request for an interview".  This is outrageous - these are very small businesses trying to balance their own demands, the demands of the VATMOSS system, and attempts to persuade the EU to moderate the rules, to accommodate small businesses who face real problems.  One of the leading lights on the campaign, Clara Josa who I mentioned to Nick is today on her way to Dublin to present information and make representations to a council of ministers meeting.  I can understand that she may have had no time on Friday to provide Nick with comments for a fairly sloppy piece.  When he spoke to me he had very little idea of what the problem was.  In support of his question "But are campaigners exaggerating the problems caused by the new VAT rules?"  he quotes an old article by Les Howard which I think even Les would now agree ignored the very real problems faced by businesses too small to survive under threat posed by this ill-considered piece of EU nonsense.

Articles like this just don't help - a realistic de minimis limit, which is what EU VAT Action are seeking - would ensure that the issue of compliance (or indeed non-compliance as is probably what is actually happening) is no longer a problem until a business grows to a size where it can realistically meet these demands for information.  We are talking about people creating things like downloadable knitting patterns who are recording VATMOSS liabilities as little as 67p.  And yet only a couple of weeks the Irish Tax Authorities issued demands to some of these traders for 5 and 6 figure amounts - undoubtedly a 'mistake' of course but illustrative of how this nonsense not only affects small business but also tax authorities who seem equally unable to cope!  This is typical a Dutch trader sells ebooks to an Irish customer and has a liability for the first quarter of €12 - then receives a demand from the Irish for over €3million!  http://www.irishtimes.com/business/revenue-sends-out-vat-demands-to-over...

I told Nick about this problem and 30 seconds research through Google would turn up a wealth of stories.  This is shoddy journalism.  But all he can do is whinge that someone "didn't respond" - nor would I have spent 15 minutes talking to the young man had I known what would result.

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07th Sep 2015 17:14

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@Paul, well done on your for campaign for the blatently obvious answer, certainty in the form of a sensible limit, rather than leaving tax payers to make up their own limit of the amount they think they can get away with before anyone will notice.  

This is not a good state of affairs. 

My logic goes something like compliance is a function of effort being lower than less than risk times likely penalties.  That is to say if it costs your £500 a year to comply with a rule, but the risk of non-compliance is £100 and the risk 10% per annum, it is not worth complying, you just pay the fines. 

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By rslosek
10th Sep 2015 23:01

I'm a member of AW and co-founder of EU VAT Action.

Given you wrote this piece within a few hours of contacting us, saying we didn't reply is a bit disingenous.

I'd be delighted to talk to you. I've been in meetings with Number 10, Treasury and HMRC and my article on EU VAT is currently around the 15k view mark.

My direct email address is via my website :)

[Edit: On 9/9/2015 we had a piece in City AM which has been widely read and quoted. Search for 'catastrophic costs'.

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08th Sep 2015 17:23

Misquoted

I do not think that campaigners have over-stated the problems caused by VATMOSS. Many micro-businesses have felt obliged to change what they offer or, in a number of cases, close down altogether. I have met a number.

A minimum registration threshold is a good idea, although my own view is that the current VAT registration threshold of £82,000 is too high.

And, I wish Rosie Slosek well as she fights the corner for many.

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