Victory for David Cameron in Europe as VAT on tech start-ups is reviewed

The European Commission (EC) will revise the VAT regime for tech start-ups after agreeing with David Cameron that they were punishing British entrepeneurs.

The Prime Minister had lobbied Jean-Claude Juncker, the president of the EC, over a new tax regime that came into force on January 1.

It forces companies selling goods online to pay VAT in every country they trade in, rather than where the company is headquartered.

The new system also eliminated the £81,000 threshold for which companies have to register for the duty.

The measures risked putting small online businesses – in particular e-book retailers, web app designers and sellers of online courses - out of business, the Prime Minister had been told.

Mr Cameron is understood to have been approached by British firms while touring the country ahead of the general election, and raised the issue with Mr Juncker on the sidelines of the European Council summit in March.

In a victory for British business campaigners, Brussels is now preparing to revise the system. It said it recognised that “some very small businesses have faced some difficulties, particularly in the UK where they were previously exempt from VAT up to a threshold".

The commission’s consultation will include restoring a VAT threshold to help start-ups, extending a single registration scheme for cross-border taxes, and allowing businesses to be audited for VAT only by their home countries.

The commission said it had originally favoured a threshold, but this was rejected by national governments when the rules were first introduced.

Making Europe more competitive, and completing the single market in digital services, is a major plank of Britain’s renegotiation drive.

A British government spokesman said: “The Prime Minister spoke to President Juncker earlier in the year about how the EU needed to come up with a fix for the problems that many small firms were facing as a result of these VAT changes.

“So we welcome the Commission taking action and asking business for its views, and we’ll continue to push for this issue to be resolved.

“We want an EU that makes life easier for companies to trade, which is why the UK will continue to work with the Commission and our partners to get rid of the barriers that hinder British business”.

Pierre Moscovici, the EU’s tax commissioner, said: "This consultation presents a real opportunity to ensure that future VAT revenues from the digital economy are distributed fairly and effectively. At the same time, we want to make it as easy as possible to comply with the rules."

On Wednesday Jonathan Hill, the British EU commissioner who is responsible for financial services, unveils a series of measures to boost investment throughout the EU by removing regulatory hurdles.

The package – known as the capital markets union – is expected to include revising the solvency rules that prevent insurance and pension funds from investing in infrastructure; increasing competition between member states on retail banking and insurance; and simplifying the paperwork required by companies that want to raise money on the markets.

The project is also expected to include a review of dozens of financial regulations passed during the crisis years to determine which are now hindering growth.

Mr Juncker had initially been sceptical of Mr Cameron’s protests, telling colleagues that it was nothing more than pre-election posturing to fend off a Ukip challenge. He is understood to have been unsympathetic to British pleas, pointing out the new regime had been signed up to by Gordon Brown’s Labour government and claiming that coping with the VAT regime was a domestic matter for Britain.

Clare Josa, of EU VAT Action, the campaign group behind the reform, said the measure was "fantastic" but warned it could take two to five years for any new legislation to come into effect.

She urged the Government to push for an interim deal to exclude the smallest British firms from the tax.

"The alternative is digital trading in the UK being shut down," she said.