UK tax authorities Make Tax Digital, whether businesses want it or not

In a changing world, it is good to know that some certainties remain, such as when companies log their affairs and give up to Caesar what is due to Caesar, that is, pay their tax. In the UK at least, even this constant is under fire. I’m speaking tongue in cheek of course, but the government’s Making Tax Digital (MTD) initiative is proving troubling to more than a few businesses.

On the upside, tax accounting software vendors seem very well furnished with information. There’s a quick start guide which shows JSON and XML formats for information exchange, RESTful API calls and so on. There’s also a developer hub to test remote access to APIs. Less available is information to businesses and accountants, who are largely in the dark beyond a central assumption that everyone is using vendor packages now, aren’t they?

Simply put, if you’re already using a package such as QuickBooks or Xero, you should be OK (according to the list of those whose software will enable auto-uploading to Her Majesty’s Revenue and Customs, HMRC). But many organisations are not, preferring to keep their books as, erm, books or indeed, spreadsheets. So, what if you don’t want to deliver your books digitally? Well, you have to.

As a techie, I find myself strangely nonplussed about this: while I might not have a problem with using a computer, many others whose income passes the £85K threshold (and who have run businesses quite happily without one) are now faced with three new potential costs: the software itself, the training to use it, and the conversion from one package, or spreadsheet, to a certified package.

Software vendor Liquid Accounts will “provide a single company, single user version of Liquid VAT Filer free of charge to any VAT registered business” — this works with MTD and, according to the article, with spreadsheets. Regarding the latter, the HMRC mentions ‘bridging software’ for spreadsheets here, confirmed here. A couple of solutions are now available, as per the article, including the TaxCalc spreadsheet plugin.

But it begs a question: why didn’t the Revenue simply define a file format standard for accountants to use, which all packages could write to and which anyone could upload? Perhaps there is no place for such primitive mechanisms, not in the API economy. For UK businesses meanwhile, waiting for clarity is becoming an increasingly risky option: we have nine months to go before the end of the tax year in April 2019, by which point MTD will be the default approach.

We shouldn’t be surprised that the British Chambers of Commerce are requesting that the roll-out of MTD is delayed, as this press release notes. On the point about British businesses having enough on their plates right now, I have to concur and can only hope our bureaucratic betters see sense before April next year.

Google and Apple may be forced to pay more tax in Russia

Russian authorities may start trying to extract more tax from foreign tech firms such as Google and Apple, according to a report by Vedomosti.

There appear to be a couple elements to this push. Firstly, the Russians have taken note of recent changes in the European Union that force the suppliers of digital services to collect sales tax based on the location of the customer, rather than the location of the supplier. This is designed to stop the big tech firms from funnelling their EU revenues through low-tax jurisdictions such as Luxembourg and denying most European countries their tax proceeds.

Russia has the same problem – apps and content sold through Apple’s platforms, for example, are provided by foreign companies, and no Russian tax is levied.

The second apparent strand relates to the Russian web giant Yandex, which is embroiled in multiple battles with [company]Google[/company] over the U.S. firm’s restrictive practices around what software and services can be installed on Android devices. Yandex has given evidence to EU investigators who are looking into this matter, and it’s also prompted an investigation by Russia’s antitrust regulator with the support of the Microsoft-backed “FairSearch” group.

According to Vedomosti, Google is paying way less tax than Yandex is – around $8 million in 2013 compared with Yandex’s $53 million, a disparity considerably wider than that between Google and Yandex’s market shares in Russia (roughly 32 percent versus 59 percent). This may be legal today, but now the authorities are considering changing the law.

The initiator of all this was apparently Putin aide and former communications minister Igor Shchegolev. It’s all at the discussion stage right now, with other participants including government representatives and media regulator Roskomnadzor, but it looks like western tech firms – already facing incoming restrictions on where they can store Russians’ personal data — have something new to worry about in Russia.

Yandex declined to comment. I’ve asked Google and [company]Apple[/company] for comment and will add it in if and when it arrives.

EU publishes details of Amazon Luxembourg “state aid” tax probe

Last year the European Commission opened an in-depth investigation into Amazon’s Luxembourg tax arrangements, which may be illegal. Amazon funnels its European revenues through a complex transfer pricing set-up in the duchy, effectively resulting in an especially low tax rate (see also: Skype). This nets Luxembourg a lot for a country that size, but countries in the rest of the EU get way less than they should. On Friday the Commission published a public version (PDF) of its decision to launch the investigation, detailing why it thinks the 2003 arrangement represented a special deal for the company, making it illegal state aid. If the investigation finds as much, Amazon may have to pay a whole bunch of back taxes.

EU tax change is about to hammer small digital service providers

Starting in January, new EU tax rules will force many businesses offering online services across the Union to take on a load of new administrative responsibilities.

The changes have caused particular consternation among micro-businesses providing such services – for a classic example, think about an individual who’s making a small amount selling knitting patterns — and the outrage seems especially virulent in the U.K. With a couple weeks to go before the changes hit, here’s a run-down on what red tape is being introduced, and why.

What new tax rules?

From January 1st, 2015, the provision of many digital services in the European Union will be taxable in the country where the service is consumed, rather than the country from which it is provided. The point, in theory, is to stop big firms from setting up headquarters in some tiny low-tax country such as Luxembourg and using that location to get out of paying taxes in the rest of Europe.

The problem here is that there are 28 EU member states, each of which has its own value-added tax (VAT) rates, and its own minimum thresholds for having to charge VAT in the first place. For many digital services businesses, this will add a degree of complexity. For those who operate micro-businesses that currently don’t have to charge VAT at all – in the U.K., for example, that’s any business with a taxable annual turnover of under £81,000 ($127,000) – this could be a whole new ballgame.

The kinds of services that aren’t affected include lawyers and accountants emailing clients, the supply of physical goods through electronic ordering processes, car and hotel booking services, and real-time educational services. Business secretary Vince Cable has also said that people can ignore the changes if they sell through a “marketplace like an app store” – an option that of course means losing a cut of the sales revenue.

But those independently selling images or text or music, or paid-for “online magazines” or software, will have to adapt – and fast.

Good grief! And with only two weeks to go?

Yes … about that. These new rules were agreed upon in 2008, so businesses have technically had around six years to wrap their heads around the implications. Of course, it’s really down to the national tax authorities to make sure everyone’s up to speed and, certainly in the U.K., it’s not clear that this happened in any meaningful way.

For example, it was only this month that Her Majesty’s Revenue & Customs (HMRC) finally agreed that people wouldn’t suddenly have to charge VAT on small U.K. revenues if they also sell into other European countries – a key issue that caused panic when people started freaking out about the changes in November.

Crucially, though, the changes do not mean that micro-businesses need to register with the tax authorities in 28 different countries. Instead, each country should be setting up a “Mini One Stop Shop” that provides a single point of contact through which to collect and distribute the VAT on sales to other EU countries.

In the U.K., a business can sign up with the local MOSS if its taxable U.K. turnover is under £81,000. This will simplify matters, but it still means that someone who previously didn’t have to register with the VAT authorities at all, will now need to register for a VAT number and submit quarterly VAT returns (declaring nil VAT on U.K. sales), and register separately with the MOSS, again submitting quarterly returns.

And then there’s all the data collection.

What data?

Get ready for some serious record-keeping (storing everything for a decade, no less.) The changes don’t make much sense if no one knows in which country the buyer is located, so the business’s customers will now need to tell the vendor which country they live in, and what their billing address is.

But there’s more: HMRC has recommended that sellers collect two pieces of information from their payment providers, such as [company]PayPal[/company]. This includes the country code of the customer’s bank, and the customer’s billing address. Unfortunately, PayPal is only willing to provide the country code, so the rest is really is down to the business to establish. So much for the convenience of no-hassle payment mechanisms such as [company]Stripe[/company].

Then there’s the small fact of the business qualifying as a “data controller” under EU data protection legislation, because they’re processing people’s personal data. In the U.K., this means they’ll have to register with the Information Commissioner’s Office (ICO), for a £35 fee.

However, the ICO’s security requirements for small businesses are quite flexible – these knitting-pattern entrepreneurs won’t need to adopt military-grade encryption, but they will need to at least try to keep their customers’ data safe, as any small business should. Whether criminals see a hacking opportunity in all the personal information that will now be stored by individuals with minimal security expertise, is another matter.

Why do you keep mentioning the U.K.?

Partly because the U.K.’s relatively high VAT threshold means this will have more of an effect there – more micro-businesses will be dragged into the VAT-collection game for the first time — and partly because that’s where people have made the most noise about this. So far.

Last month, people in the U.K. first started shouting about the changes using the #VATMOSS hashtag, but as the British campaigners have realized that micro-businesses will be hit across the EU, they have now set up an EU VAT Action pressure group (which provides loads of useful information for those who need details.)

But could the effects hit even further afield? A rather worrying sign can be found in changes that were made earlier this month to the terms and conditions of [company]Google[/company]’s Helpouts platform, which gives people a way to offer expert advice services through the Hangouts facility. As of December 3rd, the site tells users: “Providers from Ireland or the United Kingdom may only offer free Helpouts. Customers in the EU may only take free Helpouts.”

Meanwhile, the T&Cs for U.S. Helpouts providers now state: “You may not provide Helpouts for a fee to customers within the European Union. All Helpouts which are provided to customers within the European Union must be provided free of charge.” It seems Google thinks these changes are a reason to steer clear of paid-for person-to-person services in the EU altogether.

Woah. Is that justified?

Arguably not, because – in one of the weirder specificities of these rules that were designed over six years ago – live webinars aren’t covered by the changes (but recorded webinars are.) The new rules are also only supposed to affect companies based in the EU, but then again Google and other big U.S. firms tend to run their international operations out of EU subsidiaries. I asked Google to explain why it made the changes, but it has refused to do so.

The one thing that is clear is that there’s still a lot of confusion, despite the long run-up to the changes. Unfortunately, this has led to a lot of people fearing for the future of their small businesses, as they contemplate questions like: “If you decide to comply with ?#?VATMOSS???? and you sell a bundle which includes a digital download and a physical product, will you have to report the physical part of that little sale to the U.K. and the digital part to another country?” (Answer: Probably.)

Some experts have even advised no longer selling services into other European countries – a suggestion that at the very least flies in the face of the EU’s precious Digital Single Market project, and that may even contravene EU anti-discrimination rules.

So what’s a poor micro-business or seed-stage startup to do? Read the extremely lengthy guidelines about what’s affected and what’s not, and go shout at some politicians and tax authorities.

As it happens, the EU VAT Action group began a Twitterstorm on Tuesday using the #EUVAT hashtag, calling on the European Commission to suspend the introduction of the new rules for micro-businesses and sole traders. Given the fact that the rules could kill off swathes of the small entrepreneurial digital sector — which the Commission is supposedly trying to stimulate — that may be a good idea.

UPDATE (3am PT): Just thought it might be worth throwing in a few of the tweets people have been publishing today, demonstrating the urgency of the situation:

UPDATE (3.05am PT): The Commission has responded … by saying there’s no problem. Financial Affairs, Taxation and Customs spokesperson Vanessa Mock just emailed this statement:

The Commission believes the administrative burden is bearable also for the smallest online businesses. The changes imply that each business including micro businesses need to know the country of their customer: this could be established eg. by IP address, invoicing address, bank card issuing country, (the possible sources are listed in an EU VAT implementing regulation). Then based on the country of the customer the VAT rate needs to be selected for that country. The list of VAT applicable rates is provided by the Commission on its website. Finally they have to declare sales per country to their [local] tax authority.

UPDATE (3.25am PT): And now Andrus Ansip, the Commission vice president for the digital single market, has published a blog post on the matter. In it, he said that “even if the concerns come late, they should be listened to,” and that he trusts that payments processors will start giving businesses the information they need for compliance.

“Small innovative online companies matter to me,” he wrote. “I want you to have the necessary space to grow into successful businesses and to trade across borders. But I also see the merits in the upcoming VAT change. Support for e-commerce will be at the heart of our strategy for the #DigitalSingleMarket that is planned next spring.”

Skype dragged into LuxLeaks tax scandal

Skype used Luxembourgish and Irish subsidiaries to avoid paying corporation tax for five years, according to a Guardian report.

The newspaper, which analyzed confidential documents obtained by the International Consortium of Investigative Journalists, reported late Tuesday that Skype was one of the many companies that had used Luxembourg’s extremely light-touch tax regime to get out of paying significant amounts of tax.

Legally speaking, the issue here isn’t so much the actions of the companies themselves – there’s no suggestion that they broke the law as such — but the establishment of sweetheart deals by relatively small European nations that meant more tax revenues for themselves, but the demolition of tax revenues in other European countries.

The European Commission is finally cracking down on such behavior by claiming such deals amount to illegal state aid, and is also now trying to sew up the loopholes. Awkwardly, however, the Commission is now led by Jean-Claude Juncker, who was in charge of Luxembourg’s government for many years and was proudly boasted about the environment he had helped set up.

The Guardian report quoted Juncker as both insisting that the “Luxembourg model” did not exist, and saying: “Skype will remain based here … this is partly because of the favourable fiscal environment we’ve created here in Luxembourg.”

Tuesday’s revelations mark the second tranche of companies to be identified in the “LuxLeaks” scandal, with others including Disney and Koch Industries. The first caused tremendous embarrassment to Juncker and, according to reports on Wednesday, the European Commission may now force the companies involved to publish their tax agreements.

Amazon is already embroiled in an EU investigation into similar arrangements. Here’s how it worked in the case of Skype. The Luxembourgish Skype Communications company would take in SkypeOut revenues, then pay large intellectual property royalties to another Luxembourgish company, Skype Technologies, which owns an Irish company called Skype Limited.

As the Guardian described it:

Because Skype Technologies owns 100% of Skype Limited, it asks the Luxembourg tax man to treat that as though it had in fact paid licence fees and then received that money back as a dividend from Skype Limited. This imagined structure wins Skype Technologies a 95% tax break on its licence income from Skype Communications.

This 2005 deal covered a period when Skype was owned by [company]eBay[/company]. It’s not clear whether the arrangement is still in force, but [company]Microsoft[/company], Skype’s current owner, said in a statement:

Microsoft’s acquisition of Skype was finalized in October 2011, so we can only speak to activities after that date. Post-acquisition, we reviewed and modified Skype’s business model as part of the integration process. As a global business, Microsoft adheres carefully to the laws and regulations of every country in which we operate.

Uber hit with French “deceptive practices” fine and UK tax complaint

Uber keeps getting disrupted by European laws. On top of those recent Dutch driver arrests, the U.S. quasi-taxi outfit has now been fined €100,000 ($128,000) in France for falsely marketing its paid-for UberPop (a.k.a. UberX) offering as a carpooling service, and told by the Parisian court to warn its drivers that they face “criminal conviction.” Meanwhile, in the U.K. transport authorities have referred Uber to the tax authorities for, unlike other taxi firms, not paying any tax in the U.K. (Revenues go to a Dutch subsidiary that’s owned by a Bermuda subsidiary.) Indian authorities are also on the firm’s case over tax, so at least it’s not just Europe.

Apple could be liable for billions of euros in fines, as EU reportedly prepares tax accusations

Back in June, the European Commission started sniffing around Apple’s tax arrangements in Ireland, to see whether the Irish government’s acceptance of the firm’s elaborate tax avoidance tricks amounted to unlawful state aid. According to a Sunday Financial Times report, the Commission now has its preliminary findings and will this week formally accuse Apple of benefiting from illicit state aid over the course of two decades. The iPhone maker reportedly pays less than two percent tax in Ireland, where its international operations are headquartered. If Apple is shown to have received special treatment that’s denied to other companies, the firm could be liable for billions of euros in fines. Apple denies the allegations.