Micro-Businesses Shut Up Shop In Droves

Clare Josa is a member of the Digital VAT Group on Facebook, and she has put together a factlist of the problems facing small businesses in the European Union who have to work within the framework of the VAT rules introduced on January 1st this year.

The back story is that the value-added tax (VAT) rate for the countries in the European Union is not uniform. Some have rates as high as 27% while others have much lower rates. And the rates are also not uniform for different kinds of products, with some countries having very low rates for digital products.

The low rate of just 3% on digital products offered by Luxembourg is what attracted Amazon to set up its European business there.

The various countries in the EU decided some years ago that this gave an unfair disadvantage to sellers who could not relocate to countries that levied low rates of VAT.

The reasoning was that a consumer would buy a product from a seller selling with a VAT rate of 3% rather than buy the same or similar product from a seller who had to levy a higher rate of tax because the seller was located in a country with a higher tax rate.

So from January 1st, the rule about VAT rate to apply was changed from the location of the seller to the location of the buyer. Simple, eh?

That change levels the playing field for buyers, who now must buy at the tax rate of their own country and cannot ‘shop around’ for cheaper alternatives.

Just to be clear, these rules apply to digital products supplied automatically – that is without significant human intervention being part and parcel of the product. And example of a non-automated product delivery would be something like live webinars given by the seller to guide customers through the use of the product.

Unfortunately, the changes are causing hundreds if not thousands of small businesses to shut up shop.

Some that are staying in business are handing over the management of their sales to larger businesses that are able to cope with the new rules.

The downside is that using a third-party to manage sales adds costs to the small business for  – so the small business owner loses out.

Here are the ugly facts abou the new rules put together by Clare Josa:

1. It’s easy for big players like Amazon to work out where their customer is, so they can display the correct price, before purchase.
2. It’s easy for big businesses to design shopping carts that double- and triple-check the customer’s location and apply the correct VAT rate.
3. It is easy for big businesses to set up shopping carts complex enough to handle multiple rates of VAT in one transaction – and even different countries’ rates of VAT in one purchase.
4. It’s easy for big businesses to automate the hugely complex back-end calculations to create their quarterly EU VAT returns, whether using VATMOSS or with individual Member States.
5. It’s easy for big businesses to have adequate security to safely store the personal data of all of these customers for the required 10 years.

All of this is a requirement of the new legislation. All of it is nearly impossible for micro businesses and sole traders.

Many of these are using simple PayPal ‘buy now’ buttons, which don’t give them the data legally required to be able to comply with the new EU VAT rules. And nor should they!

If the payment processors DID give micro businesses that level of data (credit card / phone number / bank details etc), then the data protection issues become frightening. And most consumers would stop buying from them.

People running simple businesses with basic entry-level software are the life-blood of the UK economy. Grannies at their kitchen tables, Mums juggling kids and a home business, teenage software developers and entrepreneurial start-ups should not be subject to the same level of administrative burden as multinational, multi-billion turnover companies.

Here is how things have changed since 31st December 2014:

In the ‘olden days’, someone selling an e-book simply needed to know whether they, themselves, were VAT registered, to be able to make the sale. Then they would sell it to the customer with or without domestic VAT. No address needed. No data security issues.

Easy.

Under the new rules, instead:

* You need to figure out where in the world your customer is, before you even show them the sales page, without making them run to a competitor
* You need to figure out how to handle different VAT rates for different digital products even inside one country (e.g. Italy for ISBN e-books vs non-ISBN e-books and online courses)
* The interpretations of what is ‘digital’ and what isn’t vary widely between EU Member States, so whatever you do, you’re at risk of being pursued by MS who disagree with your Home State’s rules
* You need to figure out whether you’re selling to a consumer or a business, because different rules apply
* You have to ask the customer for their address, even for a digital download, which leads to a 25%+ increase in shopping cart abandonment rates
* Once you have displayed the correct price and they want to buy, you have to collect 2 non-conflicting pieces of information – and compare them during the purchase process – to make sure you charge the correct rate of VAT, depending on where they live.
* Most of the available data is maximum 90% accurate, so easily 10% of transactions should either be declined or manually processed.
* Most micro biz only have access to one piece of data – customer address – at the END of the purchase process, so they cannot possibly comply.
* Once you have completed the transaction, 7 of the EU member states legally require you to send a correctly-formatted invoice to that customer, in the correct currency – which transaction rate do you use? And all for a £2.99 e-book.
* Once that is done, you have to collate and analyse the data from each and every sale to complete your EU VATMOSS return – hugely complex compared to the 2014 system.
* Then you have to safely store the data for 10 years, which most of us cannot do.

Fact: thousands of UK micro businesses and sole traders have either ceased trading, or stopped selling digitally, or put their expansion plans on hold, solely due to the new EU VAT rules. And yes, we have the data to prove this.

Thousands of non-EU businesses are now actively excluding EU customers – and many EU Member State businesses are excluding sales outside of their home country. Prices have risen massively for consumers, as businesses try to cope with the new legislation, and digital piracy is on the rise.

What we are asking for?

An immediate suspension of the implementation of this legislation for micro businesses in the UK while we negotiate with the EU to obtain a workable threshold and a simplification of the rules, so that businesses can both comply and continue trading.