May 09, 2018 Industry news
We work with a wide range of business specialists, providing new and exciting solutions. But it's just as important to get the fundamentals right - like understanding VAT.
SimplyVAT.com was formed to provide expert VAT compliance services, to help online businesses trade internationally.
In this guest blog, they talk through the issues you may encounter with European VAT.
Confused about your obligations around cross-border VAT?
You’re not alone, the confusion around VAT is a significant issue for many online sellers. None more so than small and mediums businesses who are overwhelmed by a multitude of rules and regulations surrounding European VAT.
When selling online internationally, there are some sizable rewards to be reaped. Combined with the rise of online marketplaces, cross-borders sales are on the up and there are profits to be made.
The European Commission has reported an expected economic growth of 2.3% in the EU and Euro area, which is great news for online retailers.
Though with this growth, governments are seeing an increase in e-commerce VAT avoidance as sellers do not understand their obligations – or they choose not to. As a result, we are seeing elevated regulations and legislation changes all to accommodate online sellers and marketplaces in a bid to nail VAT fraud.
How is VAT defined?
VAT (Value added Tax) is a type of consumption tax which is added to a product not only at the point of sale but at production or whenever value is added.
- Globally more than 160 countries use a form of VAT, though it’s most common in Europe
- The European Union has 28-member states and the EU VAT directive applies to all
- Generally, countries in the OECD have some form of VAT system
- In Europe, each individual country determines their own sales tax rate. Despite this, there is more synchronicity when it comes to the national sales tax rate
However, the most common country that doesn’t use the VAT system is the US. Who use Sales tax and it is not added incrementally.
Selling on marketplaces what are your obligations?
- Whether selling to just one European country or ten, all countries require you to adhere to the local and EU laws when you sell goods to consumers
- You’re generally defined as an overseas seller if you store or sell goods in a member state to consumers even if your business is not situated there
- As a marketplace seller, you are still responsible for VAT when selling goods from a distance
- One of the major things you need to be aware of as a seller is the Distance selling rules
Distance Selling
The distance selling thresholds are a great way to expand your business across the EU while keeping the cost and complexity of compliance minimal. You can use these to understand where your customer base is and make informed decisions on growth and stock placement within the EU.
If you hold your stock in a fulfilment centre within an EU country, you must be VAT registered as your stock is now a taxable supply from that specific country. You are then covered by the distance selling rules where you can sell cross border into each EU country up until a set threshold. Once you reach the thresholds within a calendar year, you need to VAT register in the country you are selling into and begin to apply the local VAT rate to your products.
So, if you’re a business holding your stock in the UK, UK VAT will need to be accounted for on all cross-border sales until thresholds are met. The standard rate in the UK is 20% (please check for exceptions, reduced rates, or zero-rated items).
For example, if you’re selling into Germany, the threshold is €100,000 for the year.
So, anything under €100,000 in sales per year you continue to pay UK VAT, and anything over would be German VAT.
It can get more complex when you sell to multiple EU member states, as you will need to monitor each of the thresholds and VAT register in each country you cross the threshold. To view each EU member state’s threshold, view the full list here.
Determining the place of supply of the goods and monitoring your distance selling thresholds will allow you to understand which countries’ VAT rate you should apply.
Still confused? - There are a couple of things that may help you!
Firstly, enlist the services of a specialist VAT advisor, they can help you to register for VAT, file VAT returns, monitor your thresholds, and answer any questions you may have about the complexities of VAT.
Secondly get a software that will monitor and measure your thresholds and keep track of your invoices across marketplaces, or if you want to be guaranteed peace of mind, do both.
VAT Fraud
Recently, the EU authorities have been cracking down on VAT avoidance. According to the European Commission ‘member states have identified cross-border VAT fraud as one of their top ten priorities when it comes to the fights against international crimes.'
Failure to comply can result in hefty fines and large VAT back payments. Ignorance is not an excuse in this case. Since marketplaces such as eBay and Amazon have recently become jointly liable for the evasion of tax, you may find your account being suspended.
Furthermore, the UK tax officials, HMRC, are expected to strike a deal with online marketplaces which will give them access to their data in a bid to combat VAT evasion by cross-border sellers. According to the Financial Times, ‘Amazon and eBay would be signing an agreement with HMRC in the coming months'.
Online marketplaces are already held jointly liable for reporting non-compliant sellers and are obligated to report to HMRC on any sellers who fail to comply with VAT rules.
The agreement also commits platforms to educate online sellers on their VAT obligations.
What happens after Brexit
Currently, the EU is considered as part of the single EU VAT area. However, The House of Commons European Scrutiny Committee said that ‘UK goods sent to the EU would face VAT controls at the border for the first time since 1992’.
Should the UK leave the EU, Treaty Law automatically suggests a wide range of implications for how Britain can trade with the European Union.
Lots of businesses rely on EU-UK trade and when Brexit happens, the consequences for online sellers could be severe.
For the first time, small and medium businesses would need to pay upfront for import VAT on goods coming into the EU or vice versa.
If you have any questions, you can email heretohelp@simplyvat.com or visit www.simplyvat.com for more guidance..
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