The EU VAT MESS (again)
Those of you who follow us on Twitter are probably bored of us banging on about this, but the true lunacy of the EU VAT MESS has only just come to light. It turns out that the UK and other states are going to compensate the tax haven at the centre of this to the tune of €1.1bn for loss of tax revenue as a result of the rule change.
Let’s re-cap:
1. Large companies such as Amazon indulge in VAT tourism, by paying very low Luxembourg VAT when supplying to customers in the UK and other countries.
2. The EU declares this to be unfair tax avoidance, and decides to close the “loop hole” by making electronic services subject to VAT in the customer’s country rather than the seller’s.
3. Faced with the prospect of thousands of companies having to register for and operate VAT in 28 member states, HMRC sets up their VAT “one stop shop”, the VAT MOSS. This avoids filing separate returns to different states, but still requires sellers to track the multitude of different VAT rates in operation by different states, including obscure regional variations such as the Portuguese Azores.
4. The legislation does not include any thresholds for inter-state VAT, meaning if you sell a single item to a consumer in another EU state you must register for the VAT MOSS and charge EU VAT.
5. You can’t register for the VAT MOSS unless you are registered for UK VAT, meaning that if you make a single sale to another EU state, you’re obliged to start operating UK VAT on all your sales even if you’re well below the UK VAT threshold of £81k.
6. The guidance requires companies to collect an often impossible set of non-conflicting data to prove the consumer’s location, and then retain those records for 10 years.
7. HMRC’s original impact assessment recognised but dismissed this problem by vastly underestimating the number of businesses affected, and claiming that most small companies sell through online market places, giving as much as 70% of their revenue to companies such as… Amazon.
8. HMRC back-tracks on (5) by stating that you can avoid charging VAT on your UK sales by splitting your sales into two separate businesses – a technique known as revenue splitting which is normally considered illegal tax evasion.
9. Many companies (ourselves included) realise that the cost of compliance is greater than the affected revenue, and consider simply not supplying to consumers in other EU states, but are warned that this may be illegal under EU anti-discrimination laws.
10. Companies start to indulge in farcical discussions with HMRC about what constitutes an e-service. In some cases, by making the business less efficient, for example by manually attaching a PDF to an email rather sending it automatically, the service will no longer be considered an e-service.
11. Despite acknowledging that the change would impact businesses that are not currently registered for UK VAT, HMRC apparently did nothing to communicate the change to the rules to anyone other than VAT registered companies. Vince Cable then has the gall to tell companies just finding out about the change that he has done a lot to communicate the change.
12. Recognising that it’s about to lose a huge wedge of tax revenue, Luxembourg ups its VAT rate to 17%, a move which would probably have significantly curtailed VAT tourism on its own.
13. The UK and other member states agree to compensate Luxembourg to the tune of €1.1bn for the VAT revenue that they will lose as a result of companies ceasing to use Luxembourg as their tax avoidance state of choice.
You really couldn’t make it up.
As it stands, many micro-businesses are planning to simply shut up shop rather be killed by VAT bureaucracy.
For the record, we were already VAT registered, and did find out about the changes early this year, but the work of updating our billing system to cope with a plethora of different VAT rates, and the necessary “proof of residence” steps has been a massive and expensive distraction from doing useful things like upgrading our Virtual Servers.