New EU Tax Law

This might be the beginning of the end of tax tourism for online businesses and equally a real blow to small internet entrepreneurs. 

Online businesses selling digital products will now be liable to a new European Union (EU) indirect tax. The new tax directive has been predictably viewed by the online business community as an unwelcome move, since it will increase fiscal and administration costs, making thousands of businesses no longer commercially viable. 

The EU diktat on VAT came into force at the beginning of 2015. 

All companies selling digital products will now be required to sift through a complex EU VAT directive, with many having to incur an additional cost of hiring an accountant to make sense of the new tax directive.

The aim of this new EU tax law is to prevent online businesses from undercutting local rivals by locating in offshore jurisdictions.

But many critics argue that it will just increase operating costs and push many “Kitchen table entrepreneurs” out of business.

From January 1, 2015 any company selling digital products, that could include anything from – e-books, music downloads, training courses and even needlework patterns, will be required to navigate a hugely complicated VAT system, irrespective of the company’s turnover.

Small online business owners are outraged, claiming that they will now have to spend hours trying to understand and comply with the new EU tax law, maybe hire an accountant, or even close the business. One business owner said she had spent months trying to understand the legislation.

The new law, which is frankly totally impracticable, will now require the online business owner to charge VAT based on the country where the buyer lives, rather than where the seller is based. But due to the international nature of an online business, the buyers are often located all over the globe. So the new EU tax law is likely to become a complete compliance nightmare for internet business.

However, EU officials are adamant that the new EU tax law will stop multinational corporations such as Amazon undercutting rivals by setting up headquarters in low-VAT countries such as Luxembourg.

So why did the EU chief, Jean Claude Juncker, present himself discretely to Amazon, when he was president of Luxembourg as a consultant that could help the online giant with tax issues?

The Guardian reports, December 10 2014, that Bob Comfort, the former head of tax for Amazon, claimed Juncker had fiercely courted the online giant, behaving as a “business partner” and “helping solve problems”. Months after arriving in Luxembourg in 2003, Amazon secured a confidential deal from the local tax office. Two months ago that deal became the subject of a formal investigation by the European commission.

The whole affair reeks of crony capitalism and hypocrisy all rolled into one.The EU tax clampdown will mean that fledgling businesses must now record which European country each customer is from and charge their national VAT rate. They must also keep hold of customers’ home and bank addresses for ten years.

Enterprise Nation, a campaign group which represents small and micro-businesses estimates that around 250,000 companies will be affected by the change.

The administrative burden on small firms is ‘unacceptable,’ according to Chas Roy-Chowdhury, of the Association of Chartered Certified Accountants.

‘The Government must look at exempting the UK’s smallest businesses from this, or risk them withdrawing from trading in Europe all together,’ he said. 

‘Ministers must come up with an exemption and take it to the European Commission.’

HMRC has already introduced a scheme designed to ease the strain of the new law, called the VAT Mini One Stop Shop, or VAT MOSS. 

Under the scheme, businesses can make a single quarterly VAT return, rather than having to register separately for VAT in each of the 28 EU member states.

Nevertheless, a Facebook page dedicated to abolishing the law confirms that online entrepreneurs are still going to struggle.

Martin Wilson, online entrepreneur said, he will be closing the online part of his business.

‘The administration burden, risk and cost of complying far outweighs the business I do with the EU. I don’t want the hassle of being an unpaid tax collector’, he said.

Many other online entrepreneurs were going to remove their own products from sale.

Interior designer, Issy Zinaburg, has started a petition in protest of the new law and gathered more than 21,000 signatures.

The 33-year-old, who lives with her husband Amir in Suffolk, said: ‘I have a traditional interior design business but I am currently pregnant and I had hoped that taking my business online would be more flexible around childcare.

‘Offering online courses would allow me to take some time off after the baby is born so that I am not working all the time.’

‘I had a number of courses planned which would include PDFs, pre-recorded videos and worksheets to show people how to do their own home. But I have now had to scrap a number of products.’

Mrs Zinaburg, of the EU VAT Action group, believes that she may be able to circumvent the changes if she includes enough ‘human interaction’ in her tutorials and online courses, but says that understanding how the new rules will work has been a huge headache.

She said: ‘Everyone agrees that the loopholes used by the big companies like Amazon should be closed, but the unintended consequence is the impact on small businesses. The administrative burden on micro-businesses is huge.’

Interesting to see what happens moving forward. As it stands, the new tax law means a larger financial burden on online businesses, which will ultimately hit their bottom-line and equally suffocate micro-businesses out of existence.

In a fragile economic climate, this new EU tax law might do more harm than good.