Taxation – biggest challenge for SMEs

EU member states are opposed to Commission plans for simplified VAT rules.

Taxation is one of the top worries of Europe’s small- and medium-sized enterprises (SMEs). Europe’s tax systems, fiercely guarded by national governments, are not short on complexity. SMEs, which are rarely in a position to afford costly fiscal advisers, are pushing for increased simplification and harmonisation of systems. A study done by KPMG for BusinessEurope, the employers’ association, which was released in November, showed that SMEs consider that taxation is the biggest obstacles to their development (84% see taxation as an inhibitor of growth).

European Taxation Commissioner László Kovács’s efforts to simplify current rules on value-added taxation (VAT) by reducing the number of items that qualify for reduced rates across the EU have so far been strongly resisted by member states. Under temporary arrangements which expire in 2010, 18 member states apply reduced rates to selected labour-intensive services mainly offered by SMEs, such as hairdressing, window-cleaning and construction. UEAPME, the small business association, is worried that the reduced rates may be scrapped if member states fail to agree on sectors which should be included in a permanent scheme by 2010.

Gerhard Huemer, diretor of economic and fiscal policy at UEAPME, fears that 300,000 jobs could be at risk if VAT rates are raised after 2010. "The Commission and [finance ministers’ Council] Ecofin need to work on this now to get a solution by 2010, otherwise we could really be in trouble," he says. Any extension of the temporary regime would require unanimity from finance ministers.

Kovács is currently planning a two-track system with reduced rates applied to selected goods on a mandatory basis and to labour-intensive services on a voluntary basis. The proposals will probably be announced during the Slovenian presidency of the EU, according to a Commission official.

A study published by the European Commission in June last year, however, casts doubt on the notion that scrapping the reduced rates would harm small businesses. "The studies we have done do not show that reduced rates help employment," says the official. "The thing is that, when you have reduced rates, increasing them could produce a short-term effect."

Significant progress was made on the VAT front last year when finance ministers agreed on wide-ranging reforms to the present system. Under planned ‘one-stop shops’, businesses operating across borders will only have to fulfil their fiscal requirements in their home country with tax revenues distributed thereafter by national authorities.

The system will dramatically reduce the levels of bureaucracy, not to mention the costs, that SMEs currently have to contend with when operating in more than one country. Under terms agreed by finance ministers in December, the scheme will apply only to companies in the telecoms and e-commerce sectors. Huemer hopes that it will eventually be extended to other sectors.

The common consolidated corporate tax base, an EU-wide method for calculating business tax which will be proposed later this year, could bring great benefits to the 250,000 SMEs that operate in more than one EU country. But some member states, such as Ireland, are likely to resist moves to introduce the scheme, which they fear could be a first step towards harmonised tax rates.

Should finance ministers fail to agree unanimously on rules, the scheme could be applied optionally through enhanced co-operation. SMEs would lose out under this scenario, says Huemer. "We are more for an obligatory system," he says. "An optional system would mean possibilities for tax engineering for larger companies. For SMEs without resources, tax engineering is not an option."

EU member states are opposed to Commission plans for simplified VAT rules.