According to a report by business lobby group Enterprise Nation, HMRC has drastically underestimated the number of small businesses that will be affected by recently announced EU VAT changes.

About 15 months before the changes were introduced, the government agency estimated that around 5,000 firms that weren’t registered for VAT in the UK would be affected. However, the Department for Business

Innovation and Skills (BIS) believed that the estimate is more likely to be around 350,000, although HMRC disagreed. The organisation stated that BIS is including all online companies, regardless of their size.

The changes mean that a company selling digital services to a non-business consumer in the EU must charge VAT on sales, which is at the rate implemented in the customer’s country. This could mean that a micro or small firm making ecommerce transactions in other member states may have to register for VAT in each country where sales are made.

HMRC had launched the Mini One-Stop Shop, with the expectation being that this would help most companies. By registering for VATMOSS, a company would not have to register for VAT in all countries where supplies are made. However, 80% of micro businesses dealing in digital goods have a turnover below the VAT threshold, according to Enterprise Nation.

The CEO and founder of Enterprise Nation, Emma Jones, said that the new rules have “caused havoc in the digital small business community”. Jones added that if the changes had been announced earlier, companies would have had more time to develop solutions to the problems, as well as opportunity to amend the bill. A spokesperson for HMRC said:

“Our estimate was around 5,000 non-VAT registered businesses could be affected and so far just over 2,100 businesses in total have registered to use VATMOSS.”

What can small firms that aren’t registered for VAT do?

There are a number of options available, which includes not selling digital services and products to consumers in other countries. You could instead make transactions through a distributor, who would pay you a royalty on sales. Another option is to register for VAT in the UK and use VATMOSS, or you could register for VAT in each of the countries where you trade.

What is MOSS?

If you register for MOSS, you charge VAT at the correct rate according to the country of supply. You then account for all charges on just one VAT return and pay just one amount of tax. The VAT is then distributed correctly to each country where sales have been made.

For more advice, see our video guide on understanding VAT MOSS or contact us here at The Accountancy Partnership.

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About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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