Clueless! Two thirds of small businesses face VAT penalties due to lack of awareness

New European Union rules on VAT are set to catch out almost two thirds of telecoms, broadcasting and e-services firms that don’t have the foggiest idea what the new laws mean.

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Research carried out by KPMG worked out that 62 per cent of small businesses had no idea that new rules were being implemented and 66 per cent aren’t aware that there is a litany of penalties for those that don’t comply.

“The new rules mean affected companies face an increased compliance burden and billing becomes more difficult to manage,” Amanda Tickel, tax partner at KPMG, said, according to Real Business. “In the first instance, businesses need to ensure their systems can capture the right sort of information to evidence where each customer lives and apply the correct VAT rate. Coupled with this, those affected urgently need to decide how they’ll report and pay the VAT.”

The UK Treasury is expected to be the big winner due to the fact that any VAT collected from UK customers goes into their coffers and not from the country where the e-services are sold from, such as Luxembourg where VAT is very low.

“The majority of e-services bought by UK consumers are currently not subject to UK VAT as many of these e-services are currently sold from countries such as Luxembourg where the VAT rate is very low,” Tickel added. “This means the UK Treasury could benefit by around £300 million from 2015, but someone has to lose; either the suppliers of affected services will see significantly reduced profit or consumers will see increased prices as some of the extra VAT cost is passed on. Our survey strongly suggests that price rises will form at least part of many businesses’ responses.”

Some businesses don’t plan to continue selling in the countries where the VAT rules are changing and 28 per cent admitted they are considering limiting sales to get around the change of law.

Under the new rules, which come into effect from 1 January 2015, VAT is being charged on where the customer belongs and not the country where the company is based.