‘VAT MOSS’: Who would have thought that these two little words, introduced to unsuspecting digital small business owners and entrepreneurs in January 2015, would be met with such acrimony and claims of a total #VATMESS?

The consternation stems from EU VAT legislation introduced earlier this year applying to all “automated digital services” which brings corporate levels of regulation and administration not just to the global tech-giants but to the door steps of sole-traders and SME’s across Europe.

The legislation was originally formulated in 2008 to stop billions of euros of tax being lost from multi-nationals setting up in low-tax jurisdictions. To the annoyance of the European Commission, big players like Apple, Amazon and Google had taken the decision to headquarter in Luxembourg, and thereby avoid VAT. This essentially made everything that they sold 20% cheaper than their rivals – quite the commercial advantage – and startups simply couldn’t compete. In a bid to pursue the US giants and break their monopoly hold over the EU digital market, the EU passed regulation requiring those who sold goods to the EU to pay VAT in the EU buyer’s country, at that country’s VAT rate. To add to the administrative burden, no minimum threshold was set and sellers were tasked with collecting ‘two non-contradictory pieces of information’ to be stored for 10 years.

In order to help small businesses, VATMOSS – a VAT mini one stop shop – was created to help businesses handle VAT. In the UK, the HMRC massively underestimated how many businesses this would apply to – originally citing that it would only affect around 5,000 businesses. The Department for Business, Innovation and Skills recently estimated that there were 350,000 people working within the affected space. As a result, SMEs are having to spend hundreds and thousands of pounds on software and support services to process their VAT – costs which are hugely out of proportion with the amount of VAT due in the first place.

Since then an army of SME’s across Europe has taken to Twitter to protest against this self created  #VATMESS which threatens their continued existence.  It’s pretty obvious that the majority of those newly emerging digital businesses – which Juncker has made the centrepiece of his presidency – cannot physically comply with such extensive data requirements. Whilst the incumbent behemoths have legions of accountants at the ready to adjust to this new regime; European small business is faced with a stark choice: either pack up or face major expenditure.

The saga is a prime example of well intentioned but political rather than practical policy making. It stems from an increasing EU concern about the potential strangle-hold of US tech giants over the EU marketplace, and SMEs in this instance have been the fall guys.

In all fairness, there are signals coming out the EU that indicate a more SME friendly approach. A raft of MEPs have petitioned on the issue; whilst Vice President Timmermans has recently stated that he is prepared to reconsider the impact on small business. At the same time, President Junker has also made the creation of a digital single market an urgent priority to ensure that citizens and small business can take advantage of digital progress and its potential for boosting European growth and competitiveness.  The Digital Single Market Strategy due to be released on 6th May will focus on facilitating cross-border e-commerce harmonisation, especially for SME’s. It will also aim to simplify VAT arrangements in order to boost cross-border activities of small businesses.

Whilst this is a promising development, it underlines the critical need for the EU to establish the most appropriate legislative framework to unleash digital opportunities. We all know that even well-meaning regulation produces unintended consequences that turn small problems into big ones – and this isn’t an argument for no regulation at all. But we do need a paradigm shift in the way regulation is formulated, in order to maintain a clear focus on what the priorities actually are and the impact of regulation.

Perhaps the VATMOSS mess presents us with a learning opportunity: the EU needs to remain acutely alert to the needs of SME’s and properly consider and calculate the impact of regulation. Regulatory development must be a tool for engagement not exclusion. Equally, #VATMESS is a timely reminder of the importance of SME’s making their voices heard, in whatever way they can. Only when these two elements come together will we achieve the fundamental shift needed to formulate smart regulation for all of Europe’s digital businesses.

Photo Credit: Alamy