Brexit may clear path for EU’s e-commerce VAT plans

1 July 2016. By Magnus Franklin.

Businesses calling for simpler rules on value added tax for e-commerce in Europe could get their way sooner than expected, with Brexit removing one of the loudest voices against the plans.

Efforts by EU digital single market chief Andrus Ansip to drag VAT rules into the 21st century have come up against UK resistance. British Euroskeptics have cited the proposals as an example of excessive EU red tape, standing in the way of the UK’s sovereignty in tax matters.

The story went like this in UK Euroskeptic circles: A grandmother in the Yorkshire Dales with a knack for knitting realizes she can sell her patterns on the Internet. Orders for the patterns start to drop in from around the continent.

But then, under EU rules, she needs to start paying VAT not just in the UK, but across Europe, having to get her head around 28 different taxation systems in 22 new languages — the hassle and cost of which wipes out any benefit or will to bother.

This narrative, or variants of it, was repeated by UK lawmakers during discussions of the VAT bill. They wanted a “de-minimis” rule, whereby companies would need to reach a turnover threshold to start paying tax.

EU lawmakers tried to reduce the hassle by creating a “mini one-stop shop” mechanism for VAT payments, lending the plan the title “VAT-MOSS.” The system allowed companies to only deal with their tax authorities at home. But UK lobbyists were quick to dub it a “VAT-mess,” saying the system, which came into effect on Jan. 1, 2015, was a millstone around the neck of small companies that previously were exempt from VAT payments in the UK.

Ansip appeared keen to entertain ways to appease the critics.

In March he unveiled a proposal to ban “geoblocking” by websites — the principle that websites should not block or differentiate their service based on the location of a visitor. That bill included a waiver to allow websites to block users from other EU countries if using the website from abroad risked incurring VAT obligations. Other statements from the European Commission also suggested that a threshold was under consideration. Announcing a consultation on VAT modernization on Sept. 25, 2015, Ansip said “a VAT threshold for startups” would be one of the measures envisaged to help small companies get off the ground.

But Ansip is under pressure elsewhere to reform VAT, for entirely different reasons. A recent EU court ruling said there couldn’t be a reduced VAT rate for electronic books. Reduced rates can apply to physical books, but e-books, the court said, are a service. Ansip will want to revamp VAT law to ensure such discrepancies don’t arise as markets continue to transform from bricks-and-mortar shops to digital virtual equivalents.

Businesses are also calling for a radical simplification of EU VAT rules, with supporters of greater integration of the EU putting tax harmonization as the next logical step for the bloc. Full harmonization of sales tax would avoid companies “shopping around” for low-VAT jurisdictions, and make the headache retailers face in knowing what rate to apply much simpler.

Indeed, paying lip service to the Brits by introducing yet another exception to VAT payment could further complicate cross-border sales, not make them simpler. In announcing a VAT overhaul in April, the commission pointed out that the current EU VAT regime was intended to be “transitional.”

But tax harmonization has long been seen a no-go area of law for the UK, and not just among euroskeptics.

Without countervailing pressure from across the Channel, Ansip may well again float the idea of a deeper integration of VAT rules, as part of an expected plan to “deepen” EU cooperation across the board at a summit of EU leaders in September.

As for the granny in Yorkshire, she will be worse off whatever happens. The UK will not likely be allowed back into the VAT one-stop-shop cooperation between EU tax authorities, and it would be unlikely any negotiating team tasked to secure the “Brexit” with a mandate to free the UK from EU red tape would want such a thing.

And should our granny still want to sell her patterns to EU customers, VAT will need to be paid in the country to which she is exporting.

On April 7, the commission announced that it would put together a proposal to simplify cross-border VAT toward the end of 2016. A further proposal to simplify VAT for small companies is due in 2017. If the UK is indeed on its way out, these proposals should become a lot less controversial.

	Eliot Gao