The government has updated VAT guidance for digital micro businesses and warned the owners of the UK?s smallest enterprises to ?carefully consider? if their trading activities are regular enough to constitute a business before registering for the EU wide VAT Mini One Stop Shop (VAT MOSS).
The official HMRC information for small firms now clarifies: ?There is no registration threshold on cross-border supplies of services and businesses of all sizes fall within the scope of the changes. However, this only applies where supplies are made in the course or furtherance of a business. If activity is carried out as a hobby (ie only on a minimal and occasional basis),?HMRC?does not normally see this as a business activity for VAT purposes.?
The change comes alongside a report in the Financial Times that the tax authorities were inundated with VAT registrations following a change in EU legislation requiring companies of any size to pay sales taxes based on the location of customers.
Emma Jones, founder of small business support group Enterprise Nation, told the Financial Times: ?HMRC has clearly discovered that collecting a high volume of small amounts of tax is not viable. But where does this leave all the micro entrepreneurs who are indeed businesses yet still sell small amounts of digital products into the EU?
?From the outset of the EU VAT regulations, small businesses were affected as an unintended consequence, but this unravelling could cause further confusion in the ranks of the entrepreneurs who are doing as government insists and taking their products to the world.?
George Bull, a senior tax partner at international accountancy firm RSM, said: ?Many micro businesses have been removed from the online VAT MOSS service because they do not make enough regular sales. This could result in those businesses being forced into using sales platforms owned by the multinationals currently at the centre of tax avoidance claims.?
The European Commission agreed in September 2015 to propose an exemption to EU-wide VAT registration requirements for small firms. Prior to the change in legislation at the beginning, all UK businesses with a VAT ratable turnover of less than ?81,000 were exempt from having to register even if selling in Europe made up a proportion of firm revenue.
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