By Daniel Hunter

Small businesses in the UK and across the European Union are being excluded from operating on a cross-border basis because the VAT system in the UK and other member states is so complicated, says the Association of Chartered Certified Accountants (ACCA).

To mark 40 years of VAT in the UK, ACCA has produced a report looking in-depth at the tax which points out that the various VAT rates and exclusions in each EU member state means that most small businesses are excluded from the single market by the complexities of accounting for VAT across what are soon to be 29 member states, as well as by the number of languages involved.

“VAT was supposed to be simple. In the UK alone it has become a complicated tax, but when you add in the various rates and exclusions that apply in the EU it becomes a maze," Chas Roy-Chowdhury, ACCA head of taxation, said.

"The real losers in this are small businesses and consumers. Efforts to increase SME exports in the UK will always be stifled by the burden of the various VAT rates and exemptions across the EU. It is the most business-unfriendly tax there is, while consumers are forced to pay higher prices for the instances of double taxation.

“It is encouraging that the EU Commission is trying hard to get member states to focus serious attention on the problems that exist. The Commission is trying to make the necessary VAT information available over the internet in multiple languages so that SMEs can more readily assess whether it is viable for them to operate outside their own home market. However, more needs to be done to ensure VAT is not a bar to operating on a cross-border basis for smaller businesses.”

ACCA points out that rates vastly vary from country-to-country with Hungary charging 27 per cent VAT, while Luxembourg sets VAT at 15 per cent. However, ACCA says in its report the real problem lies in the plethora of reduced rates and exemptions which causes problems. A harmonised system for reduced rates at a common, low level would not only help reduce the complexity for small businesses, but would also reduce the opportunity for tax fraud and litigation.

“Fraudsters have taken advantage of the multi-layered nature of VAT. They have found ways of obtaining a VAT refund without paying VAT themselves; they then disappear before the tax authorities can catch up with them. This is the so-called ‘missing trader’ fraud problem," Chas Roy-Chowdhury said.

"One simple way to stop compliant traders from being duped into trading with such fraudsters is by keeping them informed of high-risk businesses. That is, actually giving them names and details of these fraudulent businesses so that if the innocent business encounters them, its managers will know not to trade. The UK tax authorities are very good at passing on this type of information but in many other member states even if the information is known by the tax authorities it is not generally passed on.”

ACCA says that had the euro-zone crisis not happened there is a chance VAT would have disappeared before the next 40th anniversary of the tax. But having seen the way that politicians have ignored the markets during the euro crisis it’s likely they will ignore any defects in the VAT system and it will still be around for another 40 years.

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