You would have to have been living in a bubble in early December not to have noticed the outpouring of anguish by a mighty handful of micro-businesses upon discovering, somewhat late in the day, that the new arrangements for VAT on electronically delivered services (AKA ‘Mini One Stop Shop – MOSS’) would interrupt their VAT-free way of life forever. These very small businesses, often run by one or two entrepreneurs, do not account for VAT because their turnover is below the UK mandatory annual threshold for VAT registration which, at the time of writing, sits at £81,000. The new regime, which applies from 1 January 2015, requires businesses of any size to register for and pay VAT in member states of the EU where electronically delivered services have been sold to their residents on a B2C basis. The threshold for this is ‘nil’. It requires all suppliers to register for MOSS and complete quarterly returns.
Micro-businesses were astonished that they would be caught in this VAT requirement despite trading below the domestic thresholds. Whilst they managed to negotiate with HMRC a side-step of certain rules, to allow them not to have to pay UK VAT simply in order to be registered for MOSS, nothing could be done to absolve them from the requirement to account for VAT on minimal levels of sales in other EU countries. We were told that some of these businesses would accordingly close, having been strangled to death by red tape. Some would ensure that people from outside the UK were unable to buy their products, and others would intervene manually so that their services were not electronically delivered, in order to continue with a clunkier version of the status quo. Meanwhile, there is no discernable reaction from micro-businesses of any other EU state, where, perhaps coincidentally, the average domestic VAT threshold is much lower.
The uproar this caused was the first time in ages that anybody focused attention on the UK having a VAT registration threshold which is several times average employee earnings. It seems almost to be accepted that this is a normal state of affairs and that micro-businesses should be able to operate in a VAT-free environment in order to shelter them from the crushing potential competition of larger operators and the general turbulence of commercial life. But if we gaze across the channel we see a distinctly mixed picture which, nonetheless, shows how extreme our threshold has become in comparison. France for instance has a threshold of just over €30,000. The threshold in Germany in less than €20,000. Austria and Belgium have a threshold of between €25,000 and €30,000. Spain is not the only one to have a general threshold of ‘nil’. Even Ireland, which has decided to use two different thresholds, has a services provision threshold of less than €40,000. Why is the UK so different that it should have a threshold of around €100,000?
Specious reasons?
It is oft stated that the main reason is to protect embryonic businesses until they are large enough to bear the cost of VAT. If that were true, then the threshold would not be based on taxable supplies alone, but would incorporate a test for overall size. The current rules allow a significant exempt business to make minor levels of taxable supplies but still remain unregistered. It also seems fairly obvious that a business does not magically grow the muscles to compete with genuine medium sized and large operations once it exceeds £81,000 turnover. On the contrary, so significant is the potential difference in tax liability for any B2C operator in the UK, that the main impact of micro-businesses not having to be registered for VAT is that they can run an inherently uncommercial business model on a footing which is just about commercial, but which, if scaled up enough to incur the VAT costs, would simply not be a business proposition. That might be a charming idea where a genuine hobby business is concerned, but one can run an activity far removed from a true hobby at a figure under £81,000. So it appears that the VAT threshold does not so much nurture small businesses until they grow up, but creates an artificial environment where certain kinds of activity, as long as they always remain small, will survive. It is a bonsai environment. And it undercuts and thus weakens genuine growing businesses.
No-one mentions whether the real reason is that it costs more for government to administer and collect from micro-businesses than justifies the revenues that might arise from them. I speculate that no-one mentions this because it would immediately spotlight an unfair comparative burden on those businesses which seek to grow their bonsai into something rather more impressive, and which are having to pay for the government’s wish not to become involved in uneconomic tax collection. But, for the tax system to work properly, it must work relatively even-handedly, so that tax does not become a determinate of success or failure. If we were to assume that the threshold had been set simply to save government money, the government would not be fulfilling its duty to provide a balanced tax system. This incentivises government to allow us to think that the threshold is a ‘pro-business’ policy.
Business infantilism
The problem which this creates is significant. Businesses that mainly work for private consumers are then faced with a major disincentive to grow beyond their infantilised state. One or perhaps two people can make a living without ever having to charge VAT. But if they decide to take on one or two employees, with all the attendant risks of trying to scale up, they immediately nudge into VAT territory. Since VAT registration works rather like residential SDLT used to do before the Autumn Statement reform, namely that once you have crossed the threshold you pay tax on every penny of taxable turnover, rather than merely the excess over the threshold, the person who makes a penny more than the threshold finds himself facing an enormous tax charge. The marginal rate on that penny is colossal. The cost of being a penny over the line can easily be £10,000 per year (or more) and this means that the business makes a loss out of joining the VAT club until it adds more than £10,000 to the turnover it reached when it joined the club. That is an enormous increase in percentage terms and one cannot see any reason why an organisation would wish to do it unless it had an extremely strong conviction of its ability to grow far beyond that scale. For many businesses only a much bigger scale will ever be viable, but there are businesses where that is not true.
So, the policy of having a high registration threshold ensures that certain businesses are locked into an infantile state and that the talents of their entrepreneurs can never be tested beyond the foothills of what they might have achieved.
Furthermore, a set-up of that kind encourages the fragmentation of a business into several different legal entities in order to escape VAT registration. If you set the threshold low enough, the threshold at which businesses have to be split in two, three, or more sections, in order to try to avoid the VAT registration requirement, becomes so low as to not be worth the effort in doing so. Set the threshold as high as we have, and much less fragmentation is needed in order to remain below the threshold. Whilst HMRC has weapons against fragmentation, the conditions have to be in place and it has to have noticed the issue. The position would be more clear-cut if the threshold were lower, since it would be harder to defend a position of there being several businesses operating over such a small aggregate economic value.
Taking this point further, it is perfectly, and legally, possible for a B2C trader not to charge VAT because he can run his business below the threshold. That means he is not regularly distinguishable from the evader – the cash-in-hand operator whose failure to account for VAT is dishonest. If you bring the threshold down to the extent that it is almost inconceivable that an honest tradesman need not charge VAT, then the general public can have no excuse for accepting a situation where VAT is not charged. Indeed, in that situation the minuscule businesses that might still theoretically operate below the threshold would find it worth their while to register for VAT sooner rather than later in order to avoid the stigma of appearing to be on the wrong side of the law.
Administrative burden?
Having said that, what level of administrative burden this would create? First, I postulated that the government perhaps thought that collecting VAT from micro-businesses was not cost-effective. That certainly might have been the case up until the inception of mandatory electronic filing of VAT returns. We are now in a situation where the postal costs are eliminated. It could once have been said that there were no techniques for controlling the compliance of very small traders. Now the greater sophistication of data analysis open to HMRC must surely make that viable. Furthermore, there is simply more of the national economy tied up in micro-businesses now than there was in the bad old days when entrepreneurialism was not thought to be a good thing. The threshold is probably omitting a great proportion of the economy.
As for the administrative burden on the micro-businesses, of course nobody running their own business from head to toe wants another piece of red tape. But let’s face it, business has been incurring more and more red tape over the years, and there is no logic under which an important aspect such as paying sales taxes should be regarded as being some kind of ‘last straw’ for small business. Annual accounting reduces VAT return submission to once per year (though not under MOSS). A flat rate scheme is available to all traders up to £150,000 which means they do not even have to keep purchase records (though, again, MOSS is different). The most basic bookkeeping would in any case furnish the relevant information, and good book keeping is something we would want to encourage in any size of business. It is difficult to see how the bureaucratic burden of operating VAT is of such importance that we should continue with a fiscal distortion which is so far adrift from that of most of our EU counterparts.
Even if we were to bring our figure down to £30,000, we would still be broadly speaking at a higher level then is average across the EU. Of course, there would be a blaze of objections from micro-businesses. They have so much to lose. The approval of those businesses which have struggled northwards of the threshold against the odds would probably be more muted, but they would be silently grateful for the unfair fiscal competition being addressed. But it takes a government of conviction to consider what is best for the country rather than what is best for their next stint at the ballot box. It needs politicians who are prepared to think the unthinkable, to shed some ingrained ideas as to what is good for business, and take the bold course of action.
Or, if all of the above appears to be too self-assured, and too uncompromising, then let the economists and the politicians step forward to explain why the UK is uniquely sensible in maintaining such a high registration threshold and what it really brings to our economy and our British way of life.
Graham Elliott – Withers LLP
You can, and indeed should, follow Graham on twitter @VatDaddy
Waiting for Godot 
Regarding businesses being locked into an infantile state: there are two possibilities here. Either the business wouldn’t be viable if it had to charge VAT, or it would be viable but rather less profitable (at least until growth had made good the damage). In the latter case, lowering the VAT threshold would be a bit of a handicap (although this could be seen as an incentive to grow); for the former, it would kill off the business altogether, which may not be the optimal economic outcome.
Would you suggest dropping the threshold in one go, or a gradual reduction (perhaps by fiscal drag, in the extreme case, though that would take 20-30 years)?
Generally I agree with you, though – especially over the grey area created by having reasonably large businesses being outside VAT and the resultant scope for evasion to look identical to compliance.
Thanks Andrew. I am agnostic about the exact route to the reduced threshold. An immediate move seems likely to be politically unacceptable and unfair to those whose plans have been based on this artificial environment. Mere erosion through pegging the current threshold appears too slow. The question would be what the middle road might look like, and that would be an interesting debate.
We could be contrarian and ask why other fiscs have increased their tax base and have non business customers pay more. I think the main beneficiary of a large reduction in the registration level will be the Exchequer.
On this logic there would be little reason to increase personal tax allowances.
But what is wrong with a world with some bonsai businesses? A bonsai is not an infantile tree that is somehow stunted. Not all businesses have to grow or perish. Is it really a justification to defend red tape by the existence of other red tape?
I think I’d like to hear from some micro businesses on what they do and why they object to the new rules.
I’m a work at home mom with two kids, both of whom have disabilities to greater and lesser degrees. I keep the house, homeschool, take my kids to doctor/therapy appointments, do therapy at home, and run what is basically a full time business on part time hours by being as efficient as possible. Yes, I am tired. And very busy. I don’t actually remember what it feels like to relax. I haven’t had 8 uninterrupted hours of sleep in over 9 years. I don’t make all that much money – in 2014 my small business grossed USD$32k. So now you want me to add one more thing to my to-do list just because the EU got into a pissing contest with Amazon and Apple?
No.
This is me blocking sales to the EU. Enjoy your VAT, but I won’t be your unpaid tax collector.
Whilst we are thinking laterally, maybe it is time we re-evaluated the moral validity of all stealth sales taxes that do not account for the taxed person’s ability to pay.
I have been running a small business developing and selling my own software for a number of years and am below the £81,000 threshold. Larger software business have many economies of scale that I don’t have , for example Adobe has such a brand that it only has to release a new piece of software and all reviews site will clamber to review and customers to buy it. These companies can employ marketing and accounting team in house and have many other advantages that I cannot keep with. I’m always going to be up against it the VAT threshold gives me a chance reducing the VAT threshold wont force me to be more competitive I’m doing my best already it would just make it more likely that by business would fail.
That is not to say my business is a failure, it is my only income and supports a family. If I was to increase sales so that I hit the VAT threshold that would be okay but I’m not at that stage, and I’m not artificially keeping my sales down.There are seems to be a point of view from commentators that unless a company is substantially growing it is failing – I do not agree as long as the company is making a reasonable profit that my mind represent a successful company.
Regarding VAT not being much of an extra administrative burden, of course it is. Currently I have to present my accounts for filing 9 months after company end of year so there could be a 21 month delay between a sale and that sale being presented in the accounts. I have an idea of my monthly sales but I have no need to bookkeep on an ongoing basis throughout the year, sales are recorded by Paypal anyway but I don’t have to look at them in detail throughout the year . If I register for VAT and MOSS I then have to submit the details only upto 3 months after the purchase was made
The other thing to not is that it is less expensive to provide my software customers in the US or Australia than the rest of the EU, how can that be good for EU citizens. Also I’ll face more price competition from software created i
As a “kitchen table” business owner and a one woman show the new EU VAT rules have worried me greatly and of more concern is the upcoming extension to physical products (thought to be 2016). I have no objection to paying VAT I have not yet earnt enough to pay income tax but I am happy to do my tax returns and pay money if it is owed but I do think abolishing the threshold overnight on digital sales like the EU has done is damaging to the EU economy.
My main reasons for strongly believing we need a threshold are as follows;
The burden to the tiniest of business owners such as myself of collecting and storing relevant data which cannot be easily done is prohibitive to trade. I operate my own website and the only data I have to confirm the buyers location is the address they enter, to be able to retrieve more data I would need to use expensive services which would cut into my small profits.
Many hobbyist type businesses like mine make maybe 10% of our sales in the EU outside of the UK and the cost for HMRC and the other EU tax offices to administer, collect, collate and distribute the VAT owed would more than likely be more than the money’s collected. It makes sense for a threshold to be set in these cases and I am not saying it should be the €100k est. of the UK but something for the tiny businesses who are starting up.
Aside from the threshold issue there are other concerns with the new way of doing VAT there are 79 (last time I checked) different VAT rates across the EU dependant on the type of product being sold. I can sell the same product in France and add their VAT at their standard rate but when it comes to Spain find that this product falls into a reduced rate of VAT. I could also sell two different products to Spain and one of them would be a reduced rate and one of them not. I fail to see how businesses too small to employ an accountant can be expected to know what VAT to charge for each product.
Another issue is the pricing, in the UK we are mandated to show the complete price of product including VAT on our websites yet until a customer places a product in their cart and enters their location how do we know what we will charge? Something that costs £1.20 in the UK inc VAT at 20% would be £1.15 for a customer in a country with a 15% VAT rate etc etc.
Also the people I have spoken to outside of the EU either refuse to believe that these rules apply to them, have decided that the EU cannot get any money from them so are ignoring them, or have stopped selling to the EU altogether. One ladies comment was that the collection and storage of data required would actually make her break the law in her own country in regards to privacy and she is more concerned with that than running foul of the EU. All this means that we become less competitive, less people are selling to the EU but the ones that are can price their products lower than businesses in the EU due to the fact they are ignoring the VAT we have to account for in our pricing.
Anyhow my response is getting dangerously close to being as long as your article but I hope you know realise that the threshold is important but is only one of the issues small and micro businesses have with the new regulations.
Your guest poster has missed a really key point here – that what he dismisses as “hobby” businesses, are in fact the lifeblood of thousands of people who don’t want to “grow their bonsai into something rather more impressive”.
You see, many of the new wave of digital entrepreneurs seek only to make a living that is flexible – often around other commitments or issues such as caring, disabilities or health issues that make employment or running a business with employees impossible.
Technology has made this possible in recent years, and this business model means that people can create a workable living without the administration costs that running a bigger small business entails. Such as VAT.
Let me clarify – a friend of mine worked out that, when childcare costs were taken into account, a business of her own would need to make an annual profit of only £3,522 (three thousand, five hundred and twenty two pounds – I haven’t missed a digit) in order for her to be able to stay at home with her child when her maternity leave finishes, instead of going back to her job.
I completely understand this man’s viewpoint – having worked with Withers LLP in a previous job, for someone who works in such a large firm, the idea of earning such a small sum of money to live on, without any intention to grow enormously, is, to him, unimaginable and probably pointless.
But for a large number of small businesses out there, mine included, the tiny profits we make, make all the difference to our quality of life, and in some cases keep the business owners off benefits.
The VAT threshold protects these people’s livelihoods – and increasing prices of what they sell to account for VAT, if the threshold was removed, makes them unworkable even without considering the extra admin. When one person performs every single task in a business, any extra admin is a big consideration.
Aside from this, as the current VAT MOSS rules stand, we cannot comply with the law – we can’t collect the data required because we are reliant on third party payment providers who don’t give us that information, and we can’t store it legally for ten years, because of cost, logistics and data protection issues. When your business turns over £4000 a year, £100 a year for server space somewhere is a significant extra spend.
I hope that goes some way to clearing up our “outpouring of anguish”.
This has been thought provoking Graham. As we know, the UK is already to go-to place in the EU for low taxation (overall) due to our zero rates and high threshold. I personally don’t mind the UK going it alone on taxation by retaining zero rates. It makes us a popular location, evidenced by the immigration issues – no-one wants to live in a worse place than they are already.
I guess what we are saying is, are small businesses in the UK mollycoddled by the comfort blanket of the threshold, which, as you argue, turns into a straightjacket, preventing businesses expanding. I think you are partly right, but I would see it more in terms of us supporting start ups and innovation and giving them at least a fighting chance of competing with large online and retail businesses. If Tesco, or Amazon could find a way to supply what you are selling, they would and obviously do, to the detriment in some places of small local businesses. So allowing people to have a level of business without worrying about VAT helps them get a leg up and also deals with the issue of the costs of collecting tax at low levels.
If such a threshold were in place throughout the EU, say EUR 35,000 (to match the lowest distance selling limit), what would be the impact on MOSS? I would argue that the big tax avoiders would still pay tax to the right member state and the net loss from not taxing at below that level would not be significant. Indeed I have suggested to HMRC and HMT that the EU contribution calculation would be a good place to look for a statistical exercise of the relative lost tax per country.
Should there be such a threshold JUST for electronic services, telecoms and broadcasting? I think this could work but I would see the rules being quickly extended to goods sold online, with the same threshold. This is the proposed approach taken in Australia I think and would be a reasonable compromise.
Should the UK threshold be immediately dropped? I would say no for the reasons others have said. But I would advocate that it be frozen and a system brought in like SDLT where someone exceeding by, say, £1000 would start off by paying a reduced rate, like a collared rate, that is increased every year for 3 years. Complex, but more fair.
I’m sure these initial thoughts have more holes than a Swiss cheese, but hopefully hidden in there is at least one idea.
Leaving aside Adobe, what about your competitor who turns over £100k per year?
I entirely sympathise with your views on MOSS and EU trade in general. It’s a mess created by a failure in 1993 for the EU to work on a true Single Market basis where VAT is charged and paid in the member state of origin rather than the recipient’s state. This arises, in my view, from a failure of any of the member states to genuinely embrace unity. But that is a different aspect to my point. I referred to MOSS merely as an intro to the issue of the UK threshold which is out of step and which, taken on its own, creates none of the issues that you have good cause to complain about.
I have a good deal more imagination than you suggest. I have considered working for myself in the past and have worked for a significantly smaller firm than my current one. My references were not so much to the unfair impact on multi-million turnover concerns and more to do with the impact on small concerns that are just not as small as £80k.
But I do not apologise for the view that the tax system should not inhibit growth. Nobody should be forced to trade more than he/she wishes. That does not mean they should be subsidised specifically in order to trade less than the person who seeks expansion. When politicians (of all stripes) say that the bedrock of our economy is the small business, they do not mean that this is because they will always be small. It is because of their potential to become any size, and their dynamism is to be encouraged. The VAT threshold does not encourage that for the reasons I give.
The problem with referring to classes of operator that have unfortunate or difficult circumstances, that everyone would wish to relieve to the extent possible, is that the threshold does not involve a ‘need’ qualification, nor is there a logical link between a tax saving and the costs and problems to which you refer. A micro-trader without any such problem still gets the tax break. The small trader just above the threshold, but who has those problems, gets nothing.
One of the advantages of a small business threshold is that it enables a small business to be more competitive. Its frequent that a small business will give more time and personal service at a lower cost to the consumer.You comment that people might like to register to avoid the stigma of appearing to be on the wrong side of the law. Can I just remind you we are not thieves, dishonest, cash in hand tax evaders.
People like using small business. They like the personal service, they like the attention to detail a small business owner has.
Small business owners are usually people who are passionate about what they do and not driven by become wealthy.
We love our work and are not interested in working for the large corporate sector. Strangely we are quite happy earning a simple basic living. There is more to life than making money and most of us have a work life balance that works
Rarely do we have large bank balances but we have time for family, living, being, doing, talking, enjoying
Your Withersworldwide profile states that defending HMRC claims for figures ranging from £20k to several millions is a regular aspect of your work.
I’m not sure that qualifies you to comment on the impact a zero threshold will have on micro business which you refer to as mere bonsai and under impressive.
I know that the main thrust of your argument is about our unusally high threshold and I found your points about the sudden impact of this interesting.
However the correlation you draw between this and the outcry about the new VAT laws in the UK is not to me convincing. For most of the microbusinesses lamenting the new VAT rules the current level of the threshold in the UK is irrelevant to our pain. Many many of us (happily) only make a few 100s or 1000s a year (if that) and would never expect to get anywhere near the French or German thresholds, let alone the UK one. Any small threshold would save us from a massive hike in fees per sale from our marketplaces (15% is my best option so far) or the burden of adminstration for our businesses being increased severalfold (if you only work a few hours a day this is a big issue because even half an hour a week is a massive cut in productive time- I’d love to see what a consultant firm would say about their fee earners having to see that % increase of their time used in admin) .
The real reason the UK has more small businesses complaining is probably largely linguistic – we have access to the very large US market. Our products are in English and we sell to consumers across the pond and are in direct competition with tiny businesses based there. The fact they (US & Canadian biz) seem to be being quietly told to ignore this legislation makes it even more impossible for smaller businesses to compete. Many people are finding that the only technically feasible option for them is harmonized pricing – but that will kill off any US sales, whilst many US sellers won’t charge any tax to EU citizens.
Add to this that a tiny % of our sales tend to go to Europe for the same reason and yet we can’t block EU sales (if we could even do this technically) without falling foul of anti discriminatory laws and the whole thing becomes even more farcical
That said, there are now Facebook groups for an increasing number of tiny businesses in other EU states trying to help and support each, so there is growing awareness and anger even where the thresholds are smaller because of the poor quality of the legislation itself which fundamentally fails to understand how things work technically and economically on the internet ..
Once they get to that sort of level they can start to afford the admin burden ectera. It would be nice if VAT could be tapered in some way so there wasn’t a big difference when you hit the threshold similar to the changes recently made for stamp duty, but the absence of that doesnt make a case for abolishing the threshold altogether. Of course you represent companies that do have to pay VAT and therefore I expect you would probably prefer the threshold to be abolished to make it harder for small companies to compete with your clients and all the advantages they already have.
My comment was that, if the threshold were lowered, this would possibly cause those who nonetheless traded below even that lower limit to register to avoid the stigma of being considered by the public as possible evaders. So that is not relevant to now, where the threshold is as high as it is. However, evaders are sheltered by the high threshold making non-VAT trading appear normal, and that is an unhappy fact, despite it not being the fault of honest traders.
In my own practice I deal a lot with owner managed businesses, although they do tend to be the more ambitious ones. £20k represents a year’s worth of output tax for a business whose net turnover is only £100k. That is still on the lower end of small. Furthermore, I advise unregistered businesses on whether or not they need to register and the advantages that sometimes comes with registering voluntarily. So I think you have formed a misconception of what I do.
Finally, the impact I am commenting on is more that on a small business that is not a micro business, not on the micro business itself. My piece clearly showed that those who prefer a micro business would defend the status quo; and that is obvious.
The reference to MOSS was essentially introductory. Your comments on its impact are perfectly fair. There will be more of that to come as it is proliferated. Are US/Canadian businesses being told to ignore it? By whom? It is plainly wrong if they do, but non-EU businesses have been required to account for EU VAT on these kinds of supplies when supplying EU nationals for some years now.
My piece was about the UK thresholds.
You started a new paragraph and sentence with……
Taking this point further, it is perfectly, and legally, possible for a B2C trader not to charge VAT because he can run his business below the threshold. That means he is not regularly distinguishable from the evader – the cash-in-hand operator whose failure to account for VAT is dishonest.
That is what you wrote. I’m perfectly sure there a many many wealthy business directors who have taken advantage of tax loopholes to avoid tax. Indeed this whole change to the EUVAT situation has come around due to very high turnover business taking advantage of those loopholes. Many entire companies are set up to manage wealth and family offices for the specific aim of reducing tax burdens. I really think this point you make is a very weak argument to reduce a threshold
With regard my misconception of what you do. Well on the website of the company you work for it clearly states. He has recently challenged HMRC ‘s decision that a client owed VAT of around £1.5m, resulting in their withdrawal.
And: It is usual for Graham to be defending HMRC claims for figures ranging from £20k to several millions as this is a regular aspect of his work
Maybe you need to have that part of the wording re-written if you consider it to be misleading.
Finally I made no comment that I was happy with everything as it is. Indeed keeping the threshold as is, is only by the hard work of a group of small business owners. Whether the threshold stays as the EU pushes forward with change is yet to be seen. However its quite clear from your piece that micro business should not come in your direction for support to keep the VAT threshold.
First and foremost – for you to say that it is ONLY the UK campaigning against the no threshold is just not true. There are thousands of us “one woman/man entrepreneurs” all across the world (more than a handful – as you so put it) that are going to have to shut down their business which is how they were putting food on the table due to this VAT. I have no problem paying taxes – but it needs to be at least where I can afford it. It seems that you nor the EU are understanding – that us little people are the backbone of businesses – if we close shop then we don’t get to buy from mid size businesses which can’t buy from large businesses which layoffs then happen which then NO government gets ANY money because no one can buy anything. The whole thing was to go after Amazon and the much larger companies – well then give us small entrepreneurs a threshold so that we are not affected up to a point. I am not in the UK and this affects me and you are damn right I am raising a stink about it and so is everyone else. It is not fair to us at all.
Some are being told to ignore it yes… but please know that majority of the small US entrepreneurs are just as concerned. I am actively involved with the groups on Facebook trying to campaign for changes to this. Yes non-EU had this regulation all along – however, the majority of us never knew it existed – so to us this is a new regulation as well. And we think it is unfair to all of the entrepreneurs.
I suggest reduction, not abolition. Most member states have a threshold and I think they are right to have one.
I should add that no client has ever mentioned unfair competition from micro-businesses, though a representative body once did so quite strongly, but that was 20 years ago. So I have no motive of the kind that you (understandably) suspect.
Bur reduction doesn’t solve your issue or what happens when you go over your threshold, what is does do is discourage businesses from setting up in the first place – after all this threshold is a turnover limit not a profit limit so profit is usually significantly less.
A reduced threshold reduces the cliff-edge effect significantly and has the other effects I mentioned.
I’ve seen replies from US congressmen and Canadian tax offices quoted saying this across social media and forums, so the message is at the very least mixed. Large business Etsy have already come out in defiance against direct HMRC indication of responsibilty for collecting VAT saying they won’t do this for resellers on their platform. However there are also US businesses who are trying hard to comply – but given that they are even further handicapped because they won’t get any benefit from VAT relief and other technical reasons, (including conflict with their own domestic privacy laws and place of taxation principles etc) this is probably a highly principled minority (although I may be being ungenerous here).
I appreciate that your piece was principally about the UK domestic threshold, but you did make a link between (and I do realise tangentially to your main argument and you did qualify it by saying it was “perhaps co-incidental”) between the outcry over EU VAT was related to this because so many businesses were sheltered by VAT protection for so much longer. This is the defensive line coming out of Europe in response to the “anguish” you mention and being repeated to small businesses in brush-off responses by MPs. But the businesses worst hit and shouting loudest are those that wouldn’t hit a threshold in most European countries, not artifcially protected fat cats. They are sole traders earning small but vital livings and supplementary incomes (as you see from your other comments). As such it It really isn’t a UK specific issue but a worldwide one and making a segue from the EU VAT issue to our large domestic threshold is just a bit of a red rag to a lot of very cross bulls right now!
On the administrative burden, I *personally* find VAT to be quite straightforward, particularly in comparison to the horrendous PAYE RTI returns. I’m not hit by MOSS and I’m already VAT registered.
For VAT, once a quarter I run through my invoices and calculate turnover and the flat rate VAT due. I login online, enter the 2 figures, click submit and that is it. The VAT is collected automatically from my business bank account. Easy to complete.
PAYE RTI is completely different. A huge headache. It requires bespoke software, archaic rules, calculations, NICs, withholding income tax, maternity/paternity complications, holiday pay, FPS’s and all sorts. And after all that, you have to make a manual payment each month of the tax to HMRC. PAYE is a nightmare in desperate need of simplification. Despite all my tax expertise I find it almost unintelligible.
The trouble is that VAT Moss is more complex then VAT, it also depends on the ratio of purchases to employees, I’m the only employee so PAYE is no big deal for me, but I have about 500 sales a month so VAT effort for entering/checking each of these transactions is going to be large.
I ran a micro business some years ago selling software – typical turnover £2000 pa. Just today, I did an analysis of one quarter of one trading year, just to see what VAT I’d pay out. It worked out to £36 divided between 10 different countries – well, that was assuming they each charged 20%. In practice I’d need to keep abreast of the numerous and changing VAT rates in 28 different countries, so that my 36 quid gets distributed accurately to the nearest penny. Why on earth should I even bother for an extra 2K? This is the reality of the micro biz. A lot of hassle for 2K a year, to generate 36 quid output tax per quarter.
The UK MOSS is a help, but it really doesn’t go far enough, and I’m not convinced that they can process my 36 quid without having to spend an amount approaching (or even exceeding) that same 36 quid. If I make a mistake in any of the calculations, then they’re not going to protect me from the anger of the VAT authorities in some other country.
If you want to kill off new businesses before they even start, then this is a good way to do it.
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