No EU Threshold for VAT on Intra-Community Digital Services – Small UK Businesses Shoulder Steep Compliance Costs

Last December, the BBNA International Tax Blog reported that the U.K. tax authority, HM Revenue & Customs (HMRC), provided limited succour to small businesses facing a steep compliance burden due to new value-added tax (VAT) rules on the supply of digital services to non-business customers within the European Union (EU). These rules came into force in January. HMRC clarified that although small U.K. businesses would have to register for VAT in order to account for intra-Community supplies of digital services – e.g. e-books, PDF downloads, software, music, games and pre-recorded online courses – they would not be required to charge VAT on services to U.K. purchasers if their taxable turnover did not exceed the U.K. threshold of GBP 81,000.

Nonetheless, the reporting burden for small businesses remains steep, and critics argue that HMRC has failed to provide much needed assistance in helping these traders to comply with complex new requirements. Furthermore, the European Commission has declined to revisit the issue of introducing a registration threshold for intra-EU digital services to final customers.

The International Tax Blog addressed the concerns of small businesses here.

In sum, under the new rules, businesses must either register with the U.K. ‘Mini One Stop Shop’ (MOSS) VAT portal to report all supplies in the U.K., or must register with each Member State where their non-business customers reside.

The new rules were designed primarily to prevent internet giants from gaining an unfair competitive advantage by basing themselves in EU jurisdictions with low VAT rates. However, these rules also have the effect of drawing many U.K. small businesses into the VAT net for the first time. This is because, in order to register for the MOSS – often, the only practical way to comply with the new rules – the businesses must first register for U.K. VAT.

Small businesses protested, and HMRC responded with guidance clarifying that businesses with turnover below the U.K. VAT threshold can register for U.K. VAT, and for the MOSS without having to account for, and pay VAT on sales to U.K. customers. Nonetheless, registered businesses must still file U.K. VAT quarterly returns and must also declare any supplies of digital services to EU non-business customers on a quarterly VAT MOSS return.
In response, a U.K. grassroots organization mobilized as the EU VAT Action Team, and lobbied the EU Commission to suspend the new EU VAT laws for small businesses and sole-traders.

Last month, two U.K. Members of the European Parliament submitted a request to the European Commission to consider introducing a registration threshold for EU digital supplies non-business customers. However, the EU Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovi, indicated that this proposal, which the EU had previously considered, and rejected, will not be considered further.

The response of the European Commission is not surprising, said Rita de la Feria, Professor of Tax Law at Durham University, and Program Director at the Oxford University Centre for Business Taxation, who has written and advised governments extensively on VAT. “The European Commission knew they were never going to get the 28 Member States to agree to a threshold for digital services,” she explained.

Professor de la Feria pointed out that the domestic registration thresholds vary widely across Europe — reflecting Members States’ differing policy objectives with respect to VAT. Sweden, for example, has a registration threshold of zero. These differences, she explained, “reflect a very different perspective on how you organize your economy. The U.K. does not include small traders because it makes no sense from an administrative efficiency perspective to go after them. Other Member States say that they have so many small traders that if you excluded them, it would lead to too many economic distortions.”

Given, therefore, that the zero-threshold for intra-EU supplies of digital services was non-negotiable, Professor de la Feria argues that HMRC should have anticipated the implications for its small business community, and helped them to prepare for the new requirements.

“No one at HMRC said to small businesses, ‘Be prepared for this, and here is how we can help you.’ How simple would it have been for HMRC to build compliance software for small businesses? A lot of the people affected by the new rules run businesses from their homes or garages. They have never had to deal with VAT at all. What I find staggering about all of this is that HMRC had eight years to prepare, and they seem to have seen it coming.”

By Joanna Norland 

Joanna Norland joined Bloomberg BNA's London office in 2014 after a ten-year career as a tax attorney and advisor with the London offices of Allen & Overy LLP, Withers LLP and PwC. She holds a J.D. from Yale Law School. Prior to law school, she worked as a freelance journalist and columnist for a number of US and Canadian newspapers and magazines.