UK micro-businesses risk EU VAT bill of up to £190k post Brexit

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With the likely date of Brexit now set for March 2019, it has emerged that over 35,000 UK micro-businesses selling over the internet face a major EU VAT compliance bill. This could hit £190,000 per annum just to preserve existing EU revenues.  The alternative is geo-blocking all EU customers.

UK online retailers lose EU VAT compliance simplifications

The explosive growth of sales to European consumers via the internet is no secret, and is set to account for over 20 per cent of retail selling in the EU within a few years. In light of this, the EU has created a special VAT compliance simplification regime, known as Distance Selling Thresholds, to eliminate the foreign tax reporting and payments burden for small businesses to encourage the growth of the EU digital market. 

One of the basic rules within this enables UK micro businesses to sell goods to EU consumers using their UK VAT number instead of having to VAT register in each EU country where their customers live. Generally, they are then exempt from having to register for VAT in each country until their sales hit the annual ‘distance selling threshold’ in every individual state. This threshold is either €35,000 or €100,000 per year per country. Once over this threshold, the UK seller must VAT register as a non-resident VAT trader in each country. They can continue to sell, but must charge the local VAT, which is payable to the local authorities, through a country-specific VAT return.

Aside from the extra monthly reporting, this requires online sellers to master up to 22 different EU languages and at least 27 other tax authorities.  The alternative is to appoint local tax advisors in each country.

35,000+ micro-businesses face bill of up to£190,000 to maintain their EU trade

The end of this exemption will have major implications for the estimated 35,775 UK micro-businesses who are currently selling over the internet into Europe, who face being drawn into the EU VAT net for the first-time following Brexit.

In 2016, The European Commission estimated the cost of this compliance burden at £7,000 per year, per country. This could add up to £190,000, 000 per year for the EU27.

Small businesses are already facing the digitalisation of the tax agenda – and even this is in constant flux, with the announcement last month that legislation to implement this initiative has been removed from the Finance Bill 2017.

Now, the many UK micro businesses that have been building up substantial new revenues from EU e-commerce will have to weigh up the compliance costs against the potential loss of trade. The alternative? Geo-blocking EU customers to avoid the VAT requirements, though this would bring an unwelcome end to EU sales.

Here, digitalisation isn’t really an option – it’s essential. It’s not just the challenges associated with understanding the various (and varying) VAT liabilities and charges in each EU state, but major potential for ‘lost in translation’ as businesses struggle to understand their obligations.

Failure to do so will leave any online retailer exposed to investigations and potential fines, quickly quashing any lingering optimism regarding any business opportunity associated with “the divorce”.

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