Tax new year nightmare for small online firms

28/11/2014

If you’re creating digital content or services that are sold to consumers, Europe’s 2015 tax laws will be a crushing blow for small businesses as they become forced to adopt the tax position of the countries where their target consumers are buying from. Here’s why…

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From 1 January 2015, VAT rules for sales of telecoms, broadcasting and e-services to EU consumers are changing. This means that VAT will no longer be charged and accounted for based on where the business supplier is established but according to the EU country where the customer belongs.

The place of supply of electronic services to non-business customers is currently determined by reference to where the supplier belongs for VAT purposes. However, from 1 January 2015 the place of supply will shift to the place where the customer belongs. This means that VAT will be due in the customer's member state.

The changes will apply to all business involved in the supply of telecommunications services, television and radio broadcasting services, other electronic services such as web-based services, digital music, video downloads,and supplies of e-books.

Commenting on the VAT changes, Danny Meadows-Klue, CEO of Digital Strategy Consulting, said: “In seeking to harmonise European processes, the European Commission has dealt a massive blow to any content or service provider”, explains Danny Meadows-Klue, CEO of the Digital Strategy Consulting group. “Small creative industry firms simply won’t be able to manage the paperwork for dealing with tax compliance across so many markets. The UK will be particularly heavily impacted because of the vibrant digital content and gaming industries.”

“Digital channels have created new types of business models and opportunities for entrepreneurs. The Commission completely missed an opportunity to protect smaller creative industry firms from the burden of paperwork that will simply be unmanageable for many”.

With just over a month until the chnages come into place, a recent survey from KPMG suggests that the majority of SMEs are unaware of New Year VAT changes and penalties.

The report found that six in ten small businesses (those with less than £10m turnover) are unaware of radical reforms to European VAT rules that will affect the supply of telecoms, broadcasting and electronic services.

Key findings from the report:

· Nearly two thirds of smaller businesses unaware of radical new VAT rules coming in from 1 Jan 2015 which will affect them directly

· Three quarters of businesses affected by new rules said they were planning to raise prices in response to them

· Businesses may restrict certain sales into some EU countries as a result of the VAT rule changes

· Three quarters of businesses considering price hikes as a result of the changes

The survey also revealed that 75 percent of respondents were considering raising their prices as a result of these new tax rules. More than half (53 percent) were predicting price rises of between 2 and 3 percent, but over a quarter (26 percent) indicated increases of 5 percent or more.

Indeed, according to KPMG’s calculations, if affected businesses chose to pass on all the additional costs of complying with these new rules as well as the uplift in VAT itself, this would result in a price increase of up to 11 percent for affected services, particularly those sold to customers in EU countries with the highest VAT rates.

But the changes should be good news for the UK economy which is set to benefit by around £300m. This is because the VAT collected from UK customers will belong to the UK Treasury, rather than to the country where the supplier is established. Amanda Tickel, Tax Partner at KPMG in the UK, explains:

Businesses may restrict certain sales some countries as a result of the VAT rule changes

The survey suggests that, for some businesses, the answer to handling the compliance burden associated with the changes to the VAT rules may be to stop selling to certain customers altogether as the results revealed that over a quarter (28 percent) of affected businesses are considering limiting sales in particular EU member states in order to reduce their compliance burden.

There are a number of ways businesses can report and pay the VAT under the new rules: through local registrations, outsourcing to a third party, or via the ‘mini one stop shop,’ an online service through which businesses can register for VAT in one country and account for VAT on supplies to customers in other member states.

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