Potential repercussions of the new VAT regulations
As of January 1st VAT laws changed in the EU. Prior to 2015 VAT was applied in the country where the product was sold. However, laws have changed and now EU VAT will be charged in the country where products are bought. This legislation applies to digital products only, i.e. downloads, online courses and e-books.
The reason for this new tax law is to try and crack down on major corporations such as the likes of Amazon and Google. Large international companies are often accused of funnelling EU sales through Luxembourg, which has a low level of VAT. However, whilst this tax has been designed to deal with multi-national corporations, it is the SMEs that could actually suffer. It’s predicted that anything from 30,000 to 460,000 small to medium enterprises could be affected by this new law.
Instead of dealing with one VAT rate, companies are now going to have to deal with 75 different VAT rates in 28 different countries. If someone buys your product and they are based in Germany for example, you will now be charged the VAT rate in Germany.
The Impact of New VAT Regulations on SMEs
So, why will this impact SMEs in particular and what considerations are there when it comes to VAT for small businesses? Well, prior to the new legislation, businesses were exempt from registering for UK VAT if they had a turnover that was less than £81,000 per annum. However, as soon as a business registers to pay VAT in another country, which they will need to do if they are selling outside of the UK, they will lose this exemption. This means that businesses will now end up paying VAT on virtually every product they sell, even if it’s a mere £1 they make. Needless to say, this could lead to a significant increase in costs and can really damage profit levels.
There is one good thing and this is the fact that you will not have to register in each country one-by-one, as HMRC have introduced VAT MOSS, i.e. a VAT Mini One Stop Shop. However, you will need to comply with data protection records and you will still need to maintain VAT records, therefore administration either for you or your accountants will increase.
There is another difficulty as well and this is the fact that it can be tough to know where the customer is actually located. After all, your product is being downloaded online and you are not sending them anything physically, so there is no need for an address. If you allow people to pay for your products via PayPal you may only have an email and this makes the sale process less clear cut.
What is the best option for SMEs
Unfortunately, what all of this means for small businesses is they essentially need to talk to their accountant to determine the best option for them in terms of taking the smallest hit. Would it be better to pay an extra 20 per cent on all earnings in the UK? Or, would it be better to lose sales from Europe and therefore be exempt from UK VAT? A difficult choice and one, obviously, dependent on the type of business and the predominant customer base, but you need to act quickly with the new regulations already in place.
We are chartered accountants in North London so talk to us now on 020 8458 8727 if you need help with this or any other aspect of the VAT regulations.