SMEs could be hit by new EU VAT rules

A set of VAT rule changes are due in the New Year and are set to impact upon thousands of e-service providers in the EU.


The majority of those at risk are SMEs who were previously small enough to be exempt from UK VAT rules but who have since increased in size.


According to Taxamo, these companies face particular risk as they are unprepared for the changes and could face heavy non-compliance penalties as a result.


HMRC estimates suggest around 42,000 UK-based online merchants will be affected, many of whom do not currently have to register to pay VAT in the UK.


Under the new rules there will be no minimum threshold applied to VAT – the current UK threshold is £81,000 – meaning thousands of companies must now register.


From January, a merchant must identify where their end customer is located by collecting two-pieces of non-conflicting evidence before applying the correct VAT rate.


Other compliance regulations include the reporting and storing of relevant VAT information for ten years to ensure that all aspects of payments are covered.


The big issue for SMEs and other companies will be coping with any potential fines they may face as it could impact on their bottom line financial situation.


If they were to fall foul of the new regulations then they could face significant fines that cannot be covered by existing levels of finance.


In such a situation, business rescue procedures could be required or alternative solutions for the future of the company could be sought, such as a pre pack administration.


E-service merchants who do not comply will be liable for penalty in the jurisdiction of the EU state in which they have infringed on VAT laws.


Regardless of whether a merchant is aware of the changes, they will still face fines for a failure to correctly follow the rules.


A warning from the Tax Incentivised Savings Association even suggested that some platforms may face bills of £10m in order to comply – although that is a pessimistic scenario.


By Phil Smith


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