The unification of VAT administration in the European Union could cause a short-term headache for businesses selling goods into the economic bloc, experts say.
Among the proposals set out in the European Commission’s recently published consultation document on VAT in the digital age are plans to improve the Import One Stop Shop (IOSS) that will make registration mandatory for all businesses. The proposals would also remove the €150 VAT threshold so that all sellers, irrespective of the value of goods, would need to declare VAT for distance sales of goods of any value.
Alex Baulf, senior director of global indirect tax at Avalara, says such a move would require businesses that trade with the EU to tackle the administrative complexities caused by the change.
'IOSS registration is no mean feat for small businesses that don’t have tax departments'
The Northern Ireland question
The EU’s VAT in the digital age proposals are silent on one key area: Northern Ireland.
In Northern Ireland, there is still confusion and a lack of certainty over procedures. Depending on whether a business is going into the north or the south of the island of Ireland, there are different considerations. And the processes are not entirely clear even before any further requirements are introduced following the consultation.
‘There will be complications, but also there will be confusion,’ says Scott Craig, head of VAT at Azets. ‘The discussions [over the Northern Ireland Protocol] need to be concluded, confirming what the position is, and then guidance needs to be issued that has a practical slant on it, with examples of what should be done and where.
‘The administration that is associated with VAT should be minimised and simplified wherever possible if it is going to help business and make sure that people are compliant.’
‘For example, making IOSS registration mandatory would require an immediate effort from sellers to ensure they’re up to speed, from finding an intermediary to act as their representative and understanding the classification of products sold, to how VAT is charged and collected on products at the point of sale, and overhauling tax calculation and reporting systems,’ he says. ‘This is no mean feat for small businesses that don’t have tax departments at their disposal like larger e-commerce companies.
Scott Craig, head of VAT at Azets, says: ‘The current procedures, whether they are with the €150 threshold or not, are in some cases stopping UK businesses selling to the EU.’ He argues that the removal of the threshold would not encourage businesses to trade with Europe, as there would be an additional administrative burden.
Craig adds that there is an assumption that every business is switched on to new technology, but this might not be the case. ‘There are still quite a few small businesses that do not have access to the online portals, or even the knowledge to do so,’ he says. ‘It is great saying that all you need to do is a few clicks and away you go, but it is not as straightforward as that.’
Fighting fraud
Europe’s interest in VAT is understandable. According to the commission’s call for evidence, VAT is a major source of revenue for member states, representing approximately 7% of GDP. In 2019, VAT revenue collected by the 27 EU states stood at more than €1 trillion. But, at the same time, revenue loss was estimated at €134bn a year.
A significant part of this loss consists of fraud, in particular missing trader intra-community fraud, which is estimated to cost €40bn–€60bn. Sometimes referred to as ‘carousel fraud’, missing trader intra-community fraud occurs when a business disappears after selling goods with VAT added but before sending the charged VAT on to the relevant tax-collecting agency.
'The VAT system is not only prone to fraud but has also become increasingly burdensome for businesses'
As the commission’s document says: ‘The VAT system is not only prone to fraud but has also become increasingly complex and burdensome for businesses. These 30-year-old VAT rules are not adapted to doing business in the digital age, [so we are] calling for reflection on how technology can be used to reduce administrative burdens and related costs for businesses and at the same time fight tax fraud.’
Act now
The original One Stop Shop was introduced on 1 July 2021 and allows businesses to avoid multiple VAT registrations in the EU for crossborder transactions. Baulf urges businesses to act now before further changes are introduced.
‘Businesses can get ahead by making sure they’re familiar with the One Stop Shop and Import One Stop Shop changes that came into play last year and registering if they haven’t already,’ he says. ‘Doing so will ultimately unlock huge growth opportunities with the world’s largest trading bloc and help ensure tax compliance should the public consultation decide to bring in additional measures.’
The commission is reviewing options for digital reporting requirements
Craig says: ‘The administration and the amount of additional work that businesses are having to comply with have grown, and anything that can simplify and oil the wheels of business would be a step forward. The paperwork and admin have to be on point, and if they are not, things can get held up. This can create cashflow problems and increase costs.’
Alongside the proposal for a single VAT registration in the EU, the commission is reviewing options for digital reporting requirements, including e-invoicing, and the VAT treatment of the ‘platform’ economy. The policy options look at the introduction of partial (limited to crossborder transactions) or fully harmonised (domestic and crossborder transactions) digital reporting requirements. The proposals also cover data storage obligations.
The growth of the platform economy has created its own headaches. The proposal document asks whether platforms should be required to collect VAT from their users and how uniform such an approach should be.
