20210224 What’s in a name?

Hello and welcome to The Financial Crime Risk and Compliance blogcast with me, Nigel Morris-Cotterill.

This episode is published the 24 February 2021

It is available in text on my blog at www.countermoneylaundering.com.


 

In this episode:

1. The impending global crisis for small businesses trading with EU customers and suppliers and a shedload of work for their bankers and others.

2. Transferwise becomes Wise. Is it a wise choice?

3. Revocation v repeal: a US crypto company has paid a penalty under a law that doesn’t exist because the US government said it had to.

4. Goodbye blogcast, hello BLOG/cast and the end of the line for our original graphic.

 

 

The impending global crisis for small businesses trading with EU customers and suppliers and a shedload of work for their bankers and others.

Value Added Tax and its half-sister Goods and Services Tax really should be simple. And when it was created in the 1970s, it was.

It’s a very clever tax, a concealed form of income or corporation tax. It’s more than a concealed form: it’s a pure form.

This isn’t the place to go into the detail of how the tax works but in summary, for registered traders (which is what the EU calls registered businesses) buying from other registered traders, the price paid is apportioned as to the cost of the goods plus tax at a rate set by national governments. When he sells it, he sells it at a price that includes tax at the relevant rate calculated with reference to his sale price and hands over the tax he’s charged minus the amount of the tax he paid when he bought it.

It’s called ″Value Added Tax″ which doesn’t make a lot of sense. If we move the words around, so that it says ″Tax on Value Added″ that describes it perfectly. Which, incidentally, is what the French who designed it call it.

If a business operates entirely within its own borders, it is still simple. But as soon as he makes a purchase or sale in another EU country (which the EU calls ″member states″) it becomes horribly complicated. Add in the complexity of attempts to tax ″digital goods″ and the fact that, over time, the EU has added several layers of complexity (in theory to address avoidance and evasion but with tens of thousands of millions lost in VAT fraud it’s clear that those measures have not worked), and now it is a labyrinthine mess in which fraudsters are having a field day.

The irony is that the EU is not a country. It does not collect taxes. Countries collect taxes. But the EU dictates the framework for VAT and taxation of digital goods is now integrated with VAT.

The latest scheme, which the UK introduced in 1 January this year so that it coincided with other changes to VAT caused by the UK’s withdrawal from the EU, will be introduced EU-wide in the middle of this year.

For businesses within the EU, it will be a hugely expensive exercise and small businesses will suffer greatly, if they can understand what they have to do (for the record, we had three people trying to work it out yesterday and we failed – one of us handles VAT for several companies in the UK.)

For businesses outside the EU (which of course includes us, as UK based companies) the situation is even worse.

1. Non-EU businesses which sell to customers (business to business or business to customer) must register for VAT. There are limited exceptions but as from the 21 July 2021, the small value exemption for goods going into the EU will be abolished. So if you sell a pair of hand-made socks to a customer in the EU, you will have to charge VAT. The rate of VAT you pay will depend on several factors. If you don’t register for VAT, you will be guilty of tax evasion. That’s a crime. So the money you receive for the socks is laundered.

2. You must register with either the non-EU MOSS scheme (acronym: ″mini one stop shop″) under which you choose an EU country as your ″home jurisdiction″ for VAT purposes.

3. If you don’t register under the non-EU MOSS scheme, you must register with each EU country which you trade with. There are 27 of them. And, because the UK has adopted the system, you have to register with the UK in addition if you want to sell your socks there.

There are some exceptions but they are complex. Also, there are ways of dealing with it but while they work for socks, they don’t work for services or digital goods, at least not for most small businesses.

The scheme appears to be carefully designed to force small businesses from outside the EU to use platforms such as Amazon.com if they want to sell in the EU. That, of course, means losing a significant percentage of their sale price for no reason except to try to comply with what has become an insanely complicated tax regime.

For digital goods, including information services, books, access to websites and even e-learning, the bottom line is this: the VAT rules as they have become present a huge barrier to entry in an industry in which technology has created opportunities which are almost without barriers.

Here’s why it matters to banks, etc. It’s all tied up with Know Your Customer.

If your customer is selling to the EU or the UK from outside either, you need to know that the required registrations are in place because, if not, you may be receiving the proceeds of tax evasion.

It is not beyond the bounds of possibility that some financial institutions will de-risk by refusing to provide services to those businesses that operate independently of the approved platforms.
It is also not too remote a thought that credit card companies will refuse to process sales by companies outside the EU unless there is evidence of registration.

If there was ever an example of how to take a simple and effective idea and destroy it with complexity, VAT is it.

For financial institutions, all over the world, this complexity is now a live issue.

It’s going to get worse as more and more countries impose what amount to import taxes on digital goods – and define digital goods differently.

For example, if we live stream a lecture, it is not a digital good under the EU’s rules. But if we then make a recording of that lecture available on demand, it is a digital good.

Some countries require suppliers of digital goods to register if they are to supply to those countries. Of those that do, there are different thresholds below which registration is not required. Simply keeping on top of this is a job that requires several people – or outsourcing to a service that small businesses and startups can ill afford.

There is no stopping the EU’s VAT juggernaut. VAT is the EU’s flagship scheme, its one grand idea that it has implemented with near-total success. And so across the world, now, even micro-traders and their financial services providers must be alert because failure is evasion and that’s a financial crime.