Small Businesses set to Feel EU VAT Rule Pain

New EU VAT rules on the place of supply of services came into effect on 01 January 2015 and are set to have a hugely adverse impact on small businesses providing cross-border digital goods and services.

From the beginning of the year, the determination of the place of taxation on cross-border transactions for digital sales has changed to be the location of the consumer, rather than the location of the supplier.

While these measures are thought to have been introduced in order to deal with very large corporations avoiding VAT bills by providing services overseas, the knock-on effect on small businesses is likely to be highly damaging.

As a result of the rule changes, any business providing digital goods and services to consumers in other EU countries will be required either to register to pay VAT on those transactions in each EU country or to register with HMRC’s new VAT Mini One Stop Shop (VATMOSS), which will collect VAT payments for other EU countries so businesses can pay a single VAT collector.

While the VATMOSS scheme will reduce the administrative burden for small businesses, in order to register at all businesses are required to register for VAT as a whole and will be subject to VAT on UK sales as well as on trade with the EU, even if these make only a small volume of sales to the EU.

The addition of VAT on UK sales for many of these small businesses will either make them less competitive or cause them to cut their sales margins.  As a result many businesses will become untenable, assuming they can afford the additional administrative burden of registering for VAT at all.

In addition to the payment of VAT, being registered for VAT comes of course with other administrative overheads, such as the requirement to collect evidence of the location of customers.  Many small businesses that rely on PayPal as a mostly anonymous payment provider will consequently need to collect additional billing information, as well as other evidence such as IP address, bank or SIM card details, in order to be certain where a customer is located.

The definition of digital sales is an important one under the new rules, since physical goods are not affected.  Generally speaking, a sales process that requires manual human action before the goods or services are delivered is deemed not to be strictly digital, although businesses should take specific professional advice to avoid grey areas.

Lucid Crystal would be happy to provide assistance if your business is affected by the rule changes; please contact us for a consultation on how we can help adapt your online processes to cope with the changes.