THE BLOG

This Is an Emergency! Hundreds of Thousands of Micro Business at Risk of Closure From 1 January 2015

12/12/2014 10:05 GMT | Updated 10/02/2015 10:59 GMT

This is not one of my usual blogs. There are times in our lives when action is called for. This is one of those times.

I'm worried. Very worried. Potentially from 1st January 2015 - yes just a few days away - hundreds of thousands of micro businesses and sole traders are at risk of closure. Why? Because new EU VAT legislation is bringing corporate levels of regulation and administration not just to the boardrooms, but also to the kitchen tables of sole traders.

These are the businesses that the digital economy has been a lifeline to: mothers, carers, chronically ill, people with disabilities, retirees, people who have been made redundant and so on. These are the people who have created flourishing and innovative businesses from their kitchen tables. There are literally hundreds of thousands of people in this category who are severely affected. It is these businesses that are facing the stark choice of either closing their businesses or risking breaking the law.

The worrying thing is that many of these micro businesses and sole traders (and even their accountants) are not even aware of this new legislation. If these businesses are selling products to EU countries using their current business model, they may face penalty fines for not complying with this new legislation.

So what on earth is happening? From 1 January 2015, telecommunications, broadcasting and electronic services will be taxed in the country where the customer belongs - regardless of whether the customer is a business or a consumer, or whether the supplier is based in the EU or outside. The administrative and legislative procedures that need to be in place in order to comply with this legislation are staggering.

This effectively impacts ANY business (NO MATTER WHAT SIZE OR WHERE YOU ARE LOCATED) selling digital goods and services to customers in the EU. You are not immune if you sell physical products from your website or third party sales platform either. Very soon you will also be included in this new legislation. So listen up.

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Why do we only know about it now? The EU and UK government have known about this since 2008. They have been working with VAT registered businesses (ie, profits greater than £81,000) trialling out new systems to test how this new legislation would work. Trouble is micro businesses like mine - many of which are under the UK tax threshold let alone even close to the VAT threshold - were under the radar. It is estimated that there are hundreds of thousands of these businesses. None of us were consulted. Many of these don't even know about these changes.

Why is it happening? The European Commission argues that this will create a level playing field because sellers will no longer be able to unfairly undercut businesses by locating themselves in another EU member state with a lower VAT rate. In reality it will unfairly disadvantage the EU's smallest companies. For example, it has been suggested that these smaller businesses can use third party selling platforms so that they do not need to worry about the whole compliance thing. The selling platform giants out there (located in low tax paying countries in order to reduce tax) are also the ones who take a cut of your profits in commission (some charge up to 75%). Now due to this legislation, micro businesses - even if they fall below the VAT threshold - will now have VAT added to their sales (in the UK it's 20%). Effectively micro businesses in the UK will lose their VAT threshold allowance. It doesn't take much to see that this is not economically viable for these tiny businesses.

If they decide not to go the third party route and sell via their own website, they are required to collect 3 non-contradictory pieces of evidence to prove which country the customer is in. For small businesses they are lucky if their payment processor gives them the customer's registered address during the sale. These businesses are also not set up to handle information such as IP address decoding or setting up APIs to double check the IP address country with the bank account address. This data that is collected then needs to be stored for 10 years!

And this is just the tip of the iceberg in terms of overall information that needs to be gathered in order to be EU VAT compliant. Some businesses do not have the facility to cope with this and have no choice but to close. Others are choosing to break the law and risk being fined.

The truth is, it isn't a level playing field. Ironically and sadly, with the legislation being as it is right now, this could cost governments far more in welfare payments than the small amount of consumer tax they would ever raise from these businesses.

So what can be done about this? Take Action Now! This is no longer urgent. It is now an emergency! We have less than a week before the EU closes for Xmas! But all is not lost, I believe that together we can make a difference. This is what you can do:

Sign this petition www.euvataction.org/take-action-now/sign-the-petition/

Other important action: www.euvataction.org/take-action-now/

Take the world-wide survey - because this affects you where ever you are located:

www.euvataction.org/take-action-now/complete-the-survey/

Visit the website for further information:

http://www.euvataction.org

Thanks for all of your help.

Alison