By Peter Gunning, Chief Technology Officer, Nettl.com

The new EU rule change to VAT, which came into force at the start of this year, means British customers now face a 20% sales tax on digital products.

But how do these changes to legislation affect small businesses?

Well, any small businesses that sells digital services, such as e-books, online courses, or downloads, to other European countries are directly affected. HM Revenue & Customs have estimated that the new rules will affect over 34,000 small businesses in the UK.

VAT is now charged in the country where the products are bought, as opposed to the country where the seller is located. These companies must adhere to the new rules or face penalties. Many businesses have voiced concerns about this - with some saying it could even force them to close.

UK businesses were previously exempt from paying VAT if they sold under £81,000 worth of products a year. Those selling to customers in the UK can still trade VAT free if they are below that threshold. However if they sell digital services to EU customers outside the UK they will now be subject to the local VAT in that country.

The new rules require small businesses to prove the place of supply, creating extra administration costs for business owners.

We suspect the legislation was created to harmonise taxes across the continent and curb the benefits for large companies diverting sales through low-tax states. Current standard VAT rates in the 28 EU member states vary widely. The changes will level the playing field and are thought to have a particularly profound effect on e-books and music downloads, upon which VAT rates vary widely throughout Europe.

Large suppliers such as Amazon and iTunes are known to house their businesses in Luxembourg, benefiting from a lower VAT rate, while the UK charges a higher rate. The UK Treasury is likely to benefit from this legislative change, but it will be the smaller businesses and suppliers that could lose out. It’s also possible that consumers will see increased prices as some of the extra VAT cost is passed on.

So what can affected businesses do? We recommend that businesses who are most adversely affected speak urgently to their web agency and look for ways to upgrade their existing e-commerce facilities to comply with the new legislation.

In an ideal scenario, businesses should be asking for upgrades to their online facility - to not only give their customers transparent and accurate VAT costs based on their location, but also looking for ways of recording and storing data which is an essential requirement in order to register for MOSS – the HMRC’s new “mini one stop shop” scheme set up to enable businesses to comply with the new VAT rules.