As of January 1st 2015, all businesses selling electronically supplied services, such as telecom companies, broadcasters and e-services, will have to adhere to new EU tax rules. Rather than having to account for VAT charges where the business supplier is based, this tax will be worked out according to the location of the customer.

Despite these major tax reforms only being a couple of months away, a new survey conducted by professional services company KPMG suggested that many small businesses aren’t aware of this pending change.

In order to gauge general awareness, 150 SMEs with less than £10 million turnover were questioned and 62% admitted to having no knowledge whatsoever about the plans.  On top of this, 66% didn’t realise there would be penalties for non-compliance.

This research also revealed a concerning lack of clarity on the costs that small firms are likely to incur in preparation for the changes.

UK economy expected to benefit

While individual UK SMEs selling in EU locations with high VAT tax such as Scandinavia will be negatively affected, the UK economy as a whole is expected to receive an extra £300 million in taxes that would have previously gone to other countries.

Amanda Tickel, Tax Partner at KPMG in the UK, explains: “The majority of e-services bought by UK consumers are currently not subject to UK VAT as many of these e-services are currently sold from countries such as Luxembourg where the VAT rate is very low – usually 15 percent but only 3 percent for e-books.

“This means the UK Treasury could benefit, but someone has to lose; either the suppliers of affected services will see significantly reduced profit or consumers will see increased prices as some of the extra VAT cost is passed on.  Our survey strongly suggests that price rises will form at least part of many businesses’ responses.”

The changes will only apply to businesses selling directly to consumers, not businesses selling to other businesses.

For further information, visit the HMRC website