Six months into the new EU Digital VAT rules, thousands of microbusinesses have closed, geo-blocking is rampant, and the legislation threatens to seriously harm the Digital Single Market.

Originally, it made sense to move the place of supply for VAT on digitally-delivered services to the customer’s location. It stopped the biggest businesses profiting unfairly from locating in lower-VAT regimes.

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The EU digital economy risks becoming uncompetitive: most other countries are ignoring these rules and so don’t face the disproportionate compliance costs or administrative burden. (Photo: Theen Moy)

But the European Commission and a huge number of MEPs now agree that the smallest businesses have accidentally been caught in this EU VAT net.

This was never the intention.

Over the past eight years, the EU commission and member states’ impact assessments ignored microbusinesses completely.

The decision-makers were told that small businesses never sold digital goods direct to customers, only through third-party platforms, and didn’t sell internationally - though the internet has no national boundaries.

The rules sound simple, but in practical terms are hugely complex.

Most microbusinesses can’t access the data required to prove the place of supply, never mind compare them automatically during the sales transaction.

Then they have to work out which of more than 80 VAT rates to apply and issue a compliant VAT invoice in the correct language, currency, and layout.

The costs of compliance for these microbusinesses and sole traders far outweigh the revenue collected.

In January, thousands of the smallest businesses closed or abandoned their digital strategy.

The legislation is too complex for their software systems and they couldn’t afford to upgrade.

Most who have kept trading either moved to third-party platforms, losing up to 70 revenue of all their revenue (not just non-domestic sales) in commission, or had to move their business to a higher-end shopping cart, costing thousands, and taking months of the business owner’s time.

These people are often running their business alongside a full time job. Most are not tech experts and they rarely have accountants.

Hugely complex legislation

Since January, we have started to see some of what can go wrong when member states try to police this hugely complex legislation.

Some states are offering unofficial thresholds, advising the smallest businesses not to register at all.

Germany issued VAT numbers to everyone who had submitted payment to them and insisted that they submit future returns direct to Germany.

The UK issued demand letters to businesses for not making their Vatmoss payments, when they had. The computer system couldn’t handle people paying over the Easter weekend, thinking no one would pay its account then, but that’s exactly when part-time business owners catch up with admin.

Luxembourg, Sweden, and Denmark initiated non-payment penalty processes against businesses for errors below €1 in their Vatmoss return. They contacted the businesses directly, ignoring the gentleman’s agreement of pursuing errors through the business’s member state tax authority.

Nearly every member state is interpreting the rules slightly differently; meaning something outside the rules in one country may fall under the rules in another. Businesses are now trading in fear of getting it wrong and being prosecuted by another country’s tax authority.

Last week, 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.

Fiscalis Summit in September

The human cost to these businesses is vast.

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.

The EU commission and many MEPs now agree that this legislation was never intended to hit the smallest businesses and that the burden is unacceptable. But now is the time for action, not just kind words.

It is imperative that at the Fiscalis Summit in September, all the Finance Minister representatives agree to two things:

First, a threshold for microbusinesses, allowing them to revert back to domestic VAT rules for their first €100,000 of non-domestic EU sales

Second, a simplification for small businesses above the threshold, allowing just one piece of data to prove place of supply: the country code which must be supplied by the payment processor.

However, this is not yet enough, because any legislation could take two years to pass.

By that point, geo-blocking 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.

We need an immediate easement, following Fiscalis, to allow a temporary suspension of these rules for microbusinesses, plus the simplified data requirements for small businesses above the threshold.

This will allow them to continue trading, while the formal legislative process takes the time it needs.

In addition, the sums collected from microbusinesses are tiny, compared to those from big businesses.

The costs to member states to manage and police the Vatmoss schemes for such tiny firms must surely outweigh the revenue they generate.

Without these measures, we will continue what was started in January 2015 – the unintended havoc wreaked on the smallest businesses, except that we are no longer accidentally stifling innovation and closing the Digital Single Market.

Clare Josa is co-founder of EU VAT Action, a UK-based NGO