An update on the bizarre VAT regulations that are putting UK micro-businesses out of business

For the story so far, see the previous blog HERE.

The latest government statement gives a clearer view of the situation than any previous official document. The link to it is below*. Change.org has a useful overview HERE and I have several points to make about it myself:

My own view remains that this piece of legislation was reasonable in its aims to curb VAT avoidance on the part of big business but that the people who developed it forgot or disregarded the effect on micro-businesses. Now this has been pointed out, instead of repairing the damage, they have made it worse. 

The government statement* differs in some key respects from the official view being given only a few days ago. The position on VAT registration is at odds with the version I was given when I spoke directly to the UK VAT Office a couple of weeks ago.

Why would this be? Either the people I spoke to were ignorant of the facts or the position has changed.

The officials in the key office ignorant of the facts? It seems unlikely given the reports of the number of queries they have had to field since news of the regulations broke in late summer / autumn.

So I surmise that the position has changed. 

It looks to me as though the realisation has finally hit home that something dire is going to happen to micro-businesses and someone has taken some action.

The reaction should have been to put in place the measures to protect micro-businesses (the measures that are already in place in respect of current VAT regulations). Instead, the move is to make a minor amendment with respect to UK VAT registration and then to spell out in excruciating detail how and why micro-businesses may as well shut up shop.

The minor amendment is to allow micro-businesses to become VAT registered in the UK and provide nil returns whilst they remain below the VAT exemption threshold. This gives them access to the one stop shop provision for EU VAT.

This looks like a step in the right direction but it does NOT solve the problem. It does not even come close.

Every affected micro-business, sole trader, small cooperative, voluntary organisation must take on the burden of VAT registration. Being able to provide nil returns on UK VAT does not equal zero bureaucracy. And that’s the easy bit. Here’s a less easy bit:

Every sale into another EU country must be identifiable. That’s easy if you’re an Amazon or a Google, you have the resources to run country-specific sites. Some micro-businesses might be able to do this, many won’t. But let’s assume the sale can be identified, then what? The VAT can’t have been added to the original invoice unless the system is sophisticated enough to determine country of origin and current VAT rates at point of sale. I could go into the details of why that is technically infeasible for a micro-business, but won't. The result is that either the VAT comes out of the micro-business’s pocket or the micro-business puts prices up across the board to cover 27 potentially different VAT rates.

The choice is stark: make yourself less profitable or less competitive.

It is the nature of micro-business that when it is micro it operates on a shoestring – there isn’t the slack to pay all its customers’ VAT bills or to make itself less competitive by across-the-board price rises. The Amazons, Googles, Apples, etc of this world couldn’t have done it when they were micro-businesses.

Why is our own government pulling up the drawbridge to deny current entrepreneurs the means to make their mark in the digital world?

You might be thinking that the pricing issue though tough, is surmountable. And you might be right. So now for the hard bits.

For every sale to someone in an EU country, a micro-business must keep two non-conflicting pieces of evidence of the buyer’s location. That’s EVERY sale. The evidence MUST show the buyer’s country.

Let's work this one through: a small cooperative sells MP3 downloads to raise money for its cause. It uses an automated online ecommerce system because otherwise it would be unable to afford to operate. A buyer in Spain pays for and downloads a single product for 99p. There are alternatives here so let’s unpack them.

1. The transaction is done via an online payment system with only an email address. The cooperative has no idea they have made a sale to Spain. For this single 99p sale, they have just become guilty of a criminal act and could be prosecuted.
2. The transaction request comes with an address on it (evidence 1) and when payment comes through it too has an address on it (evidence 2). The cooperative won’t have the resource to set up sophisticated accounting structures so if and when asked for this evidence by the VAT Office, they must rely on being able to find it. That’s OK, electronic data is easy to find. Well, as long as the cooperative has invested in robust backup systems in case of technical failure.
3. Same scenario as above but the country of origin on evidence 1 is different from that of evidence 2. In this case the seller “must contact the customer and ask them to reconcile the discrepancy between the two sources of information” I’m quoting HMRC here and I am imagining the UK sole trader making contact with the Spanish customer thanking them for the 99p sale and asking them to reconcile the discrepancy between the two sources of information. This is the sort of contact from seller to buyer that may as well be titled ‘Don’t shop with us again’.

Some of this evidence by way of billing addresses and so on might be gathered fairly painlessly. However, in order to comply with the law, every transaction must be checked to see if it is a) from one of the affected countries and b) to see if the evidence of origin matches. That in itself is a huge administrative burden.

Can’t this be done automatically? Yes, if you have the resources of an Amazon or Google or Apple. If you’re a sole trader then you will have to devote significant time to this that would otherwise be spent building your business. Your business will suffer for it.

And it doesn’t stop there.

The requirement to keep hold of these pieces of evidence puts you under the Data Protection regulations. “You will need to register as a data controller” – quoting HMRC again. This requires an annual fee – not a huge one but yet another cost on top of the extra red-tape you are now having to resource for every sale – and puts you and your business under the extra burden of the bureaucracy that goes with data protection registration.

In my view it is foolish to advise anyone to rush into VAT registration without being fully aware of the administrative burden or potential legal pitfalls – there are many. As a micro-business the effort required to ensure full compliance is likely to be so detrimental to the business as a whole that it becomes pointless. Being a VAT registered business is burdensome enough; being a VAT registered bankrupt business is even worse. The same caveats apply to registration under Data Protection.

*This is the latest from HMRC

https://www.gov.uk/government/publications/revenue-and-customs-brief-46-2014-vat-rule-change-and-the-vat-mini-one-stop-shop-additional-guidance/revenue-and-customs-brief-46-2014-vat-rule-change-and-the-vat-mini-one-stop-shop-additional-guidance

Government minister advocates law breaking but washes his hands of the consequences (updated)

A government minister has just given micro-businesses some stark alternatives.

Put simply Vince Cable provides this advice to budding entrepreneurs:

1. You should put yourselves in a position where you will have no option but to break the law – but don’t worry because the bureaucratic burden of doing this will put you out of business before you go to jail (probably). If you do end up in jail don't look for sympathy.

2. You could choose to top-slice your income and donate it to a big company – this might also put you out of business and will certainly slow your growth as a company

3. Why not simply go out of business – see it as cutting out the middle man, bow to the inevitable and just give up now

4. There isn’t a 4 - that's it.

I am so appalled by Vince Cable’s response to the petition on the new EU VAT regulations that I have written my own response to his response. Here is an extract:

In one part of his response, Vince Cable says of micro-businesses, sole-traders, voluntary cooperatives etc: “... if they can separate out their cross-border business from their domestic they will only have to register for VAT on their cross-border sales”.

My response: That statement is breathtakingly disingenuous. “they will only have to register for VAT on their cross-border sales” – Let’s unpack that. There is no micro-business anywhere that can realistically take on VAT registration in 27 EU countries. I would go as far as to say it borders on negligence to imply that they should try. 27 potentially different VAT rates, returns obligations, and languages? Just for avoidance of doubt, Cable's words are slightly ambiguous but HMRC's own documents make clear that this is what is meant.

The reality (as Vince Cable must be aware) is that even large businesses don’t take on this task. The UK government has set up a ‘one-stop-shop’ so that all EU VAT can be dealt with through the UK VAT office. Here’s the stinger. If you are not UK VAT registered, then you can’t use the one-stop-shop and must go it alone.

So why can’t any affected business simply register for UK VAT? Of course they can, BUT it has long been recognised that the bureaucratic burden of VAT is impossible for micro-businesses and simply drives them out of business before they can grow. That is why we have a VAT exemption threshold. 

Let me repeat that: That is why we have a VAT exemption threshold. 

This is to allow micro-businesses to grow to the size where they have the resources to cope with VAT registration and all that it implies. The EU VAT burden (with its potentially 27 different systems) is way more burdensome than the UK system which is recognised to be too much of a burden for a micro-business.

I really struggle to believe that a government minister seriously suggests that a sole trader, tiny cooperative venture or other micro-business “register for VAT on their cross-border sales”. That is tantamount to inciting law-breaking. It is asking a business to put itself under the jurisdiction of a set of laws it has no means to adhere to. It is grossly negligent and totally unrealistic. The reality of Vince Cable’s statement is that small businesses will be forced to cease trading.

And here is what Vince Cable’s full response SHOULD have said:

The purpose of these new regulations was to prevent huge companies like eBay, Amazon and Google from sidestepping their VAT commitments by nominally locating an office in the EU country with the lowest VAT rate. Somewhere along the way we forgot about the effect on micro-businesses. The intention of the law was not to crush entrepreneurship and close all our micro-businesses thus throwing a whole new swathe of people out of work. Sorry, we got this part wrong. Of course there should be a VAT exemption threshold and we will work to get this sorted as quickly as possible.

And here is the ACTUAL response from Vince Cable in full, interleaved with my admittedly heat-of-the-moment comments.

VC says: “The changes to VAT on digital products is not new or sudden - the change was agreed in 2008 and we've done a lot to communicate it to businesses.”

The reality: The majority of micro-businesses were unaware of the change before late 2014. HMRC itself admits it has only communicated to some already VAT-registered companies.

Micro businesses have no means of staying in the loop for this kind of thing. They cannot all afford the subscriptions to maintain membership of professional societies. Indeed even if they did this, it is uncertain they would be any better informed. A search of the websites of such organisations shows almost no mention of the new VAT regulations. The only exception I could find was TIGA who have been trying to put the case for video games businesses. The many cooperatives, voluntary groups etc who rely on raising funds through digital sales have no means to keep themselves up to date on the minutiae of the masses of legislation that rolls through the various government departments. Many of these have already given up and stopped trading. In the current economic climate that is very bad news.
[update: since writing this blog HMRC has said that the change was always intended for all businesses including micro. In my view that statement is demonstrably untrue - see later update]

VC says: “Regardless, the majority of UK micro-businesses will not be affected.”

The reality: ALL micro-businesses who sell digital products online WILL be affected. 

It won’t matter that their market isn’t in one of the affected countries. Online means their products are available in those countries and the onus is on them to deal with any such sales. 

This means significant changes to ecommerce systems to identify country of origin and block sales (that on its own is pretty bad news in the current economic climate). 
[update: HMRC has given its opinion on businesses blocking sales to EU countries. Apparently this will fall foul of anti-discrimination laws]

And if you think an alternative is to carry on with such sales and deal with the VAT, think again. Micro-businesses do not have the resources of the Amazons and eBays of this world. Imagine a sole-trader or voluntary cooperative group registering for VAT in 27 different countries? Different reporting regulations, returns to be made several times a year, language problems to overcome, exchange rate issues to be worked through, two items of “non-conflicting evidence” to be obtained 'prior to' every transaction etc. For a sole trader or tiny business that’s struggling to establish itself. I don’t think so. 

OK, so don’t bother registering until you make a sale (I can almost hear the glib politician saying it). This is an online world. So you as a sole trader make a sale to a European country via your online store. Have you already made allowance for the VAT? If so, you’ve had to invest in significant amendments to your online store to allow it to take VAT, further than that, it needs to make the calculation depending on the country of the buyer, so that’s 27 different rates potentially (oh and you’d better be sure you can keep up with any changes in any of those countries, because once registered the onus is on you). Oh and you can’t even put VAT on your invoices if you’re not registered. And how about those pieces of evidence of the buyer’s location you will be legally obliged to obtain ‘prior to’ each transaction? 

I’m not going further down this route but believe me, I could go on for pages showing you how every route leads off a cliff. Even the ‘stop selling into Europe’ alternative is fraught with technical challenges.

It really does not take much thought to realise that having to cater for VAT in potentially different incarnations in 27 countries is something well outside the resources of any but the bigger companies. No sole trader or micro-business should ever be advised to register for VAT in another country. The bureaucratic red tape would bring down the business.

VC says: “Here's a breakdown of how the changes affect micro-businesses:

Micro-businesses that trade only in the UK - and never sell to the EU - won't have to do anything. They won't have to register for VAT in 2015.”

The reality: Sure. Companies like small greengrocers, corner shops etc won’t be affected. The guys working on the latest NASA space probe won’t be much bothered by it either. We could make obvious but irrelevant statements about this all day, but let’s not. People’s livelihoods are at stake here.

VC says: “Micro-businesses that do sell to other countries in the EU but only do so through marketplaces like an app store also won’t have to register for VAT. It's up to the operator of the marketplace to account for VAT charges.”

The reality: Again, yes, as long as the micro-businesses are working through someone else – the someone else will be mainly the huge companies like eBay, Amazon and Google – they have the resources to cope with the changes. But this means that these micro-businesses will be unable to earn as much because the big companies will take their cut. Any entrepreneur who wants to go it alone and try to build a business online – forget it.

VC says: “Micro-businesses that trade to the UK and to the EU will have to register for VAT.”

The reality: anyone selling digital products online is caught in this. Even if their market is not the EU. Micro-businesses don’t have the resources to run multi-sites like Amazon and eBay. If they sell a single product into an EU market they are caught in the trap.

VC says: “But if they can separate out their cross-border business from their domestic they will only have to register for VAT on their cross-border sales.”

I addressed this breathtakingly disingenuous statement in the extract at the top of the blog. There is an update.
[update: since the start of mass protests from small businesses late in 2014, HMRC has said it will now allow micro businesses to register for UK VAT and provide zero returns, thus giving them access to the EU VAT one-stop-shop. This has been advertised as a "solution". It is not. It still lays the bureaucratic burden of VAT returns onto businesses that do not have the resource to cater for them. Let me repeat one more time: That is why we have a VAT exemption threshold. 

This move is a clear demonstration of the lies in the statements that "the change was agreed in 2008 and we've done a lot to communicate it to businesses" and that the inclusion of micro business was not an oversight. Had micro business been thought of from the start, this move would have been thought about in 2008 or earlier, not in late 2014. Had it been thought about in 2008 or earlier there would have been time to see that it is no solution to the problem of destroying small businesses.

Responses since late 2014 have brought to light that very many VAT registered businesses had no idea of the forthcoming changes and neither had their accountants, legal advisers or professional bodies. The only people who seem to have been kept in the loop are the big businesses who stand to gain a lot by mopping up the customers and sales that small businesses will no longer be able cater for legally.]

VC says: “UK sales will be unaffected.”

The reality: online sales don’t take account of borders. The sorts of ecommerce systems used by micro-businesses don’t have the sophistication of systems used by huge multinationals. The reality is that if a trader puts something on their ecommerce platform, it will be accessible across borders. What is the small trader to do? Manual intervention in all online sales is a theoretical solution (because automatic intervention to cater for the possibility of 27 different VAT regimes is a technical add-on way beyond the purse of a micro-business). I say a ‘theoretical’ solution because on the whole the only way a micro-business can realistically run an online operation with any hope of eventually growing to become a big business is to have its online sales automated. Result again is loss of business and loss of revenue. 

More businesses go under. Fewer businesses grow from micro to small to medium to large. The knock-on effect is fewer jobs and more people thrown out of work. And all because the politicians made a mistake that they now  refuse to acknowledge. The VAT exemption threshold would sort it all out at a stroke.

VC concludes by saying: “Hope that helps clear up the change.”

I am unable to respond to that without profanity.

Public and private investigations clash - eventually!

The new book Buried Deep sees the light of day and not before time. This one has had a chequered history as related in the annals of Hornsea Writers, but it's here now.

Surrey-based Damien Marks has no idea that his wife has employed a private investigator to check up on him. And she has no idea that a police team in York sees his inexplicable behaviour in a far more sinister light and have him in their cross hairs as the prime suspect in a murder enquiry.

Detective Superintendent Martyn Webber is appalled to find private investigator Annie Raymond slap bang in the middle of his case. Not that he takes her seriously, but he has his own secrets that he can’t afford for her to find. Then the death of a peripheral witness turns the investigation on its head.

Meanwhile, oblivious to the entanglements of the adult world around her, schoolgirl Olivia Lamb hugs to herself the secret of the ghost hands she saw in the surging waters of a York flash flood.

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