VAT law yet again seems to be struggling to keep up with technological change as the European Commission (EC) contemplates simplifying VAT rules further to encourage a thriving digital economy.
It was only in January this year that new rules came into force for determining VAT to be charged on cross-border supplies of electronically-supplied services to non-business customers. “Now, just a few months later, the EC appears to be acknowledging there may be a problem with the high degree of complexity faced by businesses – particularly SMEs – when seeking to take part in digital trade within Europe,” says Mustafa Sikandary, VAT manager at Moore Stephens.
Towards the end of March the EC announced that it was prioritising the creation of a ’digital single market’ and will be focusing its attention on a number of areas, including achieving better access for consumers and businesses to digital services. As part of this, the EC notes that “simplifying VAT arrangements is important to boost the cross-border activities of businesses, especially SMEs”. It acknowledges that the cost and complexity of having to deal with foreign tax rules are a major problem for SMEs. The VAT-related costs due to different requirements are estimated at €80bn.
“The EC’s announcement about the importance of simplifying VAT arrangements is a surprise, as the current rules are so new,” Mustafa says. “These now require businesses supplying e-services to private customers in the EC to charge VAT at the rate applicable in the country where the customer is located. This has created a huge administrative burden for businesses, which need to be able to identify the customer’s location, apply the correct VAT rate and account for it.”
Businesses have the ability to register in just one jurisdiction and coordinate their VAT administration through a Mini One Stop Shop (MOSS) registration. However, EC figures in March indicated that only around 7,500 businesses had registered to use the MOSS system, even though an estimated one million businesses could be eligible to do so. “This suggests that many small businesses are struggling to understand the rules,” Mustafa says. “Complex VAT rules are a problem for SMEs, and the EC seems to have picked up on this in its latest strategy for a ’digital single market’. Yet again we have an example of VAT law struggling to cope with technological change.”
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