ConDems make mess of new VAT system

This January a new VAT system was introduced to deal with the supply of digital services across Europe. The move was supposed to promote more fairness and equality – especially for small and micro businesses.

No such luck.

The Tory/LibDem government made a right mess of implementing this system in the UK and ignored the safeguards called for by a previous Labour government.

So what happened?

VAT MOSS affects businesses who supply digital services. These businesses include digital broadcasting, telecommunications or e-services (such as e-books, games, apps and music downloads).

Previously, sellers of digital services paid VAT based on being registered in a member state – wherever they were registered was where they paid their tax, and the rates of tax varied from member state to member state. For instance, digital services could be provided by a company registered in Luxembourg, where the VAT rate is 15%, but consumed in the UK, where the VAT rate is 20%.

This meant some sellers were unfairly undercutting businesses in the UK by locating themselves in another EU member state with a lower VAT rate.

This is tax dodging pure and simple. It created an estimated VAT gap of €177 billion each year across Europe – 16% of the total expected VAT revenue. It also meant that big players in digital services were monopolising the market and stifling small and micro businesses.

Member States cannot afford revenue losses of this scale. That was why the EU took decisive steps to recapture this public money by taking a tougher stance on tax evasion.

The new rules were introduced to assure transparency, simplicity and make life as easy as possible for small businesses and individual traders. Simply put, the system introduced the same VAT rules across the EU – VAT would be paid on the basis of where the product was consumed – the location of the seller no longer matters.

These rules were first discussed at the European Council when Labour were in government. Labour sought to retain a high VAT threshold for digital sales – sellers would have to reach online sales of £81,000 before VAT became applicable. We negotiated with other EU member states but unfortunately could not get agreement on this issue. The high VAT threshold remains in place for domestic sales but not for overseas sales.

The Tory/LibDems set up a VAT MOSS (Mini One Stop Shop) to help businesses affected by the rule change – including an email address, dedicated phone line and a Twitter Q&A session.

I and other Labour MEPs have been raising these issues urgently over the past few weeks with the relevant authorities, both in the UK government and the European Commission. We have asked the government for emergency measures to aid small and micro-businesses attempting to navigate the new rules. We also asked HMRC and the government to urgently improve the quality and quantity of information available in the UK, to eliminate confusion and make it clear exactly what businesses do and don’t have to do.

Unfortunately, confusion remains and people are still unclear about the rules and how they operate.

I have a FAQ section on the VAT MOSS incident on my website – you can read this here.

You can register for the VAT MOSS scheme here.

Finally, my Labour Party colleague Neena Gill has asked the European Commission to review the legislation specifically to introduce a threshold to exempt businesses with small turnovers – you can read her question here. Once the response is available I will make it available on this site.