EU Digital VAT Thresholds and What We’re NOT Asking For.


Our conversations with many officials and elected representatives about the EU’s new digital VAT regulations have one thing in common.

As soon as we mention the word ‘threshold’, they react as if they’ve been stuck with a hatpin. Then they hastily tell us all the aspects of EU VAT thresholds which cannot possibly be discussed for a whole range of reasons.

Then we explain that we’re not actually asking for any of these things that they are so concerned about.

So, for the sake of clarity all round, here’s what we’re NOT asking for.

We’re NOT asking for small business VAT thresholds to be equalised across Europe. We’re NOT looking for every EU member state to accept the UK’s £81,000 turnover threshold before VAT is levied, any more than we’re asking for the UK to accept Spain’s €0 threshold.

We are only interested in establishing a turnover threshold solely in relation to these new regulations relating to sales of digital services and any products supplied as digital files which have been designated as services for the purposes of this legislation.

Small businesses need a turnover threshold below which they are exempt from this legislation because the costs of new hardware and software required and the administrative burdens of compliance are massively disproportionate. This new system was designed with multinational corporations in mind which already have such infrastructure in place.

We are NOT asking for any new regulations to be applied to all small businesses across Europe below this threshold.

Assuming a single turnover threshold is established solely in relation to these new regulations, all other existing national regulations would still apply below that threshold. France’s autoentrepreneurs would keep their status, unaffected, as would Dutch small/medium enterprises, and those in Sweden, Denmark, Croatia – and start-ups in every other EU member state.

We’re NOT asking for anything that would challenge national sovereignty over domestic taxation.

But we’re NOT asking for a threshold based purely on a business’s cross-border digital trade. There are existing and differing national VAT thresholds for cross-border trade in physical goods but that’s easily done because any business sending a product in the post invariably knows where their customer is. They have to, in order to address the package for delivery.

The central problem with these new VAT on digital sales regulations is just how hard it is to know where customers are physically located when you’re dealing with them in cyberspace. At best you may find out once the transaction has been completed.

Setting a threshold that requires businesses to know if their customers are within their own country or outside their borders misses that central point. You still need to know where your customers are in order to separate your cross-border and domestic trade.

So a threshold relating solely to these new VAT regulations on digital sales requiring taxation at place of consumption needs to relate to a business’s total turnover.

We are NOT suggesting a lengthy new round of negotiations between the EU Commission and all the Financial Attachés of 28 member states, attempting to find a threshold every country agrees on. They couldn’t agree on one before which is precisely why we ended up with the default of these regulations applying to ‘all sales’.

There is a quicker and simpler solution available.

The EU has already designated any business with fewer than ten employees and a turnover of below €2 million as a ‘micro’ business. Commission directives explicitly state such micro busineses should be subject to fewer requirements and/or reduced fees for EU administrative compliance.

Micro businesses are already exempt from assorted accounting directives precisely because those impose disproportionate administrative burdens. Because tax authorities know the size of businesses which are worth their while auditing and investigating. Below that sort of level, they know that administering such close scrutiny would cost the authorities more than it could bring in as revenue.

If €2 million sounds an insanely large sum of money, bear in mind that’s turnover, not profit. It’s not uncommon for a business’s profit to be a very small percentage of its turnover. This is especially true of start-ups and enterprises in their early years. In other words, exactly the sorts of companies being hit hardest by these new regulations as they attempt to generate jobs and growth in the new global digital knowledge economy.

It’s a quick and simple solution. Exempt micro businesses from these new digital VAT regulations in the same way that they are excused from other EU directives already considered unduly burdensome.

So a new business starts up and trades under its own domestic rules, with all existing national VAT regulations applying. Whatever proportion of their business is digital can be conducted simply and easily using resources like PayPal Buy Now buttons.

Once that business’s total turnover takes it beyond the status of micro business, then they become liable for collecting and remitting VAT at place of consumption on cross-border digital sales, using the MOSS systems now in place.

That’s a level playing field.

That’s promoting a digital single market across Europe.

For more on the EU’s avowed aims to reduce the burdens on small and micro businesses, see The Small Business Act.

In 2013 an EU public consultation with small and micro businesses identified VAT as the most burdensome legislation BEFORE these new regulations were imposed.

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