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As from 1 January 2015, businesses supplying digital services have been obliged to account for VAT in the country where the customer is located and not where the business is based.
The result? The various VAT rates of the EU's 28 member states now need to be applied as opposed to the simple one rate that was previously applied. The whole system has been flipped on its head.
It is proving to be pretty controversial.
'OK, this is a big change but it doesn't sound too complicated', I hear you say. Surely a company's accountant could get their head around the principles over a lunchtime sandwich from Pret?
What's more, to avoid businesses having to account for, say, ‘Arvonlisävero’ or ‘Данък добавена стойност’ (ie Finnish or Bulgarian VAT) in languages where they may be a tad rusty, the government has set up a VAT 'Mini One Stop Shop'. This service, known as 'VAT MOSS', is designed to facilitate and streamline VAT payments to EU tax authorities.
So 'all' that needs to be done under the new regime is for businesses to:
It sounds so simple.
Whilst the new regime has been relatively benign for many larger retailers, micro-businesses in particular have been badly affected. A lot of them are angry and, to be fair, I don’t blame them:
It was reported by This is Money last week that 200 small firms stopped trading within days of the new VAT rules coming into force.
Furthermore, the campaigning website EUVATaction.org says that since 1 January some businesses have been refusing to sell outside of their home country; others have decided to exclude digitally-delivered services from their website altogether.
Even worse, the campaign group states:
Ironically, a major side effect ... has been driving even more micro businesses into the arms of ... 3rd party platforms, hugely cutting the micro businesses’ margins ...
All in all, it seems clear that policy makers effectively ignored the needs of the thousands of micro-businesses which sell goods and services over the Net.
The new system, designed for those businesses which are already registered for VAT, makes little sense to those businesses which have never had to pay VAT in the past. Why is there, for example, no low-value exemption?
Whilst the government has, in the end, accommodated some, but by no means all, of the concerns of the small business community:
... a lot of them remain to be convinced that the regime is workable:
Putting aside the rights and wrongs for the moment, businesses which are affected cannot afford to ignore it. Later in the week, we'll set out 12 tips on how to comply with the new regime.
In the meantime, what do you think? Should the system be scrapped and the authorities start again from scratch? Can it be tweaked and made to work? We would love to hear your thoughts below.
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