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UK Customs and Excise expects at least 80 per cent of online trade from non-EU companies operating in Europe to follow new VAT laws due to come into effect tomorrow.

Although e-commerce giants like eBay and Amazon and ISPs like AOL have all registered to pay VAT there are concerns many smaller firms are either ignorant of the new rules or have deliberately decided to flout them.

UK Customs and Excise reckon that 90 per cent of business-to-business transactions by value and 80 per cent of business-to-consumer trades will comply the EU's VAT on e-commerce directive, The Financial Times reports.

According to the company around 22 non-EU companies have registered for VAT in the UK.

Customs and Excise has powers to compulsorily register firms. However if push comes to shove and a non-EU refuses to pay then it may be difficult to enforce any UK court order on overseas firms.

The new tax measure is designed to level playing fields, iron out distortions and close loopholes that have effectively meant that providers of digital services from outside the EU have been able to market them tax-free while European online firms have had to charge VAT.

The new rules apply to a number of e-services such as Web hosting and downloaded games, music and software. From July 1, suppliers of e-services from outside the EU will have to pay Value Add Tax (VAT) at the rate due in an EU customer's country.

VAT rates in Europe range from between 15 per cent to 25 per cent depending on the country. The new scheme allows businesses the option to register in a single member state of their choice.

AOL, whose services have been tax-exempt up till now, and Amazon have moved their European operations to Luxembourg. Luxembourg imposes low VAT rates of just 15 per cent.

For Amazon the move means it will may the same (low) VAT across all of its European operations, instead of charging different rates of VAT based on each individual country's tax laws.

AOL said that it would absorb the tax hike and has no plans - at the moment at least - to pass on the charge to its UK customers. AOL's UK rival Freeserve, which lobbied aggressively for a change in the law, estimates AOL has saved £150m since 1996 because it was not obliged to pay VAT.

eBay, meanwhile, has introduced increased fees in the UK and Germany to reflect the new tax burden it faces in those countries. ®

External Links

Customs and Excise support site for VAT on e-services

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Freeserve gets frisky at AOL's expense
eBay to charge VAT in Europe
AOL centralises European ops
Boston E-Party looms, as EU set to tax online sales
Europe to levy tax on US, non-EU web sales

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