New European Union tax rules introduced in January have already driven thousands of small companies out of business, with thousands more set to follow as awareness of the change in the VAT law grows. Research has shown that incompetence on the part of collecting agencies has further added misery to the situation.

After an eight-year consultation which excluded the voices of micro-businesses, the EU introduced new rules on VAT returns at the beginning of this year, which required digitally delivered services to apply VAT according to the customer’s, not the supplier’s location.

Designed to prevent large businesses locating themselves in VAT-competitive territories, it had the predictable effect of drowning small businesses under a sea of bureaucracy, forcing them to access the data required to prove the customer’s location, figure out which of more than 80 VAT rates to apply, and issue an invoice in the correct language, currency and layout.

Unable to afford the costly software required to deal with the regulation, thousands of small business and sole traders have closed or abandoned their enterprises. Most of those who have continued to trade have either moved to third party platforms, losing up to 70 percent of their total revenue (not just non-domestic sales) in commission, or spent thousands on software.

“The human cost to these businesses is vast”, Clare Josa is co-founder of EU VAT Action commented for EU Observer. “The only reason the Digital Single Market is still functioning is because awareness levels are below 5 percent, so most businesses are continuing to trade under the former system. As awareness rises, the damage will soar.”

According to Josa, the misery isn’t confined to the legislation alone. Further confusion has been created by the member states interpreting the law in different ways, and by some tax authorities simply making blunders.

Germany has issued VAT numbers to everyone who has submitted a payment to them, and has insisted that in the future returns must be submitted directly to them. Luxembourg, Sweden, and Denmark have all slapped non-payment penalty demands on businesses for errors below €1, contacting the businesses directly, ignoring the gentleman’s agreement of pursuing errors through the business’s member state tax authority.

The UK has issued demand letters to people it claimed had not made their payments, when they had. The British government had simply extended its famed run of incompetence when it comes to computer systems: the system set up to handle the payments crashed because it couldn’t cope with people paying over the Easter weekend. Its designers had assumed that no-one would pay their bills at that time, when in fact most small traders used the break to catch up with paperwork.

And in the Republic of Ireland, Josa recounts: “the Irish Revenue mistakenly sent out 2,000 letters demanding sums as high as €100,000 from VATMOSS-registered sole traders who had already paid their Vatmoss liability (often below €10). This caused widespread panic amongst these businesses owners who don’t have accounting teams to handle this for them and for some it has been the final straw.”

Josa said two measures were now needed: allowing micro-businesses to revert to domestic rules for the first €100,000 of non-domestic sales, and a simplification for small businesses above the threshold by requiring them only to have to collect a country code to prove place of supply.

However, Josa warned: “this is not yet enough, because any legislation could take two years to pass. By that point, geo-blocking [restricting access to a website based on geographic location] will be epidemic, start-up businesses and innovation will have been severely damaged, and the Digital Single Market is likely to be dead – not to mention how many thousands of people will have lost their livelihoods.”

Margot Parker MEP, Ukip’s small business spokesman said: “This was our fear all along – just a few months down the line, small businesses are being seriously harmed. We are hearing of closures and hardship – exactly as we predicted and feared and exactly why UKIP was opposed to this legislation.

“Yet again, it is an ill-thought out idea which adds to the red tape the EU seems to love being wrapped up in.”

She said that Eurocrats were informed small businesses never sold digital goods direct to customers but only through third-party platforms, and that they did not sell internationally, even though the internet has no boundaries.

“It’s absurd – and has just led to the smallest businesses abandoning their digital strategy entirely. It’s too complex, too messy and simply not worth their time – which is precisely what we in UKIP were saying months ago.”

She has called for an immediate suspension of the rules for small businesses and a new structure to be put in place.