The EU solution to the vexed problem of taxation of economic transactions in the digital world, where a business may be hiding behind a remote server and claim to be outside of a taxation jurisdiction, follows from a recommendation made by the OECD that consumer supplies should always be taxed where the consumer, the customer, is located.  The EU is one of the first trading entities in the world to adopt this solution.  It successfully brings to an end the exploitation of the principle of the single market introduced in 1993 by multinationalcompanies and ensures a fair tax take for each EU nation related to the volume of consumer activity within each country.

However the digital economy has also made it possible for very, very small businesses to trade across national boundaries for the first time and in the last 5 years there has been an exponential growth in this sector.  In countries like the UK it has contributed to a growth in self employment and self reliance. The UK Department for Business Innovation and Skills carried out a survey of small business in the UK which showed that there were no less than 3,685,000 businesses falling beneath the official description of a Micro business.  Within the EU a Micro business is defined as having fewer than 10 employees and a turnover and asset size not exceeding €2million.  These very small, let us call them "Nano" businesses, have no employees whatsoever. 70% of them are sole traders working from home.  The survey establishes however, that 92% have an internet connection and 31% use that connection for selling goods and services over the internet.  That is 1,1420,000 internet traders.

To facilitate multinational registration for VAT purposes within the EU, instead of requiring each business to register for VAT in each country, which would be an administrative nightmare, the EU has established the principle of the Mini One Stop Shop (MOSS) which enables a single return to be made in the member state of the supplier showing the amount of VAT due at each rate for each of the various EU countries where sales have taken place within that quarter, the first of these returns becoming due by 20 April 1015 covering transactions in the period from 1 January 2015 to 31 March 2015.

When this system was first envisaged the "Nano" business did not have any presence in cross border trade at all, except, perhaps, for a limited presence in the distance sale of goods, and to avoid these businesses being overburdened, and also, of course, to prevent national taxation authorities have to incur needless costs in dealing with smaller international traders, the EU had established in 1993 de minimis thresholds that countries could adopt so that registration in the country of consumption would only be required if trade exceeded a relatively modest €35,000; although countries could choose to adopt a higher limit if they wished, both the UK and Germany, for example, chose to adopt the higher de minimis which is €100,000.  The EU Finance ministers decided in the case of e-Services, digital products, that there should be no de minimis limit whatsoever, but since this decision was taken the exponential growth in "Nano" business creates an administrative nightmare with millions of these small businesses having to register, in turn creating an administrative cost for each country which far outweighs the modest amount of VAT that could be collected.  A single supply of a knitting pattern with a value of €6 could create an obligation to account for €1 of VAT but at a cost which far exceeds any benefit to either the trader or the country in which the consumer is located. It also runs the risk of stifling the growth of this important business sector as a trader may find that the costs of individual compliance far exceeds the benefit that can be derived by entering into this type of trade.

It can be observed that the UK, which has a very high VAT registration threshold for domestic business, has also experienced considerable growth in economic terms at this "Nano" business level, which has clearly contributed to a relatively low rate of unemployment and also sows the seed for potential future growth as these businesses mature and begin to become larger, employing others eventually, and beginning to generate significant profit for the business and taxation revenues for the state where the cost of administration and collection is not a burden for either.

The absence of a de minimis limit for cross-border digital trade is threatening to stifle the very considerable growth in digital markets which the EU is trying to foster and encourage.  The "Nano" business is not officially recognised in EU nomenclature and provision, but it is vitally important to the health and growth of the EU as a whole.  It is a matter of great urgency that some form of de minimis limit is created, perhaps based on the existing provisions for distance selling, to facilitate growth in this vital sector whilst avoiding an excessive administrative burden for each member state, or running the risk of these businesses simply attempting to avoid their obligations.

There may be more than 1,000,000 of these businesses according to the Department for Business Innovation and Skills but according to Her Majesties Revenue and Customs only 7,000 businesses have registered, so far, for the Mini One Stop Shop.  The EU must act now to prevent a digital disaster.