So the new EU VAT rules have been in force for just over a week. We’ve been working with micro businesses to understand how they have been getting on – and here are some of the stories we have seen in the first week of the implementation of these new EU VAT rules.
- Businesses are closing
We have heard from 200+ UK businesses who have closed completely because they cannot deal with the administrative burden that the new rules place on them. It was either economically unviable for them to comply or they simply couldn’t face the administrative burden and have decided it’s no longer worth running a business. The case study comments are heart-breaking and are a devastating unintended consequence of this legislation, which could be immediately rectified by applying the existing distance selling thresholds to digital goods – even on a temporary basis.
- Businesses are refusing to sell outside their home country
We have seen many examples of EU businesses excluding EU sales from outside of their home Member State, to avoid the rules, which of course breaches fair trading & discrimination rules and causes the business to lose money. If you’re selling via a website, then your business is automatically worldwide. It is crazy to have to turn away customers, just to avoid the EU VAT administration burden.
- The EU is becoming an outcast
We have seen MANY examples of USA companies now refusing to sell to EU consumers, so that they won’t be hit by the new regulations, even though they already applied to the USA. This reduces consumer choice. Prices are increasing, too, to help cover the regulatory burden and the VAT ‘fudge factors’ (see below), so consumers are being hit twice.
- Consumer choice cut and prices rise
We are aware of thousands of businesses who have now dropped digitally-delivered services from their website, which will potentially damage their business and was never their intention, prior to hearing about the rules. It simply doesn’t make business sense to exclude digital products in this age, but they feel they have no choice.
Many of those who are keeping digital products have had to put up prices to cover the extra VAT and the huge amount of admin.
- Major 3rd party platforms aren’t complying
Many of the major 3rd party platforms, including Etsy (massive for sole trading craft sellers) have not been able to comply, even though their compliance was a requirement of the legislation. If they can’t comply, how can a sole trader?
- The sticky plasters are helping, but they’re a temporary fix and taking them off will hurt
The concessions we have negotiated from HMRC and HM Treasury in the UK have kept many people in business, but will only last for six months.
The UK won’t get the millions it was promised.
The news we are hearing this week from businesses is that Estonia has done a good job of publicity and there has been some in the Netherlands and Germany, but that’s about it. France is unofficially exempting those below the VAT threshold and Italy has failed to implement the legislation. The vast majority of affected EU businesses have still not heard about this legislation, which is why the UK is being so much more vocal than non-UK.
The downside of this is that, in the UK, we’re crippling our smallest businesses in order to collect tax on behalf of other countries, who aren’t reciprocating with the same gusto, meaning the £300 million per year of ‘cherries’ that the UK government was promised for implementing this is unlikely to come our way.
Impossible Things To Do Before Breakfast, Including Complying With EU VAT
To help national governments and the EU to understand why their current, “there, there, dear” response isn’t adequate, we have been collating a list of aspects of the legislation that are ‘impossible’ or at best economically unviable and unreasonable, for micro businesses.
It’s a work in progress, as people start trying to comply, but here are five of our ‘favourites’ so far:
- Display the correct price.
You don’t know where a customer is based until the final stage of the checkout process. The UK and some other Member States require you to display the VAT-inclusive price at all times. You can’t do this unless you know where your customer is and if you insist on them declaring their country before visiting your sales page, you’re likely to lose the sale.
Even if you could get their country, the 90% of businesses below 100,000 € turnover use PayPal’s ‘buy now’ buttons, rather than a shopping cart, so you wouldn’t be able to display the correct price. It’s coded into the website page, not the shopping cart.
Most micro businesses are having to bypass this by applying a best guess ‘fudge factor’ to cover VAT and then work it out afterwards. This causes UK and worldwide prices to go up unnecessarily, to compensate for Hungary’s 27%, and is already costing people sales because the digital market is so price-competitive. And it’s a completely unjustifiable level of admin for the sale of, say, a €2.99 e-book.
- Manually email, to bypass the VATMOSS rules, but actually get the email to arrive.
We have already seen people whose Yahoo accounts have been blocked for spamming because manually sending a pdf to a stranger (a customer) multiple times a day sets off the spam alerts for the main free email providers. This effectively closes this person’s business until they can get their account unblocked. As requested, we will write to the key email providers for statements on this.
Even if you can send the pdf, most incoming email servers automatically reject emails with large file attachments from people not in your address book or whitelist, because there is a high risk that these are from spammers or contain a virus file.
So we have moved from instant downloads with happy customers to grumpy customers who have to wait for a manual email that may or may not ever arrive. Getting a reputation for spam can also cause your email address – and even your website server – to be blacklisted as a spammer, meaning you are then dropped from Google search results.
- Apply the correct rate of VAT.
Most of these businesses use PayPal or other very small business shopping carts. Some of these CAN handle country-based VAT, but not until the final stage of the checkout process. And they can’t handle multiple rates per country. If you sell an e-book (with ISBN) and a pre-recorded course to a customer in Italy, the transaction requires two different VAT rates.
If you sell that same e-book with a live webinar, then the e-book is taxable in the place of supply, but the webinar is exempt from the new rules and is taxable in the business’s country. So you could have two different countries in one transaction. Micro businesses are not set up to handle this level of complexity.
- Accurately collect the place of supply.
Customers will quickly realise that, for example, pretending to be in Luxembourg gets them a discount. It is easy for a customer to declare a false address on a web page. It is also easy to use software to fake your IP location. As studies have shown this week, IP addresses are also incorrect in up to 10% of cases.
And if customers buy during their lunch break at work, most companies use secure VPN instead of IP, so you wouldn’t get the IP data. It’s not available from mobile devices. So the customer’s declared address and the system IP address are not reliable pieces of data.
And most micro businesses don’t have access to data such as the country code of the landline / mobile used for the transaction or the credit card bank details – and nor should they. These businesses simply cannot comply with the place of supply data collection requirements. And if the customer is buying after clicking an email link then they potentially never visit your website, so you have no way of collecting anything other than their PayPal account address.
And there are huge concerns with them storing this data for 10 years.
- Get the Member States to agree on what ‘digitally-delivered’ means.
The UK HMRC has been helpful and has issued clear guidance, clarifying it and adding definitions each time we have requested them. However, these definitions are quite different to those in, for example, Holland and Spain. In those states, the proportion that is ‘digital’ falls under the law and the proportion that is live doesn’t.
In the UK, any product with more than minimal human intervention is exempt. A business cannot comply with the different definitions for each of the 28 Member States.
These examples illustrate some of the administrative nightmare that has now hit the smallest businesses, as a direct result of this legislation.
The next size up of businesses have had to fund website developers to create hugely complex shopping carts to handle it for them. But even for them the cost has been huge. One business I spoke to yesterday has just had to pay £100,000 to upgrade their server to handle the data processing needed by the hugely expensive EU VAT-compliant shopping cart they have had to develop. This is still a micro business (turnover < €2,000,000), so the compliance has been a huge hit for them this year. The biggest companies, such as Amazon and iTunes, were already geared-up for international sales, so this transition has been easy for them.
Ironically, a major side effect so far has been driving even more micro businesses into the arms of these 3rd party platforms, hugely cutting the micro businesses’ margins and increasing the profits of those whose behaviour drove the creation of this legislation.
If you have news from the first week of implementation or an idea for the ‘impossible things to do before breakfast’ discussions, please let us know at the EU VAT Action Campaign Group on Facebook.
If you’re not into Facebook, please tell us your news & ideas via the comments below.
Clare Josa & the EU VAT Action Team