My conclusion is that this is the end of small enterprise and self-employment.
The decision ahead for microenterprises is not about how to alter sales and administration to comply with the changes; it is whether to continue trading at all.
As much as it pains me to do so, I would advise microenterprises and sole traders to cease digital sales by 31 December. For many of you that will mean the shutdown of your businesses.
That is what we are facing, and there is simply no way out.
That is a pretty dramatic conclusion, of course, so I want to point out some of the major issues I found with the law, its implementation, and the assumptions that have gone into it. As I will explain, there are a number of issues the powers that be have simply overlooked.
I have also turned my findings into a suggested policy strategy for altering the law and its implementation in the UK. If these changes are put into place, small enterprises and sole traders can keep their businesses open after 31 December. The choices really are that stark.
My post is written from the following perspectives:
- I am a self-employed UK sole trader writing for the benefit of others like me.
- As with most self-employed people, my income has never remotely approached the UK VAT threshold, so I have never applied for it.
- As with most self-employed people, my work has not involved third-party distribution or intermediaries.
How many people will this law affect?
The first problem with #VATMESS is that HMRC got their figures badly wrong. In its buildup to 1 January HMRC estimated that VATMOSS would affect “34,000 or so small to medium enterprises“.
“Small to medium enterprise” is an official term, not a casual expression. The official definition states that “the category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro.”
The self-employed and sole traders are simply not a part of that calculation.
The latest figures from the Office of National Statistics (.pdf, 482kb) state that there are 4.6 million self-employed and sole traders in the UK. Even if only one out of 10 of them is selling digital products, that’s 460,000.
460,000 is a lot more than 34,000.
Because VATMOSS is a no-threshhold law, it applies to your entire business even if you only make one digital sale of a £1 item. To guess that VATMOSS will only affect 460,000 sole traders is to vastly underestimate reality.
What about the fact that this law, like most EU laws, seemingly failed to comprehend the digital economy altogether? Well, that one is our own fault. Last year a report from the National Institute Economic and Social Research proved that the digital economy is grossly undercounted and underestimated within the UK’s financial landscape. This is due to a failure to update the definitions – the taxonomy, if you will – of economic activity within the UK. In fact, the definitions were established in 1948 and were last updated in 2003. What is the digital economy, officially, within Britain?
Sole traders don’t count in the national economic picture, and digital businesses literally do not count at all.
As a result, HMRC has grossly underestimated how many registrants the VATMOSS system will incur.
Were small businesses consulted about this law?
The response to the outcry over #VATMOSS from several quarters of the accountancy industry has been “you’re a business and you should have known about it.” Aside from the fact that this would be like me berating an accountant for failing to know the subtleties of responsive CSS, it’s also a form of petty bullying based on a woeful misunderstanding of the realities of self-employment.
HMRC made only one formal attempt to liaise with the SME community. This was announced in HMRC’s 2013 Budget Supplement email. (No, I’m not on that mailing list either.) It linked to a PDF, which has already been archived, which had a little Q&A which stated:
I run a smaller sized business (SME) that makes supplies of affected services to private individuals in other Member States. Can I discuss the impact of these changes with HMRC?
Yes, HMRC is very keen to establish a second 2015/MOSS stakeholder group to represent the views of SMEs. If you are interested in joining this group please provide brief details about the type of activities you are involved in, or the types of businesses that you represent. Alternatively, if you would prefer not to join the group, HMRC would still like to hear about any issues that you have so that they can be considered when drafting public guidance – see Q10. In both cases please e-mail: firstname.lastname@example.org by 30 August 2013. Unfortunately, it may not be possible to respond to every e-mail or deal with specific queries at this time.
That of course was a reference to SMEs – they of the 50 million EUR turnover. The rest of us? Nothing.
As I pointed out in my piece at Everyday Designer, many of us in self-employment work in fields where there is no professional organisation or coordination. There is no “Royal College of Web Developers” or “Chartered Institute of UX Professionals.” It’s difficult for spoon-fed accountants who belong to multiple professional guilds and societies to comprehend that. And it’s impossible for those same accountants to understand what it is like to have to rely on your own initiative to find out about laws that you don’t know about because how would you have known about them?
For its part, the EU mentioned sole traders once, on page 3 of a 31 page document about the technical specifications for the MOSS system. It reads as follows:
For the purposes of these elements, it is important to clarify some basic concepts:
- The concept of a taxable person in relation to the mini One Stop Shop
Under the Union scheme, a taxable person is a business (be it a company, a partnership or a sole proprietor) which has established its business or has a fixed establishment in the territory of the EU. The taxable person cannot use the mini One Stop Shop for supplies made in any Member State in which it has an establishment (business establishment or fixed establishment).
Under the non-Union scheme, a taxable person is a business (be it a company, a partnership or a sole proprietor) which has not established its business in the EU, nor has a fixed establishment there, and it is not registered or otherwise required to be identified for VAT in the EU.
I’m not sure if that’s legal advice, a technical specification, or a drinking game.
(After I published this post, a colleague tweeted me this House of Commons deliberation of VATMOSS. In addition to fawning over the new law while failing to ask any probing questions about it, our right honourable friends note that the estimated cost of compliance is £2.2 million and that only about 34,000 businesses are affected. In other words, total ignorance.)
Neither the EU nor HMRC made any attempt whatsoever to research the impact of VATMOSS on sole traders and the self-employed, nor did they liaise with them in the buildup to implementation.
(Update 25/11: The smoking gun – proof that HMRC categorically excluded the UK’s 4.6 million self-employed from all consideration of the Place of Supply reforms. These are the pages from their impact analysis in advance of implementation. Click each thumbnail to view full size.
What about the data retention issues?
Under VATMOSS, it is the seller’s responsibility to determine the following facts about every single digital customer:
- Whether the buyer is a B2B or a B2C client regardless of the presentation of a VAT number;
- The geographical location of the place of supply of the item (If you are a Dutchman attending a web design conference in Edinburgh and you buy a plugin created by a Spanish developer during her talk, the plugin developer has to determine the place of supply based on the Dutchman’s personal information as well as the technical setup of the Scottish conference venue.);
- Whether or not the buyer’s place of supply country requires you to issue them with a VAT invoice in addition to any automatically generated purchase invoice.
Sellers are also required to retain at least two of the following pieces of information about every digital sale:
- the billing address of the customer
- the Internet Protocol (IP) address of the device used by the customer
- location of the bank
- the country code of SIM card used by the customer
- the location of the customer’s fixed land line through which the service is supplied to him
- other commercially relevant information (for example, product coding information which electronically links the sale to a particular jurisdiction)
Furthermore, sellers are required to retain all of this information for ten years. This is four years more than the VAT requirements for non-digital sales.
Now, that is a lot of information. Except it’s not information. It’s data. It’s personally identifiable data. It’s personally identifiable data which must be kept in accordance with international law.
Are you getting what I’m saying? If not, let me spell it out for you.
VATMOSS compliance doesn’t just require registration and compliance with one government bureaucracy.
It requires a completely separate registration, reporting, and compliance process with a second one.
The most astonishing oversight of the buildup to VATMOSS has been a failure to recognise that the data collection and retention obligations are so onerous that sole traders and the self-employed will be required to register as data processors and controllers with the Information Commissioner’s Office.
Welcome to the world of Data Protection Act compliance audits. Welcome to being listed as a registered data controller on ICO’s web site. Welcome to hell.
After all, linking individuals to their IP address and bank details, and storing that information in a requestable format for ten years, is not the stuff of fair and equitable taxation. It’s all of Theresa May’s state surveillance fantasies come true.
As for ICO itself, at the moment they state that over 400,000 organisations are registered with them as data processors. Remember our low estimate figure about how many self-employed are affected by this law? 460,000.
VATMOSS would double the number of organisations registered as data processors in the UK.
ICO are struggling already and have had to ask for additional government support just for their basic remit caused by DRIP. Can they handle half a million self-employed people signing up as data processors in the next 60 days over the sales records for 99p printable downloads?
No, they can’t, and I somehow doubt that certain elements of the UK government would be bothered by that.
Well done, Britain, you totally sleepwalked into that one.
(Update 10/12/14 – today HMRC has confirmed that sole traders on the VATMOSS system need to register as data processors with ICO. See section 5 of this update. Let the record show that the only reason the issue of data protection and registration was raised was because I personally brought it up right here in this blog post. I had to do that because not one individual at the EU or HMRC did their job correctly and asked about those issues at any time from 2008 until December 2014.)
Will the VAT exemption threshold be retained?
The public outcry against VATMOSS has centred around the fact that the change overrides the threshold for VAT registration, meaning one sale of a £1 digital item brings the entire business into the VAT system even if its turnover remains miles below that threshold.
I have to say there is very little chance of this happening. The UK already enjoys the biggest VAT exemption threshold in Europe (currently £81,000). UK sole traders are unlikely to gain sympathy from counterparts in other countries who have always had to pay VAT, albeit not on digital sales.
If anything, change will come not from a response to public pressure, but from the inevitable overwhelming and collapse of the VATMOSS system, whose use we already established was underestimated by over tenfold.
Is there an alternative possible? Yes, there is.
Will an exemption be granted for ‘insignificant payment amounts’?
The EU directive which is the basis of the tax on digital products, Directive 2006/112/EC, legislates that “Member States may release taxable persons from payment of the VAT due where the amount is insignificant” (Article 212).
This is important. In the buildup to 1 January, three European countries have granted this exemption.
- Cyprus has implemented rules under its domestic legislation whereby taxable persons are released from the payment of the VAT where the amount due is less than 1.70 euro.
- In Greece, Any debit balance arising upon submission of the periodic VAT return is payable to the Greek State when higher than EUR 30. When lower than EUR 30, the balance is carried forward to the following tax period.
- In Italy, no payment is due where the annual VAT payable is lower than EUR 10,33.
Furthermore, in Slovakia, a person that is not a taxpayer is not required to pay the tax if the tax to be paid does not exceed EUR 5. However, this particular provision is not relevant for businesses supplying telecommunications, broadcasting and electronic services using the MOSS schemes.
The source of this information is a spreadsheet of national implementations which the EU has provided here (zip folder).
What is disappointing here is that the UK had the option, within the scope of the EU law, to create an exception for small-value digital sales. They chose not to do so.
HMRC should create an exception for insignificant payment amounts as its highest priority.
What other exemption thresholds are possible?
Sole traders recognise that an exemption for those trading below the VAT registration level is unlikely. However, that threshold is determined by the level of sales, not by the seller’s wages. For sole traders, sales and wages are one and the same.
One alternative suggestion would be to create threshold exemption to sole traders whose incomes from self-employment are at or below the level of average median income from self-employment defined in the annual figures produced by the Office of National Statistics.
That figure is currently £10,764, a figure which is just £764 above the personal allowance, £2,360 below a year’s full time earnings on the national minimum wage, and £5,536 below the suggested minimal living wage for a single person.
It’s worth remembering that the £10,764 figure is also a representation of gross income. By the time you factor the running costs and expenses of a self-employed business into that, your income is down into four figures, well below the point where you would even pay income tax. Even the ONS concedes that “The figures for the income of the self-employed will include those individuals who made a loss in their business and hence in theory had a negative income for the year, whereas employees do not earn a negative wage. ”
As any self-employed person will tell you, being a sole trader means you are completely and utterly excluded from access to mainstream finance. Forget about getting a mortgage, a credit card, or even a professional development loan. This year, after seven years of self-employment, I finally managed to get a mobile phone contract. I felt like I’d won the lottery. It was the first business credit I have ever been offered. As for sitting at my desk staring at lines of code despite being temporarily blinded by migraine auras, you just suck up and get on with it because there’s no sick pay.
Sole traders learn to accept these things as the price we pay for self-employment. But it does stick in the throat to learn that we are to be subjected to corporate levels of regulation – and will receive absolutely nothing in return for it.
It makes absolutely no sense – financially, economically, or socially – to apply corporate levels of regulation to financially excluded individuals with no working rights who live below all recognised standards for minimum income.
HMRC should create an exemption threshold for sole traders based on the average median income from self-employment defined in the annual figures produced by the ONS.
So, having read all of the above, would you stay in business?
VATMOSS is the greatest threat to small enterprise and self-employment in a generation.
It’s not too late to stop this disaster from happening. I respectfully propose the following policy changes – changes which must be enacted and implemented in the next thirty days before everyone sods off for the holidays.
Policy recommendations for minimising the damage of VATMOSS – and keeping small enterprises in business
- Sole traders need a low value exception for “insignificant amounts of VAT” similar to the exemptions already enacted by Cyprus, Greece, and Italy. Saddling a sole trader – as well as two different national tax authorities – with a complex calculation, invoicing, reportage, and data retention process for the VAT due on a £2 plugin is an act of pointless economic dithering.
- Sole traders recognise that an exemption for those trading below the VAT registration level is unlikely. However, that threshold is determined by the level of sales, not by the seller’s wages. For sole traders, sales and wages are one and the same. Therefore, I suggest the alternative strategy of granting a threshold exemption to sole traders whose incomes from self-employment are at or below the level of average median income from self-employment defined in the annual figures produced by the Office of National Statistics. That figure is currently £10,764.
- The reportage and retention requirements resulting from VAT MOSS are so onerous – as well as in excess of the requirements for non-digital sales – that sole traders will be obliged to register as data controllers and processors with the Information Commissioner’s Office. In addition to incurring registration costs, sole traders will be at risk of audits and penalty fines which could, in theory, happen a full decade after they cease trading. For its part, the Information Commissioner’s Office, an agency already struggling to carry out its basic remit, will be unable to handle a near doubling of registered data processors resulting from one rule change alone. That increased workload will also compromise ICO’s ability to act as a checking institution against the abuses of state power carried out in the name of national security. A solution must be found as a matter of urgency for both sole traders and ICO.
- Sole traders need the UK Government to update the Standard Industrial Classification Codes, used to define and measure all economic activity, to include the digital economy, digital goods, and digital services. It has already been proven that these classifications, which have not been updated since 2003, have failed to account for no fewer than 100,000 digital enterprises as well as every digital sole trader in our national economic measurements. The failure to update the classifications has meant that the digital economy has not been taken into consideration in forward planning, such as the buildup to VAT MOSS; after all, as far as the figures are concerned, Britain’s digital economy only counts as “other”.
- Sole traders recognise that the new rules on digital trading are aimed at large-scale digital retailers and that we are the minnows swept up in that net. Rebalancing the unfairness of this judgement must involve an immediate end to all taxpayer subsidies, including Regional Selective Assistance grants, to high-volume, high-sales corporations engaging in digital sales. Until then, the taxes paid by sub-minimum wage sole traders through VAT MOSS will continue to be used, perversely, to provide state subsidies to multinational corporations engaging in large-scale tax avoidance. What sort of ‘tax justice’ do you call that?
- If sole traders living under the minimum wage are to be subjected to corporate levels of regulation, we need quid pro quo. We need to know that the reward we will receive for VAT MOSS will be paid sick days, paid holidays, and access to a government-backed pension scheme. We also need changes to the consumer financial system which will grant the self-employed access to credit – any credit, grant them access to mortgages, and create a system of credit scoring that does not knock our personal aspirations back three years every time a business client decides not to pay their invoice on time. We currently enjoy none of these basic rights.
Right now the message from the UK government is that at least 460,000 small enterprises and self-employed individuals are not important enough to matter. We hear that message loud and clear. And we say no.
This is our hell. This blog post is the role I can play. Over to you.
Update 25/11/14: I did a podcast interview about this with Under the Radar.
Update 27/11/14: Sole trader Ysolda Teague attended a VATMOSS workshop in Edinburgh which just happened to be run by Andrew Webb, HMRC’s policy manager and the man behind the system. What follows is an astonishing chronicle of professional neglect and incompetence. In addition to being bewildered by the questions I raised in this blog, he not only was suprised at the *presence* of sole traders in this issue at all, but he threw out this:
Is it fair to describe businesses legitimately below VAT threshold as 'under the radar'?! #vatmoss
— Ysolda Teague (@ysolda) November 26, 2014
Update 28/11/14: Our good friends On Her Majesty’s Digital Service, the GDS team, conducted an assessment of HMRC’s MOSS system, as testing for GDS standards is a part of their remit. They concluded that the MOSS system was so poorly thought out and tested that they did not pass it for approval, and sent HMRC homeward tae think again. One of their critical findings was they found that HMRC constructed the system on the assumption that the user was already familiar with the process of making VAT returns on an existing system.
About the author
Heather Burns is a digital law specialist in Glasgow, Scotland. She researches, writes, publishes, consults, and speaks extensively on internet laws and policies which affect the crafts of web design and development. She has been designing and developing web sites since 1997 and has been a professional web site designer since 2007. She holds a postgraduate certification in internet law and policy from the University of Strathclyde. Learn about hiring Heather to write, speak, or consult.