HMRC’s own assessment on the impact of new EU VAT legislation underestimated the number of potential small businesses trading e-services with EU countries by more than ten thousand per cent, an Enterprise Nation report has uncovered.

Eu Vat Report

The EU VAT Taxation Report, produced by Enterprise Nation, reveals that in 2013, just 15 months before the rules were due to come into force, a HMRC investigation put the figure of non-VAT registered firms likely to be affected at 5,000. 

In fact, the report discovered, at the nearby Department for Business, Innovation and Skills (BIS), Government figures put the number closer to 350,000, but that information did not inform HMRC research.

The report suggests this then impacted how the information was communicated and to whom – which in reality meant small firms under the VAT limit trading their digital products in the EU found out about the new charges a matter of weeks ahead of implementation.

It also meant there was a lack of awareness amongst the marketplaces that had been empowered to offer a solution to those affected, causing chaos, the report claimed.

The immediate consequence of it is that it left thousands of small firms vulnerable with no alternative but to take a painful hit to profits while facing a long and expensive fight with not just British, but European tax authorities.

The long-term consequence is likely to be a hike in costs for digital services in the EU.

Emma Jones, founder of Enterprise Nation said: 

Emma Jones

“The EU VAT regulations caused havoc in the digital small business community. If details of the new charges and reporting responsibilities had been communicated earlier, we’re sure there could not only have been more opportunity to make amendments to the bill, but that an entrepreneurial solution to the problem could have been developed.

“As it was, not even the marketplaces themselves had prepared new software or worked out the finances.

“This report shows that while a minimum VAT threshold would be the best solution, that may well be some way off, partly because other European countries have never had a threshold at all, so will be reluctant to accept one at this stage.

“Micro enterprises are a hugely important contributor to the economic growth and innovation and their functioning should be stimulated, not hindered. As they stand, these rules make it attractive for small firms to cease trade with Europe – so instead of facilitating the integration of the internal market the VAT tax reform may actually aid its fragmentation.”

The report found that the number of businesses likely to be affected by the new rules dramatically increased after 2008 when the legislation was agreed.

Between 2006 and 2014 the European e-commerce market nearly tripled, growing from €106 billion in 2006 to €317.9 billion in 2014. This steep increase was facilitated by a constantly growing amount of internet users (up by 22%) and e-buyers across Europe.

Business blogging, selling music, e-books, e-learning or other digital products and services through a simple website underwent a fast development which made it one of the easiest businesses to start and go global. The report cited that the number of self-published titles in the US grew by over 400% between 2007 and 2012 – a boost likely to be compatible in the EU market boom.

While HMRC was expecting its Mini One Stop Shop (MOSS) to solve the problem for most – ie those above the UK VAT threshold, in fact, the survey revealed eight out of ten digital micro businesses fell below the UK VAT threshold.

And HMRC had expected that the rest of those below the VAT threshold would already be selling via marketplaces like Amazon, in fact 65 per cent said they sold their products via their own website with only 17 per cent reporting that they sold via a platform. 

Nonetheless, nearly half of the listed marketplaces were ready to take care of VAT collection and filing at the beginning of January 2015. Yet, most of them only announced that at end of December, which left sellers in the difficult position of not knowing how to continue trading until the last minute.

The EU VAT Action Group suggests selling via platforms adds up to 70 per cent costs to trading with Europe, eradicating any profit and putting sole traders of digital products out of business, unable to grow an element of their company.

They also suggest a trend towards centralisation of commerce in marketplaces and loss of independence of individual traders is bound to have implications on competition and competitiveness. They argue not only it will increase the market share of some of the biggest players like Amazon (currently holding 85% of the e-books market), but it will also result in a considerable reduction in micro businesses profit margins or a corresponding increase in prices.

The report calls for a Tech Hack to find a simple and cost-effective solution for small businesses to adopt and be VAT MOSS compliant. 

Download the report here

Have your say

Rich M
Rich M

This is not just a UK problem - there are micro businesses throughout the EU which supply e-services directly through their own websites, including some small marketplaces. There are also many businesses outside the EU who sell goods and e-services into the EU, who already simply ignore the rules on charging VAT for goods sold to the EU. Several large companies in the USA whom I asked about VAT on e-books simply stated that they do not charge VAT - there seems to have been no effort on the part of the EU to communicate this new legislation to countries outside the EU. The legislation appears to have been drafted and implemented without a thought to the practicalities such as: a) How to determine the actual physical address of a purchaser, who simply clicks on a button to make a payment through a third party provider. The purchaser may have a residence in the UK and Spain, be using a computer whilst on holiday in Italy and using a VPS based in the USA, so their IP address bears no relevance to their place of residence. The payment provider can provide the country code for the credit/debit card used to make the payment, but that is all (and we need to keep 2 matching pieces of evidence of residence). b) There is no easy means of identifying whether a buyer in the circumstances above is a consumer or a business - as the legislation does not apply to sales to businesses. c) There is no central lookup for software to find out the VAT rate for any given country - just a simple pdf document. d) As a result of the above, the price shown to the consumer when browsing a website can only be a best guess of the VAT inclusive price, so businesses have to illegally assume a VAT rate and charge the same price to all EU customers (no matter what their VAT rate is). e) Many small businesses who have now become aware of the legislation have simply decided to block sales to anyone whom they suspect is not in their own country (as the legislation does not cover sales to consumers in your own country), or simply withdrawn any direct e-services from sale. This goes completely the idea of a free and open market within Europe. f) Some larger companies, such as Google and Facebook have decided unilaterally that if you use some of their services, then you must be a business and therefore VAT is not charged. g) Each EU country is currently having to pay £1000s in order to administer a system which may result in the collection of £100 in VAT payable to another country - for many small businesses, the quarterly amount they need to account for to the HMRC could be as low as £50 spread between up to 27 countries. h) There is no sign of how this will be policed - tracing small businesses which offer e-services directly online (and even identify which transactions are e-services) would itself be a nightmare (unless the EU seeks and obtains the co-operation of the payment providers). However, the much bigger issue is how to police transactions by businesses situated outside the EU and ensuring that those businesses charge and account for the VAT on all transactions with the EU (whether for physical goods or e-services) - without that policing and enforcement, the EU will be uncompetitive against the 1000s of similar businesses which can happily provide the same service without charging VAT.

Juliet McKenna
Juliet McKenna

I'd like more specifics about this Tech Hack idea. We're already six months into this mess and there's not much sign of software wizards waving their magic wands and coming up with a quick fix. Which is absolutely not sneering at software developers - quite the contrary! It's not my field but I do have some idea of how long and complicated tackling something like this can be. Are we hoping for one product that will solve all the problems - validate4d customer geolocation, keeping all the various VAT rates current, B2B or B2C verification? (Just to start with) Who's going to fund the research, development and testing of something that complex - UK or EU government, payment providers, some private sector company? How long will this take - months or years - and what becomes of the businesses already being shut down by these regulations in the meantime? I've no doubt there are excellent software developers out there who could help - provided they're properly briefed on what the actual end users really and truly need, rather than relying on assumptions made by HMRC - but sitting here and hoping for that doesn't address any of the very real problems my business has here and now. I need solid proposals followed by swift action.

Juliet McKenna
Juliet McKenna

I'd like more specifics about this Tech Hack idea. We're already six months into this mess and there's not much sign of software wizards waving their magic wands and coming up with a quick fix. Which is absolutely not sneering at software developers - quite the contrary! It's not my field but I do have some idea of how long and complicated tackling something like this can be. Are we hoping for one product that will solve all the problems - validate4d customer geolocation, keeping all the various VAT rates current, B2B or B2C verification? (Just to start with) Who's going to fund the research, development and testing of something that complex - UK or EU government, payment providers, some private sector company? How long will this take - months or years - and what becomes of the businesses already being shut down by these regulations in the meantime? I've no doubt there are excellent software developers out there who could help - provided they're properly briefed on what the actual end users really and truly need, rather than relying on assumptions made by HMRC - but sitting here and hoping for that doesn't address any of the very real problems my business has here and now. I need solid proposals followed by swift action.

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