Turns out that the EU has created a nightmare scenario for the smallest of EU-based e-commerce businesses. The “Mini One-Stop Shop” (“MOSS”) was supposed to be a simple way to account for VAT liabilities in other member states, but the cost of calculating the foreign VAT is an unexpected roadblock for the “micro-businesses”, with minimal sales outside the country of residency.
The International Tax Review (http://www.internationaltaxreview.com/Article/3445165/VAT-MOSS-EU-to-review-B2C-digital-services-rules.html) writes that the core of the issues is that determining the location of the customer is difficult. Also, authorities themselves are weary of auditing micro-businesses that only have a few hundred euros in sales.
In the article, one of the VAT leaders of the Irish Revenue Authorities is quoted as declining companies that ask for a registration, because the cost of administration is disproportionate to the revenue generated. This statement requires some explanation: The VAT registration threshold in Ireland for services is an annual turnover of Euro 37,500. However, under the MOSS rules, the registration thresholds do not apply. This leads to the strange situation that micro-businesses are now required to register for VAT, even if their turnover is below the threshold of their own country.
The Irish civil servant is quoted as supporting a new, low, pan-European registration threshold.
In the meantime, the UK has already officially allowed UK-resident micro-businesses to skip the registration requirement. But to still encourage UK micro-businesses to register, HMRC says:
“If you are below the UK VAT registration threshold (currently £81,000) you can register for UK VAT to use the UK VAT MOSS. You can charge and account for VAT in respect of your EU cross-border B2C supplies but won’t have to charge and account for VAT on your UK domestic supplies. In addition, you will also be able to reclaim any VAT charged on business expenses directly related to your cross-border digital service supplies.” (my underlining)
See http://www.gov.uk/government/publications/vat-supplying-digital-services-to-private-consumers/vat-businesses-supplying-digital-services-to-private-consumers. (HMRC has these crazy web addresses)
I can understand the difficulties on the authorities’ and businesses’ sides. A European registration threshold for MOSS would be helpful, even if it takes a while for the bureaucracy to digest. Remember – first a new threshold must be agreed upon with 28 member states, then included in a new version of the VAT Directive and finally implemented in local legislation (even though in the final phase taxpayers could claim direct effect of a beneficial rule in the Directive).
I could even envisage a temporary relief where micro-businesses won’t have to register if the revenue generated from another member-state doesn’t exceed that member state’s existing threshold (currently varying across the board from a few thousand to tens of thousands of Euros). This would go contrary to the ruling of the European Court of Justice in the Schmelz case, C‑97/09 (see http://tinyurl.com/9l4v89j for a pdf of the ruling).
That Schmelz ruling applies for U.S.-based e-businesses as well – VAT registration thresholds do not apply to non-residents. U.S. businesses must always register for VAT under MOSS if they sell downloads to EU-resident individuals.
But I still don’t understand the issue that business seem to be having with the location of their customers. Everybody pays with PayPal or a credit card – and the details provided by the payment platform contain location data, right?