How the EU is strangling small businesses

Over the next couple of years, the EU is set to shut down as many as 100,000 small businesses across Europe.

This is not because they are cheating on their taxes – far from it, it is compliance which is shutting them down.

This is not because they are old, dying trades – far from it, the more high-tech they are, the harder they are hit.

The simple reason is that the VAT system has changed such that many, perhaps most, smaller businesses will no longer be able to trade legally, or they will have to hand over selling and fulfilment to giants like Amazon. Yet the whole reason behind these changes is to try to remove the advantage that giants like Amazon had over the EU tax system.

Before 2015, when selling intangible products like digital books, music, movies, or software to end users, a business trading in the EU followed VAT law in the state from which it traded. So if I bought an app from a French company, they would charge French VAT, and their business accounts would render that to the French tax authority. That worked well for small businesses, as in the UK at least they would not have to charge VAT unless they were turning over sufficient to become VAT registered, currently over £80,000 per year. So startups and small enterprises would be spared the onus of VAT accounts.

The snag with this was that large companies, which could choose the state in which they were deemed to do business, inevitably chose to do so from EU member states which had the most favourable tax laws. And if a business based itself for tax purposes in Luxembourg, selling £10 million pounds worth of products to UK customers, the UK lost out on that tax revenue.

So the answer seemed simple: make VAT payable according to the state in which the purchaser is resident. So if I, trading in the UK, sell you, resident in Spain, a copy of my electronic book, I charge you Spanish VAT at the current Spanish rate, and pay it to the Spanish tax authority.

This is fine if your turnover is large enough to employ full-time accountants, and to use a bespoke accounting system. Indeed, the tax authorities throughout Europe have even provided a simplified and unified system called the ‘Mini One Stop Shop’ or MOSS to assist. Unfortunately in order to use that service, you have to be VAT registered,* with all the overhead that entails. And even if you are VAT registered, there are complex and onerous requirements that you must satisfy, for example to ascertain and account for the residence of each customer.

But there is no small business threshold, as there was with VAT registration. This is because the VAT system across Europe is as unified and uniform as a pub brawl: some countries have no threshold below which businesses are exempt VAT, each country has its own rates, which change independently of one another, and different types of goods have different VAT rates in different countries.

The upshot is that, in the UK alone, tens of thousands of small, vivacious, often high-tech, companies are now having to decide whether to operate outside the law and face prosecution, or are having to cease all sales of electronic products. You can read horrific accounts of the problems at Heather Burns’ blog, for example. If you don’t believe either of us, try any of the hundreds of thousands of hits that the search engines now return for terms like ‘VAT MOSS’.

If this seems bad this year, under the EU’s dumb juggernaut of change, from 1 January 2016 it will apply to all products. So if you sell your knitwear, self-designed T-shirts, or paintings outside the UK, even just a few items a year, you will have to register for MOSS and account to it under its infernally complex rules. This will bring a further tranche of tens of thousands of UK small businesses to the point where they have to choose between operating illegally, or stopping all sales.

The third option is the one that giants like Amazon are really relishing, though. It is to hand over your business to one of those giants, to help swell its profits, and grow its domination over trade. Which is not, I hope, what our Eurocrats intended.

* although UK HMRC have relaxed this, in truth they have made the system even more complex. Under the ‘relaxed’ rules, UK businesses which are below the UK threshold for VAT registration but which require the MOSS service can operate MOSS and charge VAT to the whole of the rest of the EU, but can operate as non-registered for UK VAT. Simple, isn’t it not?