The UK government expects changes to EU VAT rules for digital products to raise for the UK Treasury an additional £300m in tax revenue every year.
The government has added that the changes will protect £5bn in revenue that might have been at risk without the changes, because they remove an incentive for certain companies to relocate outside the UK, in order to benefit from rock-bottom VAT rates: see: http://www.parliament.uk/business/publications/research/briefing-papers/SN07075/vat-on-digital-services
The rule changes reduce the advantage for companies of locating in low VAT countries by establishing that VAT will be paid in the buyer’s country and not where the seller is based.
So someone in the UK buying an e-book from Amazon will now pay VAT to the UK, not Luxembourg.
This will ensure that countries like the UK – which operate average or high rates of VAT – get a fair income from VAT on digital products and cannot be unfairly undercut by countries offering especially low rates to entice online business.
So all-in-all, this means more money that can be spent on, for example, UK hospitals and schools.
The changes were agreed by EU Member States, including the UK – the European Commission proposes EU laws, but it is national Ministers and MEPs who amend and decide on them.
Member States rejected the Commission’s proposal for an EU-wide minimum turnover threshold below which VAT would not be applied.
That means the new system does require very small UK companies offering digital products to consumers in other EU countries to now apply VAT, having previously been exempt. To do this, they need to keep records of where their customers are located.
However, the Commission has worked with the UK to minimise any burden, notably through the VAT mini one-stop shop (VAT MOSS) which enables businesses who sell in more than one EU member state to make their tax declaration only to Her Majesty’s Revenue and Customs (HMRC), rather than 28 different tax authorities.
What is more UK companies with a taxable turnover of less than £82 000 for sales to UK customers still do not need to apply VAT on those UK sales.
Yet many media reports have accused “Brussels” of somehow making life impossible for UK businesses, without mentioning that the new rules will both enable UK businesses to compete fairly with the rest of Europe and provide substantial gains for the UK Exchequer.
Most recently, the Mail Online’s “This is Money” section alleges on 12 April that the new rules have made it impossible to publish an e-book, in a piece headlined “Controversial European VAT rules scupper charity e-book on Terry Pratchett”.
It is unclear how the changes could in themselves prevent the publication of an e-book, given that e-books are published in every Member State, including those which never had a VAT exemption for digital micro-businesses in the first place.
Finally, European Commission First Vice-President Frans Timmermans has given assurances that the Commission is looking carefully at how the new rules are working in practice: “On VAT, the new rules came into force recently; they were decided a long time ago. We are evaluating it very pragmatically. We don’t want it to affect SMEs disproportionately, and will very carefully evaluate the effects. If there are adverse effects, certainly the Commission will take it into account.”
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