Over the past nine months, the EU VAT Action team has made the case for a VAT threshold cross-border digital sales indisputable. The European Commission and the UK Government has publicly agreed, and revised legislation will be enacted.
However, even with the UK Government’s active involvement no EU threshold will be introduced in less than eighteen months to two years (and that’s being highly optimistic!). Untold damage will still be done.
Can the UK save the businesses worst hit with a unilateral, domestic threshold, specifically and only relating to cross-border digital trade, as an interim measure to apply until new EU legislation is enacted to solve the current problems?
When as various authorities have politely and accurately pointed out, doing so would be in direct contravention of this new EU legislation which the UK has agreed to and enacted.
We are very well aware of this, and thus, of the magnitude of what we’re proposing. We do not suggest this lightly. That we are doing so at all reflects just how seriously we view the ongoing damage being done. And why we have taken extensive advice from eminently well-qualified legal and academic experts among the campaign’s supporters.
A solid case can be made in mitigation for the UK choosing to take such radical action.
The data from VATMOSS returns so far makes is clear that the administrative costs to governments of administering this system, and of collecting and remitting such taxes, for the smallest tier of businesses affected. This has justified granting exemptions from taxation in past instances. Indeed, both case law (para 20, 21) and HMRC’s own guidelines explicitly set out HMRC’s responsibility to collect taxes in the most efficient way.
“For example, if it would cost £10,000 to collect £1,000 in tax due, a higher net return to the Exchequer would be achieved by not collecting the tax in question. In such cases, it would be reasonable to allow concessionary treatment because that will result in a net increase in funds to the Exchequer.”
The data from VATMOSS returns so far makes is clear that for a high percentage of affected businesses, the administrative burdens and costs of compliance massively outstrip the tax collected. Case law supports granting exemptions from tax on just this basis, and the UK is currently defending just such an easement for small scale cider producers at the European Court of Justice. (You will have to scroll down a bit to find the details).
Small scale direct online traders remain unable to gather the data to enable them to comply. Until payment processors routinely supply customer location codes for all transactions, such businesses simply cannot meet the legislation’s requirements. The UK is currently defending another case at the European Court of Justice, because leisure boat owners are not being pursued for using commercial marine diesel rather than the higher rated fuel they should legally be using, because so few refuelling facilities offer both types of fuel. The practical difficulties of complying with the legislation are so insurmountable for yacht owners that they’re being given a pass. Surely small digital businesses deserve similar consideration when it’s impossible for them to comply?
Previous EU legislation has been amended, even abandoned, when it’s become apparent that the burdens of compliance, in terms of cost and practicality, would significantly favour big companies over small, local enterprises. For example, in 2013, when new regulations over bottling olive oil would have destroyed family businesses across Southern Europe.
In this instance, we’re not advocating the wholesale rejection of this legislation. The UK would be merely acting to limit the damage to its own economy, by way of a specific and limited exemption and only as an interim measure to cover the time it will take for the European Commission to see its own proposals along the very same lines through its legislative process.
Doing so would also be acting to avoid potential legal challenges to this legislation on the grounds of its discriminatory impacts on protected and minority groups.
It would also be acting to avoid potential legal challenges on the grounds of the failure of due diligence since this legislation was prepared without consulting or considering the interests of those businesses worst affected. Small scale direct online traders were never factored into anyone’s calculations. The authorities didn’t even know we existed.
We’ve been advised that strong cases can be made against this legislation on such grounds.
The UK government would also be acting to remove the severe market distortions and significant barriers to trade that this legislation has inadvertently created. Looking at other cases currently before the European Court of Justice, where various member states are being challenged over VAT issues, fair competition and equal access to markets come up time and again as major concerns. These cases are being brought in the interests of cross-border trade and the European single market.
So would the UK Government really find itself summoned to answer for taking action to defend its own economy and to promote Europe-wide ecommerce? When the timescale for bringing such a case to court would mean legal arguments being heard at pretty much the same time as the revised legislation on EU digital VAT was being enacted to make the interim threshold unnecessary?
Though as our experts have pointed out, this would not simply be an issue between the UK and the European Commission. This new system requires the UK to collect VAT for other countries. Easements over such things as cider and marine diesel only relate to UK VAT. Taking unilateral action over cross-border digital VAT, in direct contravention of EU law, could be challenged by other member states demanding their money.
That’s certainly possible but is it probable? When business organisations in countries such as Germany are currently lodging complaints with their own competition authorities and the European Commission over abuses and market distortions stemming from companies like Amazon’s dominance over online and digital markets. Would they simultaneously object to action facilitating a broader range of ecommerce to counter just such monopolies? When the unintended consequence of this legislation has been to strengthen the stranglehold that global corporations like Amazon, Apple and Google already have on the digital market, making future challenges to them vanishingly unlikely?
Wouldn’t other countries be just as likely to enact similar interim thresholds to help out their own small digital traders? What supports online start-ups and back bedroom businesses in Birmingham or Edinburgh helps their counterparts in Dublin, Oslo, Tallinn, Barcelona, Zagreb, Paris, Helsinki, Turin, Amsterdam, Lisbon, Bratislava – and everywhere else across the digital single market – just as much. Indeed we already have evidence of ‘unofficial’ easements in other member states.
Given the unique nature of the problems this new legislation has created, and provided any interim UK easement was tightly and precisely drawn by the finest legal minds, surely the risk of this creating an inadvertently troublesome precedent is minimal?
Until any such action might be taken, such questions remain unanswerable. It is certainly the case that the UK Government has an unquestioned duty to consider very carefully all the legal implications and other arguments on both sides of any such proposal.
Equally, our elected representatives have an unquestioned duty to defend the interests of all our businesses, from the smallest up.