Cross-border tax complexities cost UK digital service businesses £3.5 billion in lost revenue last year, according to tax compliance firm Avalara.

A new report has found that the stresses of navigating cross-border tax complexities post-Brexit continue to hold back growth for British digital service companies and is causing significant anxiety.

Due to this, 29% of UK digital services companies currently exporting to the EU plan to exit from at least one EU market in the future, and 69% said that the fear of being fined for tax compliance has recently caused them to reverse plans to sell goods in an EU country.

With little set to change in terms of the levels of tax compliance obligations on UK exporters, researchers predict that the investment loss due to complex tax administration is expected to result in a further £885 million of value lost to UK digital service business by 2026.

The flow of new regulations and compliance requirements are causing significant stress for digital service professionals. Around 67% said that ensuring they remain compliant with tax obligations and regulations is the most stressful thing about running their business.

Other issues include fear of complex terms and conditions (45%), fines (38%), legal consequences (34%), and losing time needed for other tasks (28%).

For employees who work on tax compliance, the share of time spent on tax administration in the EU was 19.4%. The time spent has damaged productivity, with the research estimating that this caused a loss of £23 million in gross value added (GVA) overall.

Despite these challenges, however, many digital services firms in Britain remain optimistic for future European growth opportunities, with nearly three quarters (73%) of respondents stating they have plans to expand to at least one more EU market.

Alex Baulf, Senior Director of Global Indirect Tax at Avalara, commented: “From the toll of Brexit-based regulation changes to the uncertainty of the pandemic — anxiety levels have been skyrocketing in the digital services sector as tax complexity has become a major red tape headache.

“The compliance burdens on UK digital services are becoming almost unmanageable, and the fear of falling foul of compliance standards is hampering growth opportunities for British exporters.

“Digital service businesses need greater support from regulators to help them navigate these changes and must invest in digitisation to take more of the administrative and compliance burden away.”

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Nina Skero, Chief Executive at Cebr, added: “Our analysis shows that, if the EU was part of the domestic market, exporters were set to make just over £300bn in revenue, instead of the £252bn they actually earned.

“In addition to these missed sales to the EU, the export activity which does take place comes with a higher administrative burden which led to an additional loss of £386 million in gross value added (GVA) last year.

“These firm-level losses are impacting economic growth prospects, preventing an estimated £8.7bn worth of investment which could support GDP by a further £16.1bn in the longer-term. This means that if UK businesses were unhindered by EU cross-border tax complexity UK GDP in 2026 could be 0.63% higher.”

Globally, tax authorities are looking to modernise indirect tax reporting to ensure greater transparency surrounding VAT payments and recovery.

Over the last two to three years, governments have been introducing e-invoicing and real-time reporting to streamline tax payments, moving away from time-consuming and inefficient manual processes.

This move towards automation, underpinned by digital transformation, will be an important long-term solution for businesses looking to release themselves from the administrative burden of compliance.

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