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HMRC greatly underestimated the impact of European Union tax rules for digital services, according to a study by Enterprise Nation, a membership group for start-up businesses.
HMRC greatly underestimated the impact of European Union tax rules for digital services, according to a study by Enterprise Nation, a membership group for start-up businesses.
The organisation’s EU VAT Taxation Report shows that a Revenue investigation in 2013 predicted around 5,000 non-VAT-registered firms were likely to be affected by the regime – but a survey by the Department for Business, Innovation and Skills in 2014 put the number closer to 350,000.
The tax authority’s use of the smaller figure affected the way the information was communicated and to whom, with the result that many small businesses did not learn about the charges until a few weeks before they were implemented on 1 January this year, the document claims.
It goes on to warn of a rise in the costs for digital services within the EU over the long term, after thousands of smaller firms have had to “take a painful hit to profits while facing a long, expensive fight with British and European tax authorities”.
The European e-commerce market nearly tripled in the years leading up to the new VAT rules, growing from €106bn in 2006 to €317.9bn in 2014. Enterprise Nation founder Emma Jones criticised the regulations for having “caused havoc in the digital small business community”.
She added, “Micro-enterprises are a hugely important contributor to the economic growth and innovation, and their functioning should be stimulated, not hindered. As they stand, these rules make it attractive for small firms to cease trade with Europe. So, instead of facilitating the integration of the internal market, the VAT reform may actually aid… fragmentation.”
