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Thursday, June 30, 2022

EU VAT Changes Can Kill Your Startup

When we first heard about the upcoming VAT regulation changes, we did not think much of it. After-all, our business does not really fall into the category as our products are either events or partnerships. However, when we started following what this really means – we got scared. Looks like Goliath is about to crush David.

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Basically, the idea is simple. For all B2C products in the telecommunications, broadcasting and e-services space – instead of paying the VAT in the country where your company is registered, it will now need to be paid where the consumer resides (If they are from the EU). No biggie, right? Wrong.
As the recent Techcrunch article very clearly explains there are major drawbacks for startups:

Recording Location

Remember the times when people just bought your stuff and you reported your VAT no matter where they are from? Gone. You now have to keep track of their credit card location and billing information and do that for all 28 member states.

Knowing the VAT rates

Many entrepreneurs we know hardly remember if it is 23% or 24% in Finland. Now they have to know all the rates for 28 member states. Then supply that information and data to your accountant and hope for the best. If you are like most very early stage startups, you try to minimize those accounting billable’s and with the Nordic hourly prices – this is not going to be good for your profitability either. If your product costs 1-5 EUR a pop, which is often in startups, expect to get charged more for accounting alone.

Registering for VAT

Paperwork takes time away from work. Now, imagine doing that for 28 member states? Yapp, according to the new rules – you must register for VAT everywhere, with one exception. The VAT MOSS workaround. MOSS (Mini One Stop Shop) will basically allow you to skip the registration in all of the states and instead you would need to register for MOSS in your country (Unless you are from outside the EU, when you can pick one). Then you can manage all your payments to other member states through that online portal. That solves the registration problem, but adds another portal to use for managing your company.

Other countries looking at your books

Nobody likes to receive letters that request to see your books, even if you do everything perfectly by the book. Again, it takes time, and distracts you from your core business. Now imagine that 28 countries can theoretically ask you to show them your books. Fun?

Special cases

If keeping track of 28 vat rates, reporting to 28 different countries and huge accounting expense was not enough for you, how about special cases? Like if a person who bought your latest SaaS product has left on a boat from Helsinki to Tallinn and bought the product at sea? That is charged from the country of origin. What if the service is provided using a mobile phone? Oh, then you simply need to track the country code of the SIM-card.

And if consumer’s really wants to make your life hell – they can and they will. Basically if they advise you that they reside in a different location compared to say what their credit card or paypal account states – they can override that by sending you THREE pieces of non-contradictory evidence of thereof.

Keeping records

According to the Data Protection Act, you will need to keep all those records for 10 years but that is not the end of the story. You will ALSO need to keep the evidence of your decision making. Yapp, you now have to separately track exactly how you made the decision for which VAT to charge. Have fun. You can read the full rule change here.

What to do?

Thankfully, there is something you can do. Especially if you are from Estonia and are friends with Andrus Ansip. First, the Digital Single Market regulations can stop this, should stop this and are currently being designed. Theoretically this can help add an exemption so that only Google’s and Amazon’s of this world would have to worry about tracking VAT.

Then you can join the Twitter Storm planned for 12:00 EEST today. It might seem like a no-biggie, but they have actually managed to get things done and changed using previous storms. So it helps.

Finally, we think that startups, being creative and all, will figure out ways all on their own too. Using Bitcoins, setting up shop outside of the EU, figuring out a technical solution which would make it “impossible” to track all this data, creating startups to solve this, etc. In the end, this brings us to a point we made in an article when Ansip just took his post – startups and entrepreneurs need their own lobbying arm in Brussels. The fact that the EU “wants to support entrepreneurship” does not always help in practice.

Whatever the “hack” of a solution will be, it will not be good for startups or the EU. So getting the law’s reversed is the best we can hope for.

Top Image Courtesy of Shutterstock // David and Goliath

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