Tuesday 8 September 2015 8:43 pm

Catastrophic EU VAT rules are destroying the digital sector

In January, new EU VAT legislation was imposed on the broadcasting, telecoms and digital sectors, causing a crisis for SMEs. 
Thousands of businesses have closed, geo-blocking (the refusal of non-EU businesses to sell into the EU) is rampant, and the legislation threatens to wreck the Digital Single Market.
In simple terms, the new rules change how firms must charge VAT when selling digitally-delivered services across Europe. Previously, for a UK business, the “place of supply” was Britain, meaning it would charge VAT at UK rates. 
But the place of supply has now been moved to the customer’s location, with the intention of stopping corporations from profiting from locating in lower VAT countries.
However, this red tape from Brussels has had unintended consequences, with catastrophic costs for SMEs. 
This week, EU finance representatives are meeting in Dublin to discuss this issue at the Fiscalis Summit. They need to act now to ensure the survival of the Digital Single Market and fair competition across the EU. 
What’s the problem? The EU VAT legislation was negotiated in 2008. But in the seven years it took to become law, digital commerce has evolved to involve far more than just global corporations and a tiny handful of SMEs. 
Millions of businesses in the EU now sell digital products and services, trading globally through their websites. Many such enterprises are micro businesses with fewer than 10 employees and thousands are one-person firms.
The legislation is fiendishly complicated. Many tax experts have privately admitted to us that this is the most difficult piece of law they’ve seen in their careers. Compliance isn’t just putting a line of code into your website or adding a plugin, even for the simplest firms. 
This is corporate-level legislation appropriate for multinationals, for whom it was intended. The MOSS system, introduced to help businesses handle multiple country VAT returns, is welcome. But it only helps with the simplest part of the process: remitting VAT between EU countries.
The nightmare for SMEs is reaching the point where you don’t know what VAT to pay. You need to know where your customer is located with three pieces of location data as soon as that person clicks on your sales page. 
You need to know if they’re business-to-consumer (B2C) or business-to-business (B2B), charge them a VAT inclusive price at the beginning of the sale, be able to issue an invoice in their country’s requirements and language, and comply with multiple countries’ interpretations of what is VATable and what isn’t. And all in real time. 
You then need to save all that data on an EU-based server for 10 years. Your business is open to audit by 27 other countries who can contact you directly if they believe you owe them tax. It isn’t possible or reasonable for the smallest businesses to comply.
But this isn’t just about SMEs burdened with new costs. Businesses are facing serious issues, affecting their ability to trade effectively.
First, companies outside the EU are geo-blocking; refusing to sell within Europe. Despite the new legislation only applying to B2C transactions, B2B sales are also being refused. Companies are therefore unable to access products and services they need to trade, as it’s simply cheaper for non-EU businesses to lose EU sales than to comply. 
Further, the EU’s proposed solution – that SMEs trade digitally through third party platforms – isn’t viable for many businesses, entailing lower profits and lost relationships with customers. Trading directly with customers or via platforms needs to be a fair choice for SMEs in a free market.
The only reason the Digital Single Market is still functioning is because awareness levels of the new VAT rules are below 5 per cent, with most continuing to trade without complying with them. As awareness rises, the damage will soar.
The EU agrees that this legislation was never intended to hit SMEs and that the burden is unacceptable. Now is the time for action, not just agreement. So it is imperative that the EU finance representatives agree two things at the Fiscalis Summit. 
First, a threshold for SMEs, allowing them to revert back to domestic VAT rules for their first €100,000 of non-domestic EU sales. Second, a simplification for SMEs above the threshold, allowing just one piece of data to prove place of supply: the country code which must be supplied by the payment processor.
But this is not enough. Such legislation could take two years to agree and by then geo-blocking will be an epidemic, startup businesses and innovation will have been devastated, and the Digital Single Market will be dead, possibly along with the next Google or Amazon.
We need an immediate easing; a temporary suspension of these rules for SMEs, plus the simplified data requirements for SMEs above the threshold. This will allow companies to continue trading while the formal legislative process continues.
EU SMEs want to comply with the law, but the law is having catastrophic unintended consequences. 
When remitting tiny amounts of tax causes the closure of thousands of businesses and steep dives in profits for thousands more, when receiving tiny amounts of tax costs governments more to administer than they receive, and when businesses cannot fairly compete in a free global market, we know the problem is serious.
We must safeguard the most competitive and entrepreneurial digital market in the world. The EU finance representatives at Fiscalis this week have the chance to fix this critical issue and enable a future for the Digital Single Market. It’s time to act.

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