It’s time for drastic action to save businesses from the VATMOSS fiasco

As reported in this weekend’s Sunday papers, calls are growing for the next UK government to insist on an extra-statutory concession to save UK business from the destructive effects of the new EU digital VAT regulations. This means suspending this legislation domestically until such time as the EU has conducted a thorough review and agreed revisions to make it fit for purpose.

The EU VAT Action team support this call. Here’s why.

Reports emerged a week ago that proposals including a realistic threshold to ease the VATMOSS burden can be expected as part of the Digital Single Market strategy presented by Andrus Ansip later in May. The most commonly suggested figure was €100,000.

We would much prefer to see Commissioner Ansip and Commissioner Timmermans honour their recent promises to remove this burden from ‘Microbusinesses and SMEs’ entirely. The simplest way is with an exemption, as argued here. A €100,000 threshold would become a permanent barrier to business growth, given how difficult and disproportionately costly it is to comply with the legislation. (We will address this at more length in our next blog post.)

However this €100,000 threshold would at least offer a lifeline to the lower tier of businesses currently faced with spending hundreds of pounds to remit trivial amounts of VAT under these new regulations, often under £20 per quarter. That’s the direct cost. Once lost earnings from time spent on compliance are added, the sums often run into thousands.

Unfortunately further reports quickly followed, insisting that the French government, possibly followed by Luxembourg and Italy, will block any proposed threshold, for whatever political reasons they feel justifies wrecking their own knowledge-based economies.

Now, since the 1st May, evidence is emerging of what a fiasco the VATMOSS system is, not only in the UK but across Europe.

UK businesses that had correctly submitted both EU VAT returns and made payments received email notification that they had not made the required payments and could face enforcement action from any EU member state where they owed money. As these incidents are investigated, explanations range from misleading computer screens resulting in payments going into a company’s existing UK VAT account to a bank transfer made on Good Friday being refused because that was a bank holiday. Not that anything in HMRC’s systems notified the businesses affected of any such issues when they made their payments.

Problems extend beyond the UK. Assurances that queries from other states’ tax authorities would go through official channels are proving worthless. One UK business has been contacted direct by Sweden to demand clarification of a €4.60 discrepancy. Even though it was supposedly agreed at EU level that minor discrepancies would be allowed for, due to currency fluctuation and MOSS systems calculating tax owed on total sales reported rather than on individual transactions as businesses must.

One Swedish business only registering for VATMOSS on 30th March, in order to report sales from 1st April, Quarter 2, has been notified of failure to report Q1 sales, and had to submit a nil return for a period when the business wasn’t even registered.

Businesses based and MOSS-registered in Holland have been sent German VAT numbers and notification of the German tax office they should now be dealing with. No one, including their accountants knows what to do with this information. One initially suspected the letter was some scam.

Meantime, the Revenue in Ireland have been telling the very smallest businesses which make enquiries that they don’t need to register as the cost of compliance for them is so disproportionate. This may be common sense in Dublin but it’s hardly fair on equivalent businesses in other member states which closed because they were told they were liable from their very first €1 sale.

Registrations across the EU now stand at just over 8,000. Over half of this unfeasibly low total is accounted for by just two member states between them. Since total registrations at the end of January stood at just under 7,000, this means fewer than 2,000 businesses have registered in the subsequent two months, indicating an ongoing lack of awareness or widespread non-compliance.

It’s certainly true that significant numbers of businesses are taking themselves out of the scope of this legislation via geoblocking, use of 3rd parties, increasing manual intervention and/or removing digital products. While all these strategies will damage their prospects for income and growth, these businesses consider this option is the lesser evil.

Others are relying on pervasive myths. Belief persists in the UK that this new regulation only applies to businesses above the domestic VAT threshold. In Germany, Austria and Switzerland there’s widespread insistence that it does not apply to those solely trading digital products in the German language.

However we also have evidence of accountants in more than one member state now refusing to deal with VATMOSS liable clients or even quietly advising them not to bother, as the VAT owed plus fines will be cheaper than complying, in the unlikely event they’re found out.

Meantime any confidence that 3rd party marketplaces and online payment providers would relieve small businesses of this burden is proving woefully misplaced. There is still no sign of any cheaply compliant technological solution because there is simply no easy fix for the customer location problem. Discrimination issues are now apparent as blind or otherwise impaired online traders face higher costs than anyone else if they seek to comply. (Upcoming blogposts will explore these issues in more detail.)

Digital businesses face on the one hand, the unsustainable burden of an expensive and unworkable system, and on the other, no prospect of relief until EU member states stop arguing which could take months or years.

This is the case in favour of an extra-statutory concession to suspend these regulations domestically to protect the UK digital economy until the European Union can take meaningful action. Indeed, other member states would be well advised to do the same.

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Contact The EU VAT Action Team

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