Recent legislation, which came into force at the start of the year, is under scrutiny as it has impacted smaller businesses trading across EU borders. Many such businesses have had to stop trading outside the UK (and other 'home' states), due to the financial and administrative complexity involved in compliance with the new laws; which now mean that VAT is charged where products are bought as opposed to where the seller is located.
The intention of the new laws was to prevent large companies avoiding higher VAT rates, by basing themselves in countries with lower VAT rates - such as Luxembourg. However, the adverse consequences on smaller businesses have led to the European Commission launching a consultation and promising measures such as an EU wide VAT threshold for start-up e-commerce businesses.
The public consultation, which runs until 18 December 2015, is aimed at:
- simplifying VAT treatment on all cross-border e-commerce transactions in the EU; and
- reviewing the success of the new rules that apply to telecommunications, broadcasting and electronic services.
Changes to the treatment of VAT were implemented in relation to telecommunications, broadcasting and electronic services transactions from 1 January 2015. In addition to the new "place of supply" rules, that have been applied to VAT on e-commerce transactions (meaning VAT is charged where the customer is located, as opposed to where the supplier is based), an electronic payment system called the "Mini One Stop Shop" (MOSS) has been implemented. MOSS has the aim of reducing costs and administrative burdens for businesses having to comply with the new legislation.
Together, the changes were intended to mean a fairer distribution of VAT revenues occurring across Member States and to prevent multi-national companies exploiting lower VAT rates in certain EU tax havens.
The reality is that the current VAT system for e-commerce activities within the EU has a number of key issues, including:
High complexity: businesses that trade internationally face different VAT treatment depending on the Member State they are supplying to, they now have to comply with different national legislation in each state. In addition, they can face audits from tax administrators in each state they supply to.
High costs: given the complexity of VAT rules, the cost of compliance is high; businesses must factor in registration costs (in each state), appointing fiscal representatives, professional advice, VAT returns and so on.
Unlevel playing field between EU and non-EU businesses: the same goods purchased in an EU country can have different tax treatments depending on the location of the supplier. The current rules actually put EU businesses at a disadvantage against non-EU suppliers as non-EU suppliers benefit from a VAT exemption that does not apply to EU suppliers.
Compliance challenges: different rules in different states lead to uncertainty about the correct tax treatment, which inevitably leads to mis-declaration and even abuse of the current VAT structure.
These issues represent a significant barrier to entry to the e-commerce market, particularly for smaller businesses.
Following the consultation, possible improvements to the EU VAT regime for e-commerce should include:
- Fair and even distribution of VAT revenues from the digital economy.
- Making it easier to comply with the rules, especially for smaller businesses trading across EU borders.
- Allowing audits only by the home country of a business and not by other Member States
- Making the VAT regime reflect the reality of business across the EU now and in the future.
Unless and until the European Commission simplifies the VAT regime for smaller businesses, the current legislation represents a significant barrier to entry and smaller EU businesses are at a disadvantage against non-EU competition. Urgent change is required to reduce the complexity (and subsequent cost) of compliance: the European Commission should, in the first instance, level the playing field for EU-based businesses by implementing a VAT threshold, meaning the new legislation wouldn't apply to smaller and start-up e-commerce businesses.