Could new VAT regulations threaten micro businesses?

In the last few years more and more small businesses have turned to the online world to sell their products. However, the EU is set to cause problems for this microbusiness internet commerce with the introduction of its new EU VAT regulations that will come in to affect from January.

Micro-businesses are protesting against the new VAT laws as they believe it could force them to reconsider trading in Europe.

From the 1st January 2015 EU VAT will be charged in the country where the products are bought as opposed to the country where they are sold. However, this legislation applies to digital products online, including e-books, online courses or downloads and much more.

The current law at the moment means UK businesses are exempt from paying VAT if they sell under £81,000 worth of products a year. This threshold is set to be removed for those exporting digital products and services to Europe from New Year’s Day.

If a UK business makes a sale in another EU member state they will have to pay VAT there. The only way to comply with these rules is either to register for VAT with that country or register for HMRC’S Mini One Stop Shop scheme (VAT MOSS). This scheme requires businesses to submit a single calendar quarterly return and VAT payment to HMRC. This information and payment is then sent to each relevant member state’s tax authority.

HMRC have now confirmed that these changes will be enforced and have gone as far as to produce official flow charts explaining the impact. All sellers of digital items will be affected in some way!

It doesn’t matter what digital item you are making and selling – from independently produced computer games, online courses or mp3s from musicians – you will still have to familiarise yourself with the new VAT tax regime.

It is predicted that some small businesses and especially microbusinesses will have to shut down. Anyone wanting to sell into the EU will also have to comply with the rules.

The new VAT procedure was intended as a way to prevent internet giants such as Amazon from avoiding VAT charges by basing themselves in Luxembourg. Instead of this intended effect it has put increasing pressure on small and micro sized businesses meaning that some will be forced to sell their e-products via larger platforms such as Amazon, eBay and Apple – essentially reinforcing the online giants that they intended to target.

Amanda Tickel from KPMG UK advises small businesses to work out whether it is financially worthwhile for them to trade in certain countries. She adds that ‘UK-based micro-businesses selling digital services into EU countries should do a careful cost-benefit analysis.”

How will the new EU VAT regulations affect your small business? We want to know!

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Kara Copple
An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.