Two-thirds of smaller businesses with turnover of under £10m per annum remain unaware of how they will be affected by major changes to European VAT rules governing the supply of telecoms, broadcasting and electronic services.
A survey conducted by financial services organisation KPMG found that 62% of small businesses did not know about the upcoming changes and 66% did not know about the potential penalties associated with non-compliance.
The changes to the rules mean VAT will no longer be charged and accounted for based on where the supplier is established, but according to the EU country where the customer is based.
The revised rules will apply to VAT charged on fixed and mobile telephone services; video conferencing services; access to the internet; radio and TV programmes transmitted over a radio or TV network; live internet broadcasts; video on-demand; app downloads; music downloads; web hosting services; distance learning; and e-books.
KPMG found that 75% of suppliers were considering putting their prices up as a result of the changes, 26% of them by 5% or more.
The audit firm calculated that if all the additional costs of compliance were passed on, as well as the uplift in VAT, prices on some services could rise by 11% in countries with higher VAT rates.
Standard VAT rates in the UK are currently 20%, slightly below the average level of 21.54%. There is, however, substantial variance across the EU, from as high as 27% in Hungary, to as low as 15% in Luxembourg.
Compliance and billing burden
KPMG pointed out that the changes would require many businesses to make deep and wide-ranging changes, including collating more accurate customer data, modifying their enterprise resource planning (ERP) systems, and altering their financial reporting, tax reporting and audit processes.
Businesses could resort to a number of ways to report and pay the VAT, either by registering locally in each country where they have customers, outsourcing the entire process, or via a "mini one stop shop" – an online service where they can register for VAT in one country and account for VAT on supplies to customers elsewhere in the EU.
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“The new VAT rules mean affected companies face an increased compliance burden and billing becomes more difficult to manage,” said KPMG tax partner Amanda Tickel.
“In the first instance, businesses need to ensure their systems can capture the right sort of information to evidence where each customer lives and apply the correct VAT rate. Coupled with this, those affected urgently need to decide how they’ll report and pay the VAT,” she said.
But other businesses may even choose to reject the added compliance burden outright and simply stop selling to particular EU countries. Over a quarter of suppliers polled by KPMG said they were considering that option.
However, it also said there would be an upside for the UK economy, which could benefit by around £300m, because the VAT collected from UK customers will belong to the UK Treasury, as opposed to the country where the supplier is based.
“The majority of e-services bought by UK consumers are currently not subject to UK VAT, as many of these e-services are currently sold from countries such as Luxembourg where the VAT rate is very low,” said Tickel.
“But someone has to lose – either the suppliers of affected services will see significantly reduced profit, or consumers will see increased prices as some of the extra VAT cost is passed on.”