Businesses caught up in the EU VAT changes are considering if they are actually “in business” and within the scope of the VAT MOSS scheme, following a recent HMRC briefing document.
The tax authority's latest guidance states that the compliance rules only apply “where supplies are made in the course or furtherance of a business”
“If activity is carried out as a hobby (i.e. only on a minimal and occasional basis)”, the statement continued, “HMRC does not normally see this as a business activity for VAT purposes.”
As outlined by VAT expert and AccountingWEB contributor Les Howard, this may offer traders who are simply pursuing a hobby, making occasional or low value sales, the chance to argue that they are not a business and deregister entirely from the scheme.
VAT MOSS traders may not be 'in business'
HMRC’s briefing goes on to say that its analysis of VAT MOSS returns submitted by businesses in 2015 indicates that “some of those registered for VAT MOSS may not be in business for VAT purposes.”
The tax authority said that it will contact those who have registered for VAT MOSS whose returns suggest they may not in business.
However, AccountingWEB’s tax editor Rebecca Cave felt that HMRC’s approach to such traders had a number of shortcomings.
“You’re talking about self-employed individuals who pay income tax ”, said Cave. “I don’t think HMRC is looking at the correct data, because it can’t possibly be tallying the VAT MOSS return with an income tax return to tie up all the trading data to determine whether somebody is a trading business or not.
“VAT MOSS started a year ago on 1 January 2015. The income tax return for the first three months of that period is due into to HMRC by 31 January 2016. The income tax return for the rest of the year is not due to be filed with HMRC until 31 January 2017.
“It says in the briefing that they’re going to be writing to people to say ‘we don’t think you’re a business’ when they don’t have the data to do that. This will confuse the taxpayer if they really are a proper business to think ‘I’m not a business, maybe I shouldn’t even declare my online sales for income tax.’
“It’s interesting that HMRC is trying to get itself out of this by saying ‘you’re not really trading so you don’t have to worry about this”, continued Cave. “It's always saying that people trading online, for example eBay sellers, have to declare all their income because the online selling amounts to a trade. HMRC very rarely says ‘you’re selling only four or five items over 12 months, you’re not trading’ – except now when it is in HMRC's interests to say that.”
Several experts have also pointed out that although the reforms were initially set up to ensure multinationals paid their fair share of VAT in the EU, the fact that HMRC employees will be reviewing individual payments (sometimes in the tens or hundreds of pounds), made by micro-businesses in order to remove them from the system is yet another example of how wrong it has gone.
Location data ‘best judgement’
The document also attempts to simplify the requirements for businesses to provide two distinct pieces of data to prove the customer’s place of supply. According to the briefing, HMRC now allows businesses below the UK VAT registration threshold to “exercise their best judgement”.
“This means businesses can rely on any single piece of information”, the document said, “such as the address provided by the customer, to determine where their customer is located.”
However, concern has been expressed that the term ‘best judgement’ might not stand up in a dispute, as another EU member state could technically demand that traders provide multiple data points for proof of supply.
Additional administrative burden
Since 1 January 2015, businesses providing digital services to EU 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. Small business groups argued that the rules were difficult and expensive to comply with and would hinder online commerce.
HMRC attempted to help small businesses comply by introducing an online VAT registration system − the VAT Mini One Stop Shop (MOSS) – allowing businesses to register once with HMRC for VAT in every EU country.
However, many traders have continued to complain that the system is too complex, and proving the location of customers adds an additional administrative burden to small business owners trying to comply with the changing rules.