Small businesses are being smothered by red tape

Small businesses in the UK are drowning in a sea of EU regulations. How can the burden be lifted?

Small businesses are being smothered by red tape

In the last year alone, 1,139 EU regulations have been introduced to the UK. Some of these include new rules on how to make smoke- flavoured food and those that set out when gin can be called ‘dry’. Open Europe, an independent think tank, estimates that the top EU laws cost the UK economy £27.4bn a year – which is higher than the estimated amount raised from the UK council tax bill. While most EU regulations strive to set a high standard for all businesses and serve to protect vulnerable employees and consumers, many argue that the cost of compliance with regulation often outweighs the benefits to the UK economy. The burden is often felt the most by smaller companies: a recent study by KPMG found that a third of SME decision-makers spend more than one day a week tackling admin and red tape.

“The challenge that the UK government faces, almost as an ambassador for small businesses in the UK, is trying to simplify what comes across from Brussels, in order that businesses – especially small businesses in the UK – that don’t necessarily have big complicated finance and HR departments, know how to consume all of these changes,” says John Coldicutt, CMO of Iris Software.

IRIS software works with 55% of the accountants in the UK, which means its software often needs to be updated in order to comply with new legislation. It serves not just to support accountants but also small businesses that run their payroll systems with IRIS software, which is compliant with the Real Time Information (RTI) legislation that was introduced last April. Coldicutt says Iris has to stay ahead of new legislation in order to support its colossal clientele.

“The more the UK government can do to throttle back the changes it’s making in compliance and the more it can do to influence some of the changes coming from Brussels the better because it allows small businesses to focus on what they do best and it allows their accountants to help them to grow rather than spend all of their time trying to make sense of the changes in legislation,” he says.

Coming down the pipeline

One of the latest European regulations to be enforced in the UK is the new EU VAT regulation, which officially came into effect on 1 January, 2015. Say goodbye to tax avoidance, as has been accused of the likes of Amazon and Starbucks, and hello to hundreds of thousands of struggling SMEs. The new VAT legislation aims to tackle tax dodgers, yet however heroic the rule will prove, small business owners may be martyred for the greater good.

There will no longer be the Luxembourg loophole for major tech companies to exploit to their hearts’ content; the EU Treaty has spoken and has scrapped the previous VAT rule which saw companies only pay the VAT rate of the country the business was registered in. Now, businesses that sell electronic products and digital services within the EU will pay the VAT rate of their customers’ home country and, by selling to EU customers, will forfeit their UK VAT free allowance therefore subsequently paying an extra 20% VAT. The current tax-free allowance applies to merchants selling under £81,000 of goods, however if they sell to just one or two customers within the EU, this allowance is sacrificed. SMEs have two choices: comply with new legislation and see profits taxed at different rates or refuse to sell to EU member countries, which comes with a whole host of anti-discrimination laws.

Small businesses will now have to register for VAT in the countries they sell to; there are 28 EU countries with 75 different VAT rates. HMRC has introduced a handy system called a VAT Mini One Stop Shop (VAT MOSS) that enables businesses to register for all of the EU countries on a quarterly basis. For some of the smallest UK businesses, it is yet another legislation that will require more time and attention from their already limited staff and resources.

With some entrepreneurs letting the legislation kill their vibe, others are leveraging the change. Taxamo, a real-time software-as-a-service (SaaS) company, has developed a unique tool to help companies comply with the EU VAT rule. The new software enables merchants to outsource the hassle of registering for each EU VAT rate and trust in Taxamo to identify each customers location and pay VAT accordingly, a necessary compliance that is challenging for businesses that often only have an email address to identify a customer. To go it alone, businesses would have to request more details from their customers which makes the customer journey longer and confusing.

“We changed our pricing to accommodate those really small guys; the UK Treasury can attract more revenue from the likes of Amazon and iTunes … it’s not all negative really, [the new EU VAT Rule] would need to happen otherwise the big guys would just go to Luxembourg and it would be unfair competition between the small guys in the UK because they would be selling to the same market and none of that money will be going to the UK tax authority,” concludes John McCarthy, CEO of Taxamo. 

Jade Saunders
Jade Saunders

Share via
Copy link