A word on VAT and the VATMESS

The whole point of this post is to get you to click on this link so you can join the attempt to stop a poorly-designed piece of legislation damaging small businesses and creators. Don’t feel like you need to read any further if you’re busy, just click the link, sign the petition, write to your MP and MEP, talk on social media or whatever. This isn’t malicious legislation designed to force small businesses and sole traders out of business, it’s badly designed legislation which didn’t consider real world ramifications because not enough people were talking about it. It will only get fixed if enough people start talking about it.

A quick disclaimer: this is not intended as legal or accounting advice – I’m not qualified to offer that. More a précis of the situation as it looks from here.

What’s happening with VAT, and why is everyone so mad?

If you’re ever asked for an example of legislation that had really good intentions, but was terribly implemented, you’ve got a ready made example right here (and you need to go to better parties). The new EU VAT legislation was designed to clamp down on tax-avoidance by mega-companies: making it harder for them to funnel sales through low-tax jurisdictions & ensuring that they contribute more to the economies in which their sales are made. This is a good idea, badly implemented.

The poorly designed bit

In the UK there is an exemption for businesses trading at a certain level. If you’re turning over less than the threshold (which will be £81,000 on the 1st of January 2015, when the new rules come in) you’re not obliged to register for VAT. This is good news for small businesses – the administrative burden of complying with VAT regulations in the UK isn’t especially onerous for a company once it reaches a certain size, but it’s a problem for companies with very limited resources. A one-person band, creating their art and selling it for a song, is not going to have the financial firepower to hire an accountant or respond to VAT queries. They also don’t need the quarterly ritual of collecting bank statements and sifting through to complete a return. There are some tools which make it simpler (we use Freeagent to keep our books in order, and it’s great), but if that costs £20-25 a month, and you’re right on the breadline, it’s another cost you can do without. A VAT exemption threshold for small businesses is a good thing, is what I’m saying.

After the new regulations are introduced, you won’t be able to take advantage of the threshold if you’re making sales of certain digital items (ebooks etc) elsewhere in the EU. The failure to agree, when crafting the legislation, on a similar low-turnover threshold throughout the system leaves thousands of small businesses with an added administrative and tax burden that’s potentially crippling.

How can I get around this?!

Well you can’t. Not really. It is, after all, a change that was designed to close a tax loophole. However poorly designed it is one thing that you can say for it is that’s it’s pretty darned effective at achieving that key aim…

You could:

  • Stop selling affected products outside of the UK – assuming that you can afford to lose the revenue and have a robust method for preventing people outside the UK using your online shop (which, let’s be honest, you can’t and don’t).
  • Stop selling digital products outside the UK and insist that only physical copies can be shipped overseas – again, assuming you can handle the lost revenue & increased cost of postage, as well as having that robust method of controlling purchase types. It’s also worth bearing in mind that this will only buy you a year: from January 2016 the new regulations will be extended to cover physical products as well.
  • Break the law and hope nobody notices (which is not recommended because obviously it’s not).
  • Cease trading.

None of which are very palatable options.

Thus far the HMRC response to the changes has been a little… shall we say “lacklustre”? They’ve set up the VAT Mini One Stop Shop (VATMOSS), which it should be said is very good as far as it goes, since it removes the admin involved in registering for VAT in each of the EU jurisdictions by hand, but that’s about it. The threshold is still gone – if you’re trading in the EU outside the UK you’ll need to register & complete the returns every quarter no matter the number of sales you’re making, the overall percentage of your sales made outside the UK, or the overall turnover of your business. Your record-keeping will necessarily become more finicky, with more time needed to keep everything in order, which takes away from time you should be spending on your actual work. You’ll also obviously be losing revenue that you’d previously been keeping, since you’ll be charging VAT on all your digital products from now on. In the medium term that will raise prices across the board, and in the long term may even have an impact on the viability of the market.

What strikes me as most unfair is that the tax take from the thousands of small business operators who are currently having conniptions about these changes is, let’s be honest, going to be really small. The heads of the corporations this legislation was designed to bring into line aren’t having the sleepless nights here.

What can I do?

Right at this moment – not a lot. That’s why people are so worried and angry. It should be noted that there are murmurings in the news that the HMRC and government at large are beginning to take notice, and that this could lead to the situation being revisited. The most sensible option for the various governments of the EU would probably be to introduce a cross-border threshold beneath which VAT registration isn’t necessary (only Malta, Spain and Sweden have no such threshold in place already). Whether that will happen or not is up for debate, although looking at it objectively there’s no benefit to a government or tax authority which currently has a threshold in shutting down businesses of any size. This is why I said at the top of the page that this looks more like a good idea badly implemented than a malicious attack on small traders – not enough people were consulted, too few case studies were considered, and the average small business’s familiarity with the nuances of debate on tax systems was over-estimated. These changes are potentially hugely damaging to the creative and digital industries at a ground level, and even at this late stage it’s well worth a few clicks to try and have an impact. At the time of posting the petition was in need of another 976 signatures just to reach 5000. Please consider signing to get it over the line.

Either that, or get ready to at least partially shut up shop on digital sales come the new year.

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