Angry micro-business owners have mobilized Twitter and Facebook to protest HMRC’s new EU VAT regulation which requires digital service suppliers to pay VAT when they sell to customers in EU Member States. According to the new rules, starting 1 January 2015, VAT on B2C supply of digital services will be paid in the consumer's country rather than the supplier's country.
Currently, when a digital service is supplied to a consumer, the supplier accounts for VAT based on their location. However, come New Year's Day the requirement threshold will be completely abolished, albeit only for businesses selling digital products and services to EU Member States. This means if you supply a digital service to consumers in several Member States, you will be obliged to register and charge VAT in each of those Member States, no matter your business turnover.
It’s worth noting here that UK businesses are currently exempt from paying VAT if they don’t cross the threshold of £81,000 in sales each year. So as long as you don't sell outside the UK and stay below the turnover, you can continue as you do now. However, if you are not absolutely sure whether your business will be affected by the new EU VAT rules, please have a look at this simple flowchart published by HMRC.
To support business owners that are affected, HMRC has introduced a work-around called VAT ‘Mini One Stop Shop’ or MOSS. Using MOSS you will only need to register in one jurisdiction, make 1 MOSS VAT return, and 1 MOSS payment to cover all of its obligations across the EU.
Speaking about the new rules a spokesperson from HMRC said, “The changes should only have a small effect on administrative burdens. Although a business needs to have a UK VAT registration number before it can register for the Mini One Stop Shop (MOSS) online service, provided it separates the cross-border part of its digital services business from the domestic part, it can voluntarily register for VAT on the cross-border business only.”
However tax and accounting experts think otherwise. According to them, VATMOSS, which could affect 34,000 online SMEs, is definitely complex and there are many questions a business will need to consider sooner than later. For instance: What digital service they sell and to whom? Whether a supply chain will get affected by these changes? Location of consumer? Pricing of products: local/global? Corporate tax issues, among other things.
Small business owners feel changes to VAT rules will likely threaten micro enterprises across the UK. Many have announced plans to cease trading overseas entirely. Carla Watkins, a stationery subscription business, spoke to the Telegraph, "I had planned to launch an e-course in January. Though I've worked on it for months, it now falls under these rules. Even if I could find a way to capture the correct information, it's simply not worth the extra time and hassle admin for VAT compliance.”
Concerned about the plight of micro businesses, Lorraine Dallmeier organised a ‘Twitter storm” on 25 November to protest against the changes. According to her, “The new legislation is going to have a huge financial impact on people, as well as the administrative burden that comes with it. There are 28 countries in the EU with 75 different VAT rates.” Showing solidarity, hundreds of micro business owners took part in the campaign using #VATMESS and #VATMOSS hashtags to voice their opinions. There are still thousands of tweets questioning HMRCs decision pouring in every day.
According to the Enterprise Nation blog, “More and more businesses will need to hire accountants to file quarterly VAT returns and there would be extra paperwork required with UK businesses having to determine and prove if they are selling to individuals or businesses in the EU, with the determining factor being if the other party can provide a VAT number.”
What can you do now?
Issy Zinaburg has set up a petition on change.org, urging Vince Cable to intervene and uphold the VAT Exemption Threshold. Currently 6,337 supporters have signed up in support. We think this can be implemented easily but will only bring temporary relief.
If you have questions about #VATMOSS, @HMRCcustomers is holding a Twitter clinic on Thursday (27th), 3.30-5pm.
In terms of preparation, all those affected should consider if MOSS is right for them, address the issue of pricing, register for VAT, get proper admin systems in place to track and validate consumers and their locations and consider if some countries are worth targeting or not. Most importantly, affected businesses should get ready to plan and achieve the steps necessary to be ready before 1 January 2015.