VAT in the Digital Single Market: is help on its way for internet start-ups?

Matthew Wentworth-May

At the end of last year we highlighted important changes to the VAT rules on the cross-border supply of digital services (such as digital downloads, e-books or online gaming) to individual customers, and how, without a financial threshold above which the rules would apply, they would create a costly administrative burden for internet start-ups (our blog entry is here).

As predicted, internet start-ups are struggling to come to terms with the new rules. The cost of complying averages €5000 per annum, but the alternative (of blocking online supplies to customers in potential growth markets) is no more attractive, and is undoubtedly driving many start-ups to risk penalties for non-compliance.

Helpfully, the European Commission, as part of its Digital Single Market strategy, has now launched a public consultation on what measures could be taken to simplify the VAT treatment of digital services, including the introduction of a threshold (the survey is online, and can be completed here:
https://ec.europa.eu/eusurvey/runner/ModernisingVATcrossborderecommerce).

The Commission’s view must be welcomed, although we would caution against celebrating too early. The earliest legislation can be brought forward is 2016, which means no changes will be made before 2018 at the earliest. There is also no guarantee that all Member States will agree to a threshold – some, like Italy, have no domestic VAT threshold, and are unlikely to support the introduction of one here.

In the meantime, it is hoped that domestic tax authorities will take a sensible approach, and will be slow in applying penalties to those start-ups who struggle to comply.

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