Rules for taxing digital services sold across European borders are being reassessed just months after they came into force. Responding to complaints that they represent an unreasonable burden on small businesses, the European Commission says it is now investigating possible adverse effects of the new system.

“If the effects are not the effects intended by the legislation, or simply not foreseen by the legislation at the time it was drafted, because the economy has developed, especially in the digital area, far more quickly than we could have envisaged, certainly the Commission will take that into account,” said Frans Timmermans, Commission vice-president charged with better regulation, in the European Parliament on 25 March.

Details of the measures being considered and the timetable for presenting them will be included in the Commission’s Digital Single Market strategy, due to be published on 6 May.

The legislation was agreed in 2008, but only came into force at the beginning of 2015. It covers automated digital services sold across borders, including downloads of e-books, music, games and software, or any product supplied as a digital file.

Previously, companies selling such products and services to consumers in Europe paid value added tax (VAT) in their home countries. This allowed multinationals such as Amazon to gain a competitive advantage by locating sales in a country with low VAT rates, such as Luxembourg.

Since January 2015, VAT on each sale must be paid in the consumer’s country. This means companies must be able to pinpoint their customers’ location, calculate the VAT due in each country and pay it to the relevant national tax authority.

While this addresses the issue of large companies being strategic about VAT, it applies equally to a self-publishing author of e-books or a hobbyist selling knitting patterns over the web. Complaints about the system centre on the additional burden it imposes on such micro-businesses.

Most European Union states have set up one-stop services that allow micro-businesses to make a single payment at home for distribution across Europe. However, they still need to track their transactions, calculate the VAT and archive the data.

People can avoid the administrative burden if they sell through a third-party platform or marketplace. These charge a fee, but most have agreed to handle VAT for sellers. Opponents of the system point out that this has the perverse effect of strengthening the position of the large companies, which already dominate the online marketplace.

Another response would be for micro-businesses to block sales to the rest of Europe, or territories where the volume of sales is low. This would be particularly regrettable for the Commission, which has declared war on geo-blocking in its pursuit of a Digital Single Market.

Protests have been most vocal from the UK, where a relatively high threshold for paying VAT means that many start-ups and micro-businesses fall outside the system altogether. But signs that it is of wider concern emerged last week when members of the Parliament’s Alliance of Liberals and Democrats for Europe (ALDE) group from 16 countries signed a letter of protest to Jean-Claude Juncker, the president-elect of the Commission.

The letter states that the administrative burden is discouraging digital micro-businesses from selling their services to customers elsewhere in the EU. “Paying VAT rates for 28 different EU countries is complex, time-consuming and requires changes to website design and pricing that risk driving potential customers elsewhere. In particular, the obligation to record and provide evidence for the location of each customer is a huge obstacle for very small businesses,” it says. The letter does not suggest a specific solution to the problem, but ALDE leader Guy Verhofstadt called in Parliament for an exemption for all small businesses.

This is also the solution proposed by EU VAT Action, a lobby group formed by online traders in the UK. It wants an immediate suspension of the legislation for businesses with a turnover below €2 million, for a finite period of time, so that impact assessments can be carried out, the legislation reworked, and a permanent derogation negotiated.

While pleased that an exemption is now on the agenda, the group is aware that the issue still risks being seen as a UK problem. “We still have to prove to them that all EU member states are affected,” wrote Clare Josa, one of the group’s campaigners, following Timmermans’ intervention.