New EU VAT regulations could end up being extremely onerous for early-stage tech startups and could drastically slow sales of digital products in the 28-member state block. The new rules are an attempt to curb the big web giants like Amazon, Google and Twitter from funneling all EU sales through Low-VAT Luxembourg. But with no threshold to exempt tiny small businesses – including startups – all the red tape and regulation which a big company can easily afford will be levied on seed-stage startups as well.
The new rules have sparked a UK campaign to get an exemption for small businesses.
From 1st January 2015 in the European Union, VAT liability will switch from the country where the product is sold to the country where the consumer buys it. But the rules will only apply to digital products such as ebooks, e-courses, recorded training videos, music or audio downloads etc.
This means digital businesses – ones which have been lauded and encouraged by almost every EU state for the last 5 years – will be penalised, while other types of small businesses shifting around physical goods are completely unaffected.
One light on the horizon is that the new law won’t apply to downloads from app-stores or other portals. Sources at the UK’s BIS department told us: “After strong lobbying from the UK, the EU agreed to ensure that app stores or other internet portals will normally be responsible for accounting for the VAT on downloads to consumers, which will simplify accounting for many small businesses and prevent many of them from needing to register in other member states or for the mini one stop shop.”
But businesses run by a single person (‘sole trader’) will be particularly hard hit.
People and companies that sell digital products will have to record the location of the buyer when they bought the product – often impossible or simply a huge downward friction on sales.
They will also have to hold that data for 10 years under the Data Protection Act.
Realistically, few small businesses at an early stage do this, and many tech companies only require a PayPal address, not a real address.
To charge VAT on a product in the country where the buyer is, the company will have to be registered for VAT in that country. There are 28 countries in the EU with 75 rates of VAT, so seller of digital products would need to be registered in every country where someone buys their products.
A work-around, is that companies will be able to use something called a ‘Mini One Stop Shop’ (“VAT MOSS”) by registering for VAT in the UK. This then distributes the VAT money to the rest of the EU states.
However, the requirement threshold for registering has been scrapped for businesses selling digital products. So every single tech company selling online would have to register with a VOSS, no matter what their turnover, from thousand to billions in euros.
Things get tougher if the person buying something is actually moving. As City AM recently pointed out, a French person travelling from London to Paris by train, having passed through the Channel Tunnel, could purchase an online subscription, connecting to the French mobile network, with a French IP address, and using a French credit card, but it would be correct for VAT purposes to show this as a UK customer. Getting this wrong risks an unlimited fine, even though the VAT rate in both countries is 20 per cent.
Tech startups in the UK, for example, currently are able to grow to a point where they can bring in revenues and deal with complex financial regulation before dealing with VAT. Now, they will have to deal with VAT rules and all-encompassing legislation from the very start.
Let’s be clear about this: This is a massive block to early stage entrepreneurship.
The new rules are especially onerous for women entrepreneurs, who often start businesses from home, perhaps after starting a family or during their maternity leave. This is the fastest growing sector of the entrepreneurial community.
The VAT rules are also likely to be patchily applied. They may well be enforced in highly regulated states like the UK and Germany — but are unlikely to be enforced in new EU states like Bulgaria.
The law also opens up the possibility for tax authorities all over the EU to come and audit other businesses in other parts of the EU. Thus, a company might have to undergo an audit with the Bulgarian, Italian or Spanish tax regimes.
As the Huffington Post points out, Digital entrepreneurs in Europe will be penalised for selling into Europe and therefore encouraged to sell outside the EU member states due to the high levels of VAT red tape.
It’s also a block on the creation of culture: A woman who writes and sells an ebook while nursing a baby will have to follow the same rules as Amazon. The same for a teenager selling an MP3 from a store.
Startups providing platforms for this to happen — whether they be platforms for sharing or selling knitting patterns or any kind of digital good — will also be hit, because what incentive is there for the thousands of users to comply with EU VAT law? None.
A new campaign and Change.org petition is calling on business minister Vince Cable in the UK to intervene and uphold the existing VAT Exemption Threshold for businesses supplying digital products.
Of course, some entrepreneurs see it as an opportunity. This company is selling software to comply with the new rules.
Guy Levin of the startup lobbyists Coadec told us: “The government should be making it easier for startups and freelancers to sell across Europe, but the new VAT rules may do the opposite. It’s vital that the government looks again at what it can do to protect sole traders and small businesses from the burdensome impact of these changes.”