HMRC miscalculated the number small firms affected by the new EU VAT rules by more than 10,000%, according to a report by Enterprise Nation.
New EU rules were introduced in January 2015 that require UK digital services firms to charge VAT based on the rate that applies in the country of the customer, rather than at the UK rate. This means businesses now need to collect information about their customers’ locations and VAT statuses, potentially across all 28 EU member states.
An EU VAT Mini One Stop Shop (MOSS) was set up by HMRC which prevents UK VAT-registered businesses from having to register for VAT in each separate EU country.
Enterprise Nation reveals that in 2013 an investigation by HMRC estimated that around 5,000 non-VAT registered businesses would be affected by the new rules. However, similar research by the Department for Business, Innovation and Skills put the figure at around 350,000.
The report suggests that HMRC’s underestimation resulted in businesses finding out about the rules within weeks of their implementation.
It is claimed that HMRC assumed that most EU-trading businesses would be above the UK VAT threshold and therefore eligible to use the MOSS. However, Enterprise Nation’s survey reveals that 8 in 10 digital micro businesses were below the UK VAT threshold.
HMRC also expected that the majority of businesses below the UK VAT threshold would be selling in online marketplaces such as Amazon. Enterprise Nation’s survey found that 65% of micro firms sell products from their own website and only 17% use online marketplaces.
The lack of awareness also meant that online marketplaces that allow micro firms to trade overseas were not in a position to offer solutions to affected businesses.
Emma Jones, founder of Enterprise Nation, said:
“The EU VAT regulations caused havoc in the digital small business community.
“Micro enterprises are a hugely important contributor to the economic growth and innovation and their functioning should be stimulated, not hindered. As they stand, these rules make it attractive for small firms to cease trade with Europe.”