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.