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High VAT Rates ‘Restricting International Growth’: E-Commerce Roundtable

30th October 2013 Print

An e-commerce roundtable discussion that took place in Brighton recently found that many digitally-based enterprises are reluctant to expand into certain international markets due to a high VAT rate for businesses. Some, according to Anna Higgins of organisers Accordance, are going as far as shutting down some country-specific versions of their websites before they cross the threshold beyond which they would be liable to pay VAT on sales.

“In (the case of) Hungary, for example, (e-commerce businesses) just don’t bother (continuing to offer services there), as it wipes out their profit completely,” she explained.

The roundtable was organised with the aim of discussing many of challenges that e-commerce businesses face in the pan-European market place, with particular focus on issues including VAT rate discrepancies, supply chain administration and compliance and customer relationships. Representing Accordance was managing director and event chair Nicholas Hallam, head of consulting Andy Spencer and business development head Higgins. They were joined by experts in the VAT and wider tax & business worlds, including Eloise Walker of law firm Pinsent Masons, Jane Tchan of entrepreneurial podcast site SmallBizPod and group VAT manager at Pentland Group, Martyn Gulliver, a long-standing client of Accordance.

Particular focus was given to the forthcoming changes to the place of supply rules and how it might affect what VAT rate companies may pay. Currently, providers of e-books such as Amazon base themselves in Luxembourg, a nation that allows businesses registered within its borders to enjoy a relatively low VAT rate. Spencer explained that when the legislation kicks in in 2015 it could come as a big shock to certain companies.

“We’ve seen clients with massive sales (in places such as Luxembourg), but they weren’t paying much VAT. Suddenly they’ll realise that they have to account for VAT in each local market in which they sell and they might struggle to cope; their pricing is all wrong as they haven’t properly taken account for VAT until now.”

Gulliver continued on the point of pricing and how it can help prepare e-commerce businesses for taking a hit on their overall bottom line as a result of paying a high VAT rate in certain regions. “In (Pentland’s) case we supply at the same price to customers in every country. We pay the appropriate VAT rate in each country. Therefore if the rate is lower than 20%, we can make a bit of money; if it’s higher then we’ll take the hit. It helps to even things out.” Spencer then pointed to the fact that “some of our clients have seen massive jumps in turnover by offering the chance to pay in Euros or via PayPal (in addition to pounds Sterling).”

The panel agreed that businesses shouldn’t be held back from international growth by high VAT rates, but instead look to tailor their offering to the local market, increasing the potential to make more sales and thereby reducing the risk to the bottom line.