Starting in January, new EU tax rules will force many businesses offering online services across the Union to take on a load of new administrative responsibilities.
The changes have caused particular consternation among micro-businesses providing such services – for a classic example, think about an individual who’s making a small amount selling knitting patterns — and the outrage seems especially virulent in the U.K. With a couple weeks to go before the changes hit, here’s a run-down on what red tape is being introduced, and why.
What new tax rules?
From January 1st, 2015, the provision of many digital services in the European Union will be taxable in the country where the service is consumed, rather than the country from which it is provided. The point, in theory, is to stop big firms from setting up headquarters in some tiny low-tax country such as Luxembourg and using that location to get out of paying taxes in the rest of Europe.
The problem here is that there are 28 EU member states, each of which has its own value-added tax (VAT) rates, and its own minimum thresholds for having to charge VAT in the first place. For many digital services businesses, this will add a degree of complexity. For those who operate micro-businesses that currently don’t have to charge VAT at all – in the U.K., for example, that’s any business with a taxable annual turnover of under £81,000 ($127,000) – this could be a whole new ballgame.
The kinds of services that aren’t affected include lawyers and accountants emailing clients, the supply of physical goods through electronic ordering processes, car and hotel booking services, and real-time educational services. Business secretary Vince Cable has also said that people can ignore the changes if they sell through a “marketplace like an app store” – an option that of course means losing a cut of the sales revenue.
But those independently selling images or text or music, or paid-for “online magazines” or software, will have to adapt – and fast.
Good grief! And with only two weeks to go?
Yes … about that. These new rules were agreed upon in 2008, so businesses have technically had around six years to wrap their heads around the implications. Of course, it’s really down to the national tax authorities to make sure everyone’s up to speed and, certainly in the U.K., it’s not clear that this happened in any meaningful way.
For example, it was only this month that Her Majesty’s Revenue & Customs (HMRC) finally agreed that people wouldn’t suddenly have to charge VAT on small U.K. revenues if they also sell into other European countries – a key issue that caused panic when people started freaking out about the changes in November.
Crucially, though, the changes do not mean that micro-businesses need to register with the tax authorities in 28 different countries. Instead, each country should be setting up a “Mini One Stop Shop” that provides a single point of contact through which to collect and distribute the VAT on sales to other EU countries.
In the U.K., a business can sign up with the local MOSS if its taxable U.K. turnover is under £81,000. This will simplify matters, but it still means that someone who previously didn’t have to register with the VAT authorities at all, will now need to register for a VAT number and submit quarterly VAT returns (declaring nil VAT on U.K. sales), and register separately with the MOSS, again submitting quarterly returns.
And then there’s all the data collection.
Get ready for some serious record-keeping (storing everything for a decade, no less.) The changes don’t make much sense if no one knows in which country the buyer is located, so the business’s customers will now need to tell the vendor which country they live in, and what their billing address is.
But there’s more: HMRC has recommended that sellers collect two pieces of information from their payment providers, such as [company]PayPal[/company]. This includes the country code of the customer’s bank, and the customer’s billing address. Unfortunately, PayPal is only willing to provide the country code, so the rest is really is down to the business to establish. So much for the convenience of no-hassle payment mechanisms such as [company]Stripe[/company].
Then there’s the small fact of the business qualifying as a “data controller” under EU data protection legislation, because they’re processing people’s personal data. In the U.K., this means they’ll have to register with the Information Commissioner’s Office (ICO), for a £35 fee.
However, the ICO’s security requirements for small businesses are quite flexible – these knitting-pattern entrepreneurs won’t need to adopt military-grade encryption, but they will need to at least try to keep their customers’ data safe, as any small business should. Whether criminals see a hacking opportunity in all the personal information that will now be stored by individuals with minimal security expertise, is another matter.
Why do you keep mentioning the U.K.?
Partly because the U.K.’s relatively high VAT threshold means this will have more of an effect there – more micro-businesses will be dragged into the VAT-collection game for the first time — and partly because that’s where people have made the most noise about this. So far.
Last month, people in the U.K. first started shouting about the changes using the #VATMOSS hashtag, but as the British campaigners have realized that micro-businesses will be hit across the EU, they have now set up an EU VAT Action pressure group (which provides loads of useful information for those who need details.)
But could the effects hit even further afield? A rather worrying sign can be found in changes that were made earlier this month to the terms and conditions of [company]Google[/company]’s Helpouts platform, which gives people a way to offer expert advice services through the Hangouts facility. As of December 3rd, the site tells users: “Providers from Ireland or the United Kingdom may only offer free Helpouts. Customers in the EU may only take free Helpouts.”
Meanwhile, the T&Cs for U.S. Helpouts providers now state: “You may not provide Helpouts for a fee to customers within the European Union. All Helpouts which are provided to customers within the European Union must be provided free of charge.” It seems Google thinks these changes are a reason to steer clear of paid-for person-to-person services in the EU altogether.
Woah. Is that justified?
Arguably not, because – in one of the weirder specificities of these rules that were designed over six years ago – live webinars aren’t covered by the changes (but recorded webinars are.) The new rules are also only supposed to affect companies based in the EU, but then again Google and other big U.S. firms tend to run their international operations out of EU subsidiaries. I asked Google to explain why it made the changes, but it has refused to do so.
The one thing that is clear is that there’s still a lot of confusion, despite the long run-up to the changes. Unfortunately, this has led to a lot of people fearing for the future of their small businesses, as they contemplate questions like: “If you decide to comply with ?#?VATMOSS???? and you sell a bundle which includes a digital download and a physical product, will you have to report the physical part of that little sale to the U.K. and the digital part to another country?” (Answer: Probably.)
Some experts have even advised no longer selling services into other European countries – a suggestion that at the very least flies in the face of the EU’s precious Digital Single Market project, and that may even contravene EU anti-discrimination rules.
So what’s a poor micro-business or seed-stage startup to do? Read the extremely lengthy guidelines about what’s affected and what’s not, and go shout at some politicians and tax authorities.
As it happens, the EU VAT Action group began a Twitterstorm on Tuesday using the #EUVAT hashtag, calling on the European Commission to suspend the introduction of the new rules for micro-businesses and sole traders. Given the fact that the rules could kill off swathes of the small entrepreneurial digital sector — which the Commission is supposedly trying to stimulate — that may be a good idea.
UPDATE (3am PT): Just thought it might be worth throwing in a few of the tweets people have been publishing today, demonstrating the urgency of the situation:
UPDATE (3.05am PT): The Commission has responded … by saying there’s no problem. Financial Affairs, Taxation and Customs spokesperson Vanessa Mock just emailed this statement:
The Commission believes the administrative burden is bearable also for the smallest online businesses. The changes imply that each business including micro businesses need to know the country of their customer: this could be established eg. by IP address, invoicing address, bank card issuing country, (the possible sources are listed in an EU VAT implementing regulation). Then based on the country of the customer the VAT rate needs to be selected for that country. The list of VAT applicable rates is provided by the Commission on its website. Finally they have to declare sales per country to their [local] tax authority.
UPDATE (3.25am PT): And now Andrus Ansip, the Commission vice president for the digital single market, has published a blog post on the matter. In it, he said that “even if the concerns come late, they should be listened to,” and that he trusts that payments processors will start giving businesses the information they need for compliance.
“Small innovative online companies matter to me,” he wrote. “I want you to have the necessary space to grow into successful businesses and to trade across borders. But I also see the merits in the upcoming VAT change. Support for e-commerce will be at the heart of our strategy for the #DigitalSingleMarket that is planned next spring.”