By Nick Leech, digital director, 123-reg.co.uk
The 1st January 2015 saw the introduction of a new EU law that will affect any company operating online. Any online-only company that wants to sell to a consumer in a country within the Union is now required to pay VAT in its country of origin, instead of the country the buyer is located in. This means anyone selling digital products that doesn’t require direct human interaction is liable – regardless of whether the company is based in the EU or not.
While the new rule is designed to stop large corporations from avoiding tax, it also affects small businesses doing business online in Europe. These small businesses could become liable for VAT in foreign countries, including those U.K. businesses with a revenue of £81,000 or less, who were previously exempt from registration.
To help small businesses, the VAT Mini One Stop Shop (VATMOSS) has been created to allow U.K. businesses to register for VAT in one place, rather than in every country in which they operate. VATMOSS, however, includes the business’ home country, meaning that all of the U.K. businesses that were previously VAT exempt will now have to register if they plan to sell in the broader European region and potentially become liable for extra taxation. Additionally, two further pieces of information will need to be collected for each customer to prove where they are located – a feat that’s not necessarily easy for a small business to incorporate into its invoice and charging processes.
The new VAT law provides affected businesses with two main options if they want to continue trading in the EU. The first is to register in each country and file accounts, which enables them to remain exempt in their own countries. Or businesses can apply for VATMOSS and then run the risk of being taxed in their own countries and therefore face the requirement to change their charging processes… So which is the best option?
Realistically that depends on the size of the business and the amount of trade that will be done with consumers in other European countries. If the company is growing fast and largely reliant on customers from a wide range of countries, then VATMOSS may be the simplest option as it will make the reporting process easier. However, if the business only does intermittent trade or only does so with one or two countries, it may be simpler to just register with those countries.
While it would require you to submit reports directly to that country, it would mean you do not have to register for VAT in your home country if you’re still under the threshold.
There are also a few alternative options for small businesses that are willing to take a slightly more radical approach in addressing the changes:
Don’t sell in the EU It’s the simplest but potentially the most restrictive option. To avoid having to register or be liable for VAT, businesses can simply not trade outside of their home country or focus outside the EU, though this obviously restricts the international trade that the EEC and European Union was created to support.
Become more personal
Any business that provides a service electronically, such as automated downloads or access to software without human interaction is liable, meaning incorporating a human element can remove that liability. For example an e-book supplier could send it to the customer via a direct email rather than a download, or even physically on a disc.
Switch focus to B2B Business-to-business firms are not liable for the VAT law. It may be a drastic policy, but if your business is in its early stages and there is an option to change the focus purely to other businesses, it allows you to continue trading in Europe without the additional costs.
There’s no doubt the new VAT law has meant small online businesses trading within the EU will have to change their processes. However, they do not have to suffer as a result. There are several options on the table to suit different business plans. Businesses need to ask themselves what is most important to them – changing their recording and purchasing processes or operating with a couple foreign revenue streams. Once this question is answered, companies can easily navigate the VAT challenge and continue trading in a way that makes the most sense for their business.