A NEW European Union VAT rule comes into effect from tomorrow and it's worrying thousands of micro-businesses in the UK.

In future they will have to pay VAT on digital products sold into the 27 other member states of the EU. These products include e-books, online courses or PDF downloads of things such as knitting or sewing patterns.

VAT rates vary considerably across the Channel. Most countries have a higher rate and one or two lower rates. Denmark, however, has only one rate - 25 per cent.

To comply with this ruling companies below the UK VAT threshold of £81,000 will either have to register with EU countries separately or sign up for the UK Government's Mini One Stop Shop scheme (VAT MOSS), which will do it for them.

But signing up will make them liable to VAT in this country. It looks like a classic Catch-22.

According to the Federation of Small Businesses the UK has 3.3m sole traders. One of them is Sarah Gleasdon who runs her sewing pattern company, Made by Jack's Mum, from her Yorkshire home.

She said: " When I first heard the announcement about the changes to VAT regulations I seriously considered stopping selling digital downloads altogether. I design PDF sewing patterns and sell worldwide. It wouldn't be financially sensible to try and sell only within the UK, or to exclude EU sales.

"I also don't know how, on a practical level, I could do this as I sell through outlets such as Etsy - an online international marketplace - which are available to all. I only transitioned from the majority of my business being handmade clothing to PDF patterns in the last nine months, so I seriously considered giving up and going back to clothing.

"I am a very small business, (annual turnover of around £12,000), have one toddler and another child on the way. So there is no way I can justify the expense of an accountant. However, I enjoy my work and business is growing so I am going to continue.

"I am registering for VAT and also for MOSS. To be honest I am going into it a little blind. I have no experience of running a VAT-registered business and am trying to read up on all the rules and regulations. One that concerns me is the fact that we're supposed to gather several pieces of information to prove someone's location.

"Selling through Etsy I simply receive an order confirmation and a payment receipt with the buyer's address on. That is all the information I receive.

"I am fortunate in a sense in that I will not have to charge VAT on other areas of my business since children's clothing is VAT exempt in the UK. Other micro businesses will not be so fortunate and once they are VAT registered will have to charge VAT on everything.

"I am also a little concerned with the extra record keeping. For example I will now have to submit a VAT return every quarter instead of a regular tax return once a year. This means that unless I shut down business completely and de-register for VAT (which I don't intend to do) I will have to submit a VAT return when I am on maternity leave later this year, very soon after our child is born. Not an ideal activity to do with a newborn but since I am a one-woman-business I will have no choice.

"I think the new rules could be disastrous to micro businesses. We are expected to have the knowledge and facilities of large businesses. Had I known about these changes when I was looking into moving into PDF patterns I wouldn't have done it."

Bradford East liberal-Democrat MP David Ward said the new ruling had been rushed through to deal with large VAT-avoiding corporations without realising the impact on smaller enterprises like Sarah Gleasdon's.

"We are supposed to be part of an EU trading partnership making it easier to trade, then lo and behold this ruling comes in which could make things very difficult for micro-businesses. This is not a small matter: we know that growth in the economy is going to come from small to medium-sized companies.

"Forty per cent of our trade is with the EU. Anything that affects that must be a bad thing."

Shipley's Conservative MP Philip Davies described the new ruling as a knee-jerk reaction by the EU, rushed through to counter big companies from evading or avoiding paying VAT.

"Small business will be put at a disadvantage because many of them cannot afford to cope with the implications of this. It could be the difference between having a contract and not having a contract.

"The EU would be better off sorting out the mess of the eurozone. They haven't had their accounts signed off for 19 years."

The new ruling could be extended to all products sold into the EU by 2016, the Government has intimated.

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