Business

31 March 2015

VAT rule threatens small business 

In theory, the current economic environment should be more favorable to smaller digital businesses – growth is gaining momentum and lending to small companies is getting easier. There is concern, however, that new EU rules for value-added tax on digital services threaten the existence of thousands of small businesses.

Smaller digital businesses are viewed as an important jigsaw piece of the economic recovery puzzle. Earnings have started to improve and fund managers who invest in small companies say their leaders see a brighter outlook ahead, but EU tax changes introduced at the beginning of the year are casting a shadow.

 A shift in the VAT rate imposed on electronic transactions, from the country of the seller to that of the customer, was primarily intended to remove the advantage of online retailers whose European businesses are in lower-rate countries, notably Luxembourg.

 The new rules also mean that in the UK and elsewhere, smaller businesses that previously operated below the VAT threshold must now levy the tax on digital sales in other EU countries, adding greatly to their administrative burden. As many as 200,000 companies are estimated to have registered for VAT for the first time, and some say it renders their businesses untenable.

 Pressure group EU VAT Action says that thousands of the smallest UK businesses are unable to comply with the requirements, including having to keep customer data for 10 years, and Prime Minister David Cameron, as well as leading European Parliament members, have promised to press the EU Commission for a general exemption for microbusinesses.