How much help would a €100,000 EU digital VAT threshold actually offer?

Posted on by Juliet McKenna, Co-Founder of EU VAT Action

It sounds like an awful lot of money, doesn’t it? €100,000 or £74,000 at current exchange rates. Surely that’s a high enough turnover threshold to mitigate the damaging impact of EU digital VAT?

Let’s look at the detail. Bear in mind that €100,000 isn’t a single person’s salary. It’s a theoretical business’s annual turnover, not profit. Profit is what’s left after operating expenses, wages, advertising, accountancy, IT and all other costs have been deducted from total income. A widely accepted rule of thumb is a new business should aim for 5% profit if it’s going to stay afloat. For a business on this proposed threshold, that means €5,000/£3700 available after all other overheads have been covered. That’s not money for throwing a party but for investing in ways to develop and expand the business.

How about moving into digital sales across Europe? For the moment, we’ll slide over the fact that online businesses are global by their very nature from the outset, because that’s how the Internet works. Let’s assume our theoretical business has been operating solely in its own EU state and now looks at the burden of VATMOSS compliance.

Bear in mind that this burden isn’t only additional accountants’ fees and computer costs. This business needs a software solution that’s fully compliant with the new regulations. A few are on offer now but a lot fail closer inspection. In addition this solution needs to be integrated with an existing platform and ecommerce systems. If something’s not compatible, there may well be further costs in new hardware and online services.

Even something as comparatively simple as cookie notification software can throw up conflicts. A VATMOSS solution will be vastly more complicated, demanding extensive shopping around, testing and bug fixing, all of which take up valuable time. The less IT expertise a business has in-house, the more time this will take. Time is something small businesses can rarely afford to spare and certainly can’t afford to waste.

Even hiring in IT specialists to handle everything isn’t a complete solution. Whoever’s running the business still needs to understand the basics of these new regulations in order to be certain that whoever is overhauling their online checkout understands exactly what’s needed. It takes time and effort for both sides to get up to speed. If they don’t? That’s how IT projects fail spectacularly and expensively.

And every hour spent on EU VAT, VATMOSS and compliance is an hour not spent on work generating income to contribute to that 5% profit. Businesses have reported compliance costing them one or two people’s full-time hours for at least a month, in some cases more.

Still, a business has to invest to grow. Speculate to accumulate. Maybe this will be worth it in returns from increased sales? Let’s hope so, since a business must commit to these up-front costs without necessarily knowing what their cross-border digital sales will be. Up until now, if you’re trading online, you haven’t needed to know where your customers are located. It’s not as if you’re sending them a parcel.

Here are some actual examples of costs in time and money incurred by businesses hit by these regulations since 1st January 2015.

Using the VAT they’ve discovered they owe for the first quarter, January to March 2015, and using 20% as an approximation of VAT rates, we can roughly estimate the value of their projected annual cross-border sales – always remembering that income from sales is by no means all profit.

• £1000 (plus 2 months of work) to build a new website to cope
£36.95 VAT owed for Q1 2015
£750 approximate annual sales subject to EU VAT.

• £500 in web development costs.
£0 VAT owed for Q1 2015
Fingers crossed for the rest of the year then…

• £1000 (£175 in accountancy fees plus time)
£10.09 VAT owed for Q1 2015
£250 approximate annual sales subject to EU VAT

• €900 – €1500 costs
€50 VAT owed for Q1 2015
€1000 approximate annual sales subject to EU VAT

• £700+ in software and accounting costs
£18.74 VAT owed for Q1 2015
£400 approximate annual sales subject to EU VAT

Consider those costs against that £3,700 available to our €100,000/£74,000 company.
Against £1,850 available after turning a 5% profit on €50,000/£37,000 annual turnover
Against £925 for a start-up bringing in €25,000/18,500 in its first year.

Every business must assess plans and investment with rigorous cost versus benefit analysis. Where’s the justification for spending money on an EU digital VAT solution when it’ll be anywhere from two to five years before the up-front cost is paid off and cross-border sales even become profitable?

Lots of other ideas will be competing for that money. Ideas offering far more realistic prospects for short term profit and longer term gains. Especially where digital sales are only one element of a trading strategy, alongside the sale of physical goods, consultancy or other services.

Even when a business is wholly digital, creating products still costs time and money. Making music, fiction, non-fiction resources, training materials, knitting patterns or anything else requires hardware and software. Those need maintaining and updating and digital enterprises still have to finance advertising, customer service, professional skills training, and so on.

No wonder online businesses in every EU state are now opting for geoblocking or using 3rd party marketplaces, even at the cost of a middleman’s fees. At least that only means losing money on actual sales. Others are doing away with automated digital products entirely, even if offering low cost, entry level downloads has been an integral part of their marketing strategy and business plan.

This includes businesses trading well over that proposed €100,000 threshold. We have heard from one enterprise with an annual turnover around £300,000 and nine staff. They have taken measures to keep their business outside the scope of this legislation after calculating their total annual VAT payable on the digital products they used to sell would be around about £1,500 per year. Compliance could cost up to £15,000. A €100,000 threshold won’t change their cost-benefit analysis.

These are the sort of calculations which underpin existing EU exemptions for small and medium enterprises, relieving them of the burden of compliance with other financial and audit requirements. These are the reasons why a business with an annual turnover of €2 million and ten employees can still be considered ‘micro’ and warrant such consideration, astonishing though that may seem.

But there’s no threshold or any exemption from these new digital tax regulations. A business is liable for collecting and handing over the correct tax owed, according to 28 different countries’ VAT rates from their very first €1 sale.

No wonder MOSS registrations across the EU by the end of this first quarter are so ludicrously low. And with registrations so low, how much income will the new system actually generate, to justify this wholescale upheaval? What revenue will governments see to offset the incalculable damage this is doing to the digital single market across Europe?

Juliet McKenna, Co-Founder of EU VAT Action
Professional writer of epic fantasy novels with excursions into shorter fiction, darker fantasy, some media tie-in stories. Find her books here.

Contact The EU VAT Action Team

http://www.julietemckenna.com

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

Posted on by Juliet McKenna, Co-Founder of EU VAT Action

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.

Juliet McKenna, Co-Founder of EU VAT Action
Professional writer of epic fantasy novels with excursions into shorter fiction, darker fantasy, some media tie-in stories. Find her books here.

Contact The EU VAT Action Team

http://www.julietemckenna.com

Why it’s more important than ever to take your VATMOSS problems to HMRC

Posted on by Juliet McKenna, Co-Founder of EU VAT Action

I was the EU VAT Action Team’s representative at the most recent HMRC Digital VAT Working Group this week. As far as this campaign is concerned, the single most important thing to come out of that meeting is that everyone needs to take their problems direct to HMRC.

If you’re having trouble completing your VATMOSS return, for whatever reason. If you’re having trouble working out if the software solution you’re hoping to use is actually compliant. If you’re trying to find a way to take your business out of the scope of this legislation. If you simply do not understand something in the official guidance. Let them know.

Please use the dedicated email address vat2015.contact@hmrc.gsi.gov.uk or if you’re feeling particularly brave, ring HMRC’s helpline on 0300 200 3701 (or +44 (0)2920 501 261 if you’re based abroad).

If your heart sinks at the thought of getting caught up in a lengthy email chain or spending time and money which you have far, far better uses for on yet more phone calls about all this, we absolutely sympathise.

Why should any of us have to take all this time out from working for our own businesses’ benefit and earning our own livelihoods to sort out a mess which we had no hand in making? It’s not as if we have any good options here. The best we can hope for is finding the least damaging option for our personal circumstances, whether that’s geoblocking, restructuring our business to include sufficient manual intervention, using 3rd party platforms or paying hundreds of pounds for software and accountancy services to enable us to remit a frankly trivial amount of VAT.

Well, here are some good reasons. Firstly HMRC want to help. Thanks to all the evidence amassed by the thousands of people supporting this campaign, they now understand the scale and scope of the difficulties which businesses are facing, and how the smallest are the hardest hit.

Really? That may not seem so obvious if you’re reading the official online guidance which gives the impression this is all fine and straightforward. Well, there’s only so much material an online help page can offer, and how often it can be updated. If it tries to cover every conceivable scenario and peculiarity, a website will rapidly become unworkably confusing. Go direct and you can get the specific help you need. (If that doesn’t happen let us know, because that’s what we were promised in that meeting!)

Crucially, your problem will then be logged officially with HMRC. Remember what we said about them being convinced of the massive difficulties for businesses and revenue authorities alike created by the new EU digital VAT rules? HMRC’s representatives are now taking every opportunity to raise these problems with their counterparts in other EU member states at official meetings discussing cross-border tax and related issues. They’re already making progress in convincing other member states to follow the UK lead in decisions over what does or does not meet the manual intervention standard, and such like.

Still more important, the more evidence HMRC has, the stronger the case they can make asking for a thorough review of this legislation to make it workable – along with proving the need for immediate temporary measures to mitigate the damage being done while that review is under way. You can supply that evidence. Go to a forum or online group, and you may (or may not) get accurate information but HMRC will never hear about your problems.

Come to that, you can use that email address to supply evidence of more than immediate problems with tackling VATMOSS. If you have opted for barring customers from outside your own country as your only realistic option to escape software and accountancy costs you can’t meet. If you have abandoned direct sales and now have to bear the cost of 3rd party platform commissions. If you have cut back on digital products and increased manual intervention so you’re now earning less money for working more hours. Let HMRC know.

If you have managed to tackle VATMOSS without too much grief, but find the costs of doing that vastly outweigh the value of the relevant sales, with the actual VAT remitted an even smaller fraction of that? Let HMRC know. That’ll add to the bigger picture that’ll emerge after the 20th April deadline for submitting returns here in the UK, and in mid-May when all the EU member states are due to exchange information (and money) derived from the new system’s first quarter. Won’t that make for interesting reading?

But will all this really make a difference? Well, this campaign has already had a massive impact, thanks to everyone who’s been involved. We’ve seen numerous questions submitted in the European Parliament from MEPs across the spectrum of political parties and different countries. We’ve seen the UK Prime Minister raise this issue at the highest levels in the European Council. EU Commissioners are now publicly acknowledging there’s a problem and they need to take action.

Just yesterday, on 14th April 2015, Andrus Ansip, the EU Commissioner responsible for the digital single market said this about VATMOSS to the European Parliament’s internal market committee:

“We wanted to protect but we somehow destroyed those businesses so we have to somehow fix those problems… The member states rejected proposals by the Commission to set thresholds quite high. I myself would like to repeat this proposal and I hope member states will now be able to understand how important this is for family businesses, self-employed people and medium-sized businesses.”

Thanks to everyone’s hard work, we’re making progress towards the solutions we need. Yes, it’s getting exhausting but if we all lend a hand, we can share the burden so everyone can benefit in the end!

(And don’t forget, you can still complete our online impact survey if you haven’t already done so. We’ve now got translations for a range of European languages, to help us prove this isn’t just a UK issue.)

Juliet McKenna, Co-Founder of EU VAT Action
Professional writer of epic fantasy novels with excursions into shorter fiction, darker fantasy, some media tie-in stories. Find her books here.

Contact The EU VAT Action Team

http://www.julietemckenna.com

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

Posted on by Juliet McKenna, Co-Founder of EU VAT Action
EU VAT Action Campaign: Thresholds

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.

Juliet McKenna, Co-Founder of EU VAT Action
Professional writer of epic fantasy novels with excursions into shorter fiction, darker fantasy, some media tie-in stories. Find her books here.

Contact The EU VAT Action Team

http://www.julietemckenna.com

Alert the OECD to the EU Digital VAT Catastrophe

Posted on by Juliet McKenna, Co-Founder of EU VAT Action

The Organisation for Economic Co-operation and Development (OECD) promotes policies to improve economic and social well-being around the world. It provides a forum for governments to work together and share experiences and seek solutions to common problems arising from economic, social and environmental change. They also look at issues like how much people pay in taxes and how this affects business.

At the moment, they are looking at international VAT/GST guidelines on place of taxation for business-to-consumer supplies of services and intangibles. That’s ‘Value Added Tax’ or ‘Goods and Services Tax’ depending on where you live, equivalent to US sales taxes added at the time of purchase. Intangibles means digital products and services.

This is a hugely important opportunity for everyone to voice concerns over the ways in which start-ups and small businesses are being wrecked by the new EU regulations on VAT payable on cross-border digital sales.

OECD_clock-image

It is particularly significant for those in OECD member countries outside the EU such as the United States, Australia, Canada and New Zealand. This is the best way to make your voice heard on this matter.

Getting as many responses as possible is vital. These regulations have been devised with the biggest companies in mind. The OECD needs to know the destructive consequences for smaller enterprises and the damage that will do to grassroots economies around the world. There is currently a Discussion Draft for Public Consultation available here.

We need as many people as possible to comment on this document by 20th February 2015. You need only send two or at most three pages. The more focused your submission is, the better and please use your own words as far as possible. The more individual you make your argument, the more weight it will have.

Having researched previous similar consultations, this is the format we would use:

  1. A brief statement of who you are and the reasons for your interest in the implementation of the 2015 EU VAT changes to electronic B2C services.
  2. General comments on the problems with EU digital VAT, VATMOSS etc, briefly outlining your key concerns. Keep this section concise, just a couple of lines.
  3. Specific issues for you, your business and your particular sector. For each point that you raise, make a direct reference / citation to a specific paragraph in the Discussion Draft. Please cite the paragraph number. If you find the prospect of searching through that document off-putting, please don’t! We have identified the key reference points for you in the detailed guidelines you can download here: OECD Submission Guidelines.
  4. Conclusions/Suggestions. If you’re commenting as an individual, you need not include these. If you’re submitting on behalf of a group, you may or may not wish to include the EU VAT Action campaign’s stated aims. It’s entirely up to you.

Please prepare your response and submit it as a Word document by e-mail to Piet Battiau, Head of Consumption Taxes Unit, OECD Centre for Tax Policy and Administration at .

Once you have sent your submission, please tweet @euvataction with hashtags #OECD and #EUVAT to let us know and to help encourage other people to do the same. Please spread the word about this opportunity for positive action through your other business and social networks.

Juliet McKenna, Co-Founder of EU VAT Action
Professional writer of epic fantasy novels with excursions into shorter fiction, darker fantasy, some media tie-in stories. Find her books here.

Contact The EU VAT Action Team

http://www.julietemckenna.com