We’re being asked daily what will happen with the EU Digital VAT / VATMOSS rules, if Britain votes to leave the EU on 23rd June. We have worked hard to keep this campaign true to its roots – being about micro businesses – and staying out of politics, but it’s a crazy bun-fight out there and we need to dispel some of the myths. So here’s a summary of what you need to know, as you decide how to vote in the EU referendum, when it comes to EUVAT.
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1. Myth: If we leave the EU, we won’t have to worry about EUVAT any more
Not true. The EU Digital VAT rules that changed ‘place of supply’ from the business’s country to the customer’s country for digitally-delivered sales apply internationally. Every single business in the world is affected.
If we leave the EU, we will still need to comply with these rules, if we want to sell to EU consumers (B2C only – B2B uses different rules). Any changes made to these laws in the future will also apply globally.
It is not the case that we would automatically revert to how things were before 1st January 2015.
2. Myth: If we leave the EU, HMRC will keep the VATMOSS system
The VATMOSS system means you can submit 27 VAT returns and payments in one go, via one website, instead of registering for VAT in each and every EU Member State, in their language, with their rules. It is part of the European Union. If we leave, the laws as they stand mean that the UK would no longer be eligible to run a VATMOSS portal, just as, say, the USA and Canada can’t. That doesn’t mean it couldn’t be negotiated, but it does mean that, at the moment, no one knows for certain what would happen.
If we lose VATMOSS, then our simplest option would be to register for the Irish VATMOSS system, because it’s in English, but that would mean doing the returns in Euros, instead of Sterling, and risking Germany, Denmark, Sweden – and the other countries who have already sent out warning letters – pursuing you for rounding errors.
3. Myth: If we leave the EU, HMRC would continue to sort out EUVAT problems for us
HMRC may or may not continue to try to act as an intermediary if, say, Germany decides to hassle you, in German, about your VATMOSS return, or lack of (we have had two more cases of that this week).
But HMRC may not be allowed to help, because the existing legal framework has no provision for that. But the teams may be able to negotiate it. Again, no one knows. But the likelihood of the VATMOSS team in Ireland wanting to bust a gut to help you is low – even though we can vouch for the fact that they’re really lovely people. Your support calls would be international call rates and they are a small team, as with HMRC. Losing the UK’s VATMOSS system would more than double the Irish team’s workload, for no extra revenue, so it would be hard for them to support us. The bottom line is that they’re busy and they will need to prioritise their home-grown businesses.
And complying would be harder.
The ‘light touch’ guidelines that HMRC has been running, to allow thousands of the smallest businesses to keep trading, would no longer apply, because they have always been local interpretations, which we wouldn’t have the right to apply, if we leave the EU. The most recent changes, allowing the smallest businesses to be classified as ‘hobbies’, so that they wouldn’t face the VATMOSS data burden, would also be lost.
Leaving the EU would also mean that the HMRC common sense interpretations of what is ‘digital’ and what is ‘not digital’ could no longer be relied on. Each Member State has its own definition – some are much stricter than others – and we would lose the HMRC protection on this.
For me, and many thousands like me, that would – overnight – move a substantial portion of my business into the EU Digital VAT realm, because I would no longer be protected by HMRC’s sensible interpretation of ‘human intervention’.
4. Myth: If we leave the EU, just think of all that extra Digital VAT the UK government will get back
The UK is a major net-winner in the EU Digital VAT stakes, meaning we get back from other countries much more than our businesses send abroad on digital sales. I remember at our Downing Street meeting last February being told it would pay for a hospital, each year.
If we leave the EU, we lose those incoming revenues, but would still have the pay the VAT to the other EU Member States, meaning we would become a net loser.
5. Myth: If we leave the EU, the UK government will tell the EU where to go on EU VAT, as it negotiates new trade deals
Unlikely. If we end up renegotiating our trade deals with the EU, then our government will be steeped in discussions about:
- immigration (free movement of people is something Norway had to agree to)
- how much we’ll pay for the right to trade (at the Fiscalis summit in October the Norwegian representative told me they pay 10% of the total EU budget in trading fees – I pray that was a mistranslation)
- export / import tariffs for physical goods – to keep our factories open
The likelihood of them throwing their toys out of the pram over a threshold for EU Digital VAT is low. They haven’t done so, so far. George Osborne has – please correct us if we’re misinformed – consistently refused to raise the topic of an interim threshold at the ECOFIN Finance Minister meeting.
Although these rules inadvertently hit micro businesses hard, and cause us massive pain, they are nothing compared with the potential damage that could be caused to the wider UK manufacturing industry if the government doesn’t prioritise getting the best trade deals, in a post-EU Britain.
6. Myth: If we leave the EU, I can just ignore EUVAT, because no one will chase me
Just this week we saw another business get a warning letter from an EU Member State, because they had deregistered from the VATMOSS system (they were only doing B2B transactions, so weren’t eligible). The chasing does happen.
And you can bet your bottom Euro Cent that those countries who have been enjoying the additional Digital VAT revenues from the UK are going to make sure they keep them. Ignoring these rules is a high-risk strategy.
7. Myth: If we leave the EU, then the government can decide on a threshold for EU Digital VAT
Here is a response one of our supporters got from the ‘Leave’ campaign this week:
“If we Vote Leave, there is no reason why the UK wouldn’t have the capability to provide a threshold for micro businesses, although this would ultimately be a decision for the Government to make themselves.”
Unfortunately this is simply not true. If we want to trade with any country on the planet, we have to abide by its trading laws. And the EU’s legislation means that the EU Digital VAT laws would still apply to us. There is currently no threshold.
If the UK government chose to set a threshold, it could lead to double-taxation. You would be liable for VAT in the UK on your sales below the threshold, as well as the country in which your customer lives, because the EU has no threshold.
Believe us: we have been round and round that gerbil wheel with HM Treasury – we can’t just pick a threshold without risking trouble from the European Court, because we are illegally withholding taxes from other countries, and risking businesses being prosecuted. And being prosecuted by the other 27 EU Member States, in their language, under their legislative process, isn’t something I would wish on anyone.
8. Myth: The EU VATMESS was the EU’s fault and was imposed on us
Here’s how we often hear this phrased:
“EUVAT is an example of the EU pushing laws down Britain’s throat, and so if the UK leaves the EU, the whole EUVAT thing will just go away, because it won’t apply any more.”
We’ve already covered the fact that legislation applies internationally, whether or not we are members of the EU.
The thing is that our government debated and passed this legislation. They had teams actively involved in drawing up the details. The debating took over seven years. The reason we’re in the mess we are in is because no one predicted the consequences on the smallest businesses. No one was thinking that way (they do now!)
British negotiators asked for a threshold, but they were unsuccessful. Yet our government still debated it and voted the legislation in – all parties, not just one. It was not forced on us.
These rules were not imposed on us. All EU tax law requires unanimity. All 28 Member States had to agree to this. And they did.
Hint: if we leave the EU, then these rules would get imposed on us, with no input, no debate and no veto. We would lose our seats on the Tax Committees, VAT Committees and ECOFIN EU Finance Minister meetings where solutions – and future legislation – are debated.
9. Myth: If we leave the EU then we can just apply the same ‘place of supply’ rules to other countries, so we make lots of money
Ok, so the UK could do this, but it would need to fit within the framework of all our international trade agreements, or risk major fallings-out with our trade partners. It would need yet more negotiating.
And yes, it is the trend we are seeing from the OECD (Organization for Economic Cooperation and Development) members, worldwide.
Also, as a business, you would still have to prove where your customer was, but this time for your home government’s records, so it won’t make things any easier than they are now. And the UK would have to create a system that allowed payments to be sent to overseas countries for our digital exports.
10. Myth: If we leave the EU, then all the campaign work has been wasted
Absolutely not. Though it’s a great question!
In the past 18 months, the way that the UK government and the EU Commission work with micro businesses has changed forever.
Before, they didn’t understand us and they believed the representatives of industry lobbyists and the regulatory bodies, few of whom have ever run a business. Now the question, “How will this affect micro businesses” is routinely asked, early on in the process.
That is an incredible achievement. And it took the effort from each and every one of us.
But what we would lose is easy access to having a voice in creating solutions. I would not, for example, get invited back to do more keynote speeches at the European Parliament, because we wouldn’t have any MEPs. Our government would no longer be a leading voice in the discussions in the EU committees or European Council, where solutions will be discussed.
In fact, at the September Fiscalis meeting in Dublin, where representatives of the 28 Finance Ministries spent 3 days discussing EU VAT, the two most vocal attendees were both representatives from the UK’s HMRC. They stuck their head above the parapet on your behalf. If we leave the EU, then they won’t be at the next meeting.
Also the hard work that has been put in could risk being devalued by those still with a seat at the table, because our country could be seen as the sulky kids who stormed out of the party.
We’re staying out of the political debate, because each person in the UK has a right to choose. But it is important that you understand the effect of your choice.
Please keep writing to your MEPs and MPs, to let them know how you’re suffering with the unintended consequences of the EU VAT rules that came into force in January 2015.
The referendum means that UK Civil Servants have been in Purdah for more than a month, now, and still aren’t allowed to talk to anyone about anything that might influence how they vote, so the campaign has effectively been stalled. And the UK’s renegotiations over it’s EU deal put a stop to all EU VAT discussions in the European Parliament and Council, for obvious reasons, for much of this year.
But Juliet and I are meeting with senior representatives from HMRC and HM Treasury in the week after the referendum, to discuss next steps. And we’ll report back then. Whether we stay in, or whether we leave, it’s important to keep working towards urgently-needed solutions, because – either way – the problem won’t go away.
Reminder: What Are We Asking For?
The EU Commission has promised to propose legislation in the next few months, to bring in a threshold, but this could still take years to debate.
So in the meantime, we are asking Finance Ministers to bring digital sales under the existing Distance Selling Thresholds for physical goods, as an interim measure. Surely it’s a no-brainer?
The data from the public consultation the Commission ran in December has been published this month and our initial review of it shows that the biggest problem still faced by micro businesses is correctly establishing where their customer is based. 18 months into the legislation and there is still no tech magic wand – and we don’t expect to find one any time soon. That is why we need the thresholds for those for whom the cost of collecting this data would be disproportionate.
Thank you so much for your on-going support. Once the referendum is over, we can all make progress again! And if you want to be involved in the solution to the EUVAT problem, please come and join us over at our super-friendly Facebook group: EU VAT Action.
And if you have comments, questions, or more myths that need dispelling, please let me know, via the comments.
Clare Josa, Co-Founder Of EU VAT Action
UPDATE: Feeling Shocked And A Bit Freaked Out By The UK Referendum Result?
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