Opinion

EU VAT: A nasty hangover for UK startups?

5 min read

11 February 2015

New EU VAT rules for online businesses is an unwelcome hangover to many e-commerce vendors, especially those no longer able to take advantage of the UK EU VAT exemption if they company earned below a certain threshold.

Yet companies based in the UK may be able to take advantage of the EU law, with them no longer being financially penalised for operating in countries with higher VAT rates than others. Big businesses, already strained to comply with EU legislation, may find the change of VAT could considerably burden them, but it appears the burden will be shared by online businesses of all sizes.

There is a grace period recently installed for digital businesses, which will last six months from this January. This extension notice enables companies to register for VAT in each individual country, or simply register with MOSS (Mini One-Stop Shop) in time to avoid any financial or trade penalties. Yet this grace period does not excuse laziness with companies having to act over the coming months to comply with the new EU tax rules. The process of upgrading internal e-commerce and customer relationship management systems is not an easy task, especially for young companies which have limited budgets and small IT teams.

For any business, updating every functioning payment and e-commerce platform with the new tax rule is a complex and time-sapping process. With the new EU VAT, businesses need to revisit and rethink their commerce platforms. This goes beyond fixing the standalone payment processors, such as PayPal and Stripe, as they are only a small part of an e-commerce platform. Payment processors will naturally fall short when in-depth knowledge of customers, how they buy and where they come from, which is required by the new VAT. This change in tax laws gives businesses the opportunity to revamp their billing, payment, CRM and subscription platforms.

Smaller online and e-commerce businesses, which are more flexible than their big business counterparts, may find the EU VAT rules significantly restricting their reach and revenue. If a business does not comply with the new regulation, they will be unable to sell to any customer outside their respective countries, which is a life-threatening blow to smaller e-commerce companies. The alternative option – raising prices to cope with the new rules – could also end badly for start-ups. On top of the complexities brought by the new tax, online businesses need to think about how their EU customers shop online today.

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Recent research from Avangate revealed 45 per cent online consumers compare three to four different online channels before making a buying decision. The reality is consumers shop around and move to the most efficient service, regardless of the country of origin, especially in the case of digital goods and online services. This research also shows how empowered today’s customers have become, as they vote for by their fingertips and use the fastest, most reliable service. 

Therefore, the new VAT rules can prove to be a point of friction for consumers and online businesses must show complying with new changes still means business as usual.

While this tax may appear to be a nasty hangover for online business, this is more of an business opportunity to engage with demanding consumers and is even more of a reason for businesses to get up to date with their commerce systems. Having a better understanding of what customers do, will provide them a better customer shopping experience and will increase the chances of customer retention.

Yet even the most empowered customer will be at the whim of their country’s VAT rate as businesses generally prefer to sell to countries which has a lower VAT over those with higher rates. This grace period is the time to prepare and online businesses can seek expert advice to secure their future growth and not be held back by the EU regulation.

Michael Ni is commerce expert at Avangate.