Value Added Tax (Place of Supply of Services) (Supplies of Electronic, Telecommunication and Broadcasting Services) Order 2018

Lyn Brown Excerpts

Monday 10th December 2018 General Committees

[Lyn Brown (West Ham) (Lab)]

It is an absolute pleasure to serve under your chairmanship, Mr Hosie. As the Minister said, the VAT MOSS system was introduced in 2015 as a means for small businesses that export digital services to simplify how they pay VAT to different EU countries. The locus for VAT payment was changed from the country of the seller to the country of the buyer.

As hon. Members are aware, the introduction of VAT MOSS was chaotic, to put it mildly. Labour MPs and MEPs were involved in trying to ensure that microbusinesses could continue to operate despite ambiguity about whether or how they should be paying VAT on digital services. I am told that, unfortunately, some of the platforms used by many of the microbusinesses refuse to aid them in capturing the customer data required to enable them to pay VAT through VAT MOSS. It would be helpful if the Minister could inform us of any discussions his Department has had with online platforms about how they will be able to support microbusinesses in complying with the new VAT rules.

The EU VAT rules mean that even very small businesses that currently export digital services to other EU member states have to account for VAT for each and every country in which they make a sale. For example, a music publishing business in the UK that allows fans in other EU countries to pay to download music would have to collect two separate pieces of data to prove which country each payment has come from. That is necessary for small businesses to confirm that they are compliant with the law and paying the right VAT.

In 2011, the average cost for small and medium-sized enterprises to account for VAT in other member states was estimated by the European Commission to be roughly €4,100 a year, although that was before the introduction of VAT MOSS. For many smaller digital businesses, high administration costs could make engaging with customers in other EU countries simply not worth it. The Commission found evidence that having to deal with a range of different VAT regimes was leading to geo-blocking, where businesses actively deny access to their services to consumers from different EU states. The problem is not just that small businesses obviously lose trade revenues, but that opportunities for those thousands of small businesses to increase productivity and for trade growth simply are not being taken up.

The directive that this SI implements, Council directive 2017/2455, is designed to remedy that situation. It allows small businesses to operate solely within their own country’s VAT regulations if their sales to customers in other EU countries are worth less than the local equivalent of €10,000. This statutory instrument incorporates the 2017 directive into UK law, with the threshold figure set at £8,818. It is based on the exchange rate published by the European Central Bank at the time the 2017 directive was first adopted by the European Union. Businesses will have the option to opt out of these changes. If they do, they will have to follow the previous VAT rules and account for transactions in every EU member state in which they have made a sale for the following two calendar years.

The Institute of Chartered Accountants in England and Wales has pointed out that, because our domestic VAT laws also contain thresholds, a small number of firms may be able to use this new exemption to ensure that they will not have to register for VAT anywhere, despite trading in both the UK and other EU states. Has the Minister made any assessment of the number of firms, if any, that would be in that position?

The new rules could increase VAT revenue in the UK as small services exporters opt to pay VAT here to save on the administration costs involved in accounting for transactions elsewhere. However, they could also decrease VAT receipts in the same way if firms in other EU countries that export here do likewise. Which effect will be larger will partly depend on the UK-EU balance of trade in services for this specific set of small digital trading businesses. Has the Minister made any assessment of whether this change will lead to net gains or net losses in VAT receipts to the Treasury?

I would also like to know more about the threshold, which is set at a nominal value of €10,000 across the EU and has been converted to £8,818 based on the exchange rate on a specific day. There seems to be no mechanism to uprate this threshold automatically to compensate for inflation or nominal growth in the economy. Presumably, that will mean that, unless the threshold is uprated through legislation every few years, EU-wide the exemption this SI establishes will be relevant to fewer and fewer businesses over time and will stop serving its intended purpose. Does the Minister know of any plans to uprate this threshold in future or to establish a mechanism to do so automatically?

Brexit will have an obvious effect. Let us imagine, wildly, that the Government’s Brexit deal goes through once we are given the opportunity to vote on it. This is an area where, to quote the draft political declaration,

“the United Kingdom will consider aligning with Union rules in relevant areas.”

It is noteworthy that the VAT reform process within the EU is ongoing, and major changes are on the horizon. EU institutions are working on

“a simpler and resilient definitive EU VAT system”,

which, as things stand, could deeply affect our businesses, including SMEs, but our Government may have little influence. Has the Minister considered how to engage with those reform proposals, how continued alignment will work if we take that course, or how to adapt domestic policy to minimise damage to trading businesses if we end up on the outside of reformed VAT regulations in the future?

If we face the disaster of no deal after 29 March, small businesses will have had to deal with three different sets of VAT rules within just three months. The current set of rules will apply until new year’s eve. The new rules will apply until 29 March. From 30 March, businesses will potentially need to use the rules for non-EU VAT registration. That seems deeply unfair to small businesses. How will HMRC keep businesses up-to-date on the rules that will apply to them if Brexit goes badly? I fear that this is yet another case in which the Government’s failures in the Brexit negotiations are leaving UK businesses without the certainty that they crave.