It is well known that the UK operates a very high VAT registration threshold (which has been the past subject of discussion in my blog for other reasons than the following). Other EU states on average have a threshold in the region of €30k, compared with ours of £73k. This means that, if our businesses make supplies in another EU state (under rules which require them to register there rather than allow the reverse charge to apply to the overseas customer) they will be more likely to be swept up into VAT registration than if an overseas business makes similar supplies in the UK.
Well, that is true until 1 December 2012. But from then the UK will introduce a rule that removes the threshold entirely for businesses that are not established in the UK. This will give small UK businesses a significant advantage over other overseas businesses, whether or not from the EU. To escape this the business would have to set up a base in the UK. It seems paradoxical that creating a palpable establishment in the UK should lead to less rather than more taxation than the business which has no base here. How can such a thing be justified? Is it not protectionist? Does it not treat other EU trading parties unequally, thus offending against the Treaty of Rome?
It is all legal and arguably justifiable. Indeed, the UK had no choice but to introduce it, because it stems from a decision of the European Court of Justice, in the case of Schmelz.
Taking one step back from that case what we find is that the VAT Directive, from which all our VAT rules spring, states explicitly that reliefs for small enterprises such as a de minimis threshold for paying VAT on supplies is only applicable to traders who are established in the Member State in question. This stipulation appears to have been ignored at least in the UK. A potential reason for its being ignored has been the apparently obvious clash between it and the general principles of the EU that there should be equivalent treatment for all businesses across the EU. As we have learnt from the episode concerning the UK's failure for many years to implement the cost sharing exemption which was mandatory under the VAT Directive, problematic provisions of the Directive do tend to be ignored in the hope that they will not be enforced any time soon.
Schmelz has brought this to an end. The ECJ's task was to answer the question of whether this discriminatory provision could be justified in the light of other more egalitarian EU law. It proved equal to the task. It seems from the decision that the discrimination against foreign businesses is necessary because the member state cannot monitor the activities of small undertakings which are not based in its own territory. Only if the business is based in its territory will it regularly receive sufficient information to be able practically to counter fraud or abuse.
There is something ironic about this. It appears to be only a recent development that HMRC has used the information in its possession, from company and personal tax returns, to track businesses that may have traded above the registration thresholds without accouting for VAT. For many years there was little indication of any co-ordinated such approach. A second point is that the mere fact that there is a zero threshold for overseas businesses does not suddenly make them visible. If the UK authorities have no access to information that might help them control fraud or abuse, that is not going to help them catch businesses which turn over, say, £20k, but do not register as they ought. A zero threshold does not achieve the stated objective.
It seems as if the ECJ simply hit on a reason for supporting the provisions in the Directive without facing the rigour of a credibility test in real terms.
But it leaves the UK with no real choice but to introduce a nil threshold for non-established traders effective from December 2012. One wonders what level of resource will be earmarked to policing it.
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