What links digital entrepreneurship, the collaborative economy and the future of public services? They’re issues close to Nesta’s heart – and they’re all touched by the strange tale of VAT MOSS.

For those so far unaware of this controversy, the background. On 1 January 2015, new VAT regulations came into force for businesses selling digital services – anything supplied digitally, such as apps, downloadable music and e-books – to consumers in the EU. Rather than paying VAT in the supplier’s location, it is now to be paid in the consumer’s country. (Business-to-business transactions aren’t affected.)

According to HMRC, the rule change was intended to stop businesses being ‘unfairly undercut’ as a result of companies deciding to ‘locate themselves in another EU member state with a lower VAT rate’. We can also assume part of the rationale was to help make sure large digital services firms pay their fair share of tax (and so support ailing public services).

So far, so sensible – until you start thinking about the implications for micro- and small businesses. To comply with the new regulations, businesses either have to register for VAT in each member state they sell to, or sign up for HMRC’s ‘Mini One Stop Shop’ (MOSS). Although the MOSS removes the need for separate VAT registrations, it’s still pretty burdensome. Digital service suppliers have to collect two separate pieces of identifying information about each of their EU customers and complete quarterly returns for HMRC. And as some EU countries have no minimum VAT threshold, no-one’s exempt.

The changes have also affected collaborative platforms that let micro-entrepreneurs sell digital services directly to customers, such as Etsy and Bandcamp. And here’s the rub. The more a platform is focused on community rather than profit, the less likely it is to have the resources to adapt to the new regulations. The result is that many micro-entrepreneurs have little choice but to start selling through third party platforms that deal with the VAT for them, but take a cut on sales. Knitwear designers selling patterns through free platform Ravelry now have to offer them through commercial LoveKnitting – commission free until July 2015, not in the longer term.

You might feel knitters are small fry (though don’t say that too near me or I’ll poke you with my DPNs), but there’s a serious point here. In a fast-moving area of economic activity with a number of possible alternative futures, this story shows how a small change, relatively unheralded (only the Telegraph has given this significant coverage in the UK), and designed for other purposes, can have significant consequences. The future for digital micro-entrepreneurs, and the collaborative platforms they use, could be decided by accident.

For more information, see gov.uk