An estimate by HM Revenue & Customs (HMRC) that 5,000 small businesses would be hit by changes to EU VAT rules should, says DAN MARTIN, have been 350,574 companies, according to a new report.
The claim is made in a research document published by small business network Enterprise Nation which looks at the impact of regulation introduced on January 1 requiring companies selling certain digital products and services to charge the appropriate of amount of VAT applicable to the EU country in which they are purchased.
According to the study, a year before the rules were due to come into force an HMRC investigation put the figure of non-VAT registered firms likely to be affected at 5,000.
But Department for Business, Innovation and Skills figures showed the number of non-VAT registered firms trading in digital products is 350,574, a statistic which did not inform HMRC research.
As a result, Enterprise Nation claims thousands of companies did not find out they were affected until a few weeks until the law was implemented.
It also meant there was a lack of awareness amongst the marketplaces such as Etsy that had been empowered to offer a solution to those affected which caused “chaos”, the report claimed.
HMRC was expecting its Mini One Stop Shop (MOSS) to solve the problem for most, i.e. those above the UK’s £81,000 turnover VAT threshold, but, in fact, the study revealed eight out of 10 digital micro businesses fall below the UK VAT threshold.
Emma Jones, founder of Enterprise Nation said: “The EU VAT regulations caused havoc in the digital small business community. If details of the new charges and reporting responsibilities had been communicated earlier, we’re sure there could not only have been more opportunity to make amendments to the bill, but that a thoughtful entrepreneurial solution to the problem could have been developed sooner.
“As it was, not even the marketplaces themselves had prepared new software or worked out the logistics and finances.
“Micro enterprises are a hugely important contributor to the economic growth and innovation and their functioning should be stimulated, not hindered. As they stand, these new rules make it attractive for small firms to cease trade with Europe so instead of facilitating the integration of the internal market the VAT tax reform may actually aid its fragmentation.”
Campaigners such as the EU VAT Action Group have called for a minimum VAT threshold across Europe but Jones said “that may well be some way off, partly because other European countries have never had a threshold at all.”
The report called for a “private sector led and tech enabled solution” to help small businesses comply with the regulations.