This post is by Claire Taylor, CEO of SIMPLYVAT.com.
If you sell online, you need to understand which international tax laws will be relevant to your business. Just because you sell online, this doesn’t mean your business is not governed by the normal rules of taxation.
And if you sell to buyers within European Union (EU) countries (also known as member states), even if your business is based in another part of the world, you will need to know how Value Added Tax (VAT) impacts your business.
What do ecommerce businesses need to think about? What exactly are the different rules and regulations? What do you need to do to ensure you are compliant? What happens if you don’t comply? And finally, what upcoming changes in VAT regulations should you be aware of?
As we will see below, the VAT rules you need to consider when trading within the EU are not impossible to comply with if you ask yourself the right questions.
Additionally, the EU VAT landscape is ever changing and today this is true more than ever with new parameters such as Brexit and a focused fight against VAT fraud in ecommerce by EU tax authorities happening. In this guide, we will cover the rules you should currently follow and explain to you the new legislation coming into place in the next year that may impact the way you trade in the EU.
- The EU VAT rules
- Who pays the import VAT when importing goods into the EU?
- The EU VAT Distance Selling Rules
- The 2021 VAT ecommerce package
- Which VAT rate applies to your goods or services?
- Are your invoices compliant?
- Selling to non-EU customers
- Compliance tips
- Pricing tips
- The cost of compliance: penalties and fines
- Failing to plan is planning to fail
The EU VAT rules
There are some fundamental questions which need to be asked:
- Where are you based? Inside or outside the EU?
- Where are your customers? Inside or outside the EU?
- What are you selling? Goods or services?
- Who are you selling to? Businesses or consumers?
This article is going to focus on B2C sales – the online retailer selling either goods or services directly to private consumers.
Who pays the import VAT when importing goods into the EU?
When importing goods from outside the EU and selling into EU member states, the responsibility for taxes and duties depends on who is the “importer of record”.
It is usually the consumer who will be asked to pay the import charges and VAT, via the parcel carrier, before the goods will be delivered. This is often not a pleasant customer experience, especially if it is unexpected. The additional import costs may even negate the benefits of buying abroad and can result in a high number of goods returned from disgruntled customers.
To avoid this, you may want to consider registering for VAT in the first port of entry into the EU for your goods. By keeping ownership of the goods, you will be the importer of record, and VAT will be charged on the cost price of the goods on entry.
The import VAT you pay is reclaimable on your VAT return, and the customer pays the full price at checkout – including VAT – so no nasty surprises for them. You will also benefit from a reduction in the number of returned goods.
The EU VAT Distance Selling Rules
If you are based in the European Union, or hold stock within the EU and sell to consumers within the EU, the Distance Selling Rules apply to you.
The rules apply even if:
- You are not VAT-registered.
- You are a sole trader.
- You sell through marketplaces such as eBay and Amazon
The rules only apply when you are selling to EU consumers.
For sales within the EU, if you have not exceeded the threshold in the buyer’s country, you should apply your domestic rate of VAT to those sales – if you are VAT registered. Otherwise no VAT should be applied.
Once you have exceeded the threshold in another EU country, you will have to register for VAT there, charge the country’s own rate of VAT, and file VAT returns according to the frequency and deadlines set by that country.
You will stay registered as long as your distance sales exceed the threshold for the year. If your sales drop and you want to de-register, check the rules in that country – how soon you can de-register varies.
The distance selling thresholds differ by country. In most EU member states the threshold is set at Euros 35,000 (or equivalent). For Germany, Luxembourg and The Netherlands, however, it is Euros 100,000 (or equivalent), and in the UK it is £70,000 (or equivalent).
It doesn’t take much to breach the lower thresholds. To put it in perspective, if you sell medium or high-value goods, fifty luxury branded handbags can easily carry you over.
Changes to the EU VAT Distance Selling thresholds – 1st January 2021
Please note – these distance selling rules will disappear from 1 January 2021 due to the introduction of the 2021 EU VAT Ecommerce Package – see below.
In the meantime, it is very important to follow the current rules until the changes are introduced on the 1st January 2021.
Fulfillment centers – where is your stock held?
You may decide you want to house your stock in a fulfillment center or warehouse in an EU country, in order to fulfill your EU orders more cheaply and efficiently.
Be aware – as the stock is now held within the EU, and is still owned by you, this has created a “taxable supply” and raises the immediate need for a VAT registration. There is no threshold to exceed.
Please note, the French and German tax authority have already introduced measures that now make the marketplaces liable for the VAT owed by the third-party sellers, instead of the sellers themselves. This has, in turn, made the marketplaces insist that a seller must have a VAT registration in place prior to being able to use a marketplace in either of those countries.
Once you have registered in an EU country, sales from the stock within the EU become governed by the VAT “distance selling” rules – the same rules apply to both EU businesses and non-EU businesses selling from stock held within the EU.
If you decide to use a distributor or agent, the same VAT liability may not apply – it will depend on your contract with them and who has ownership of the goods. To find out check your contract and speak to an expert like ourselves.
The 2021 VAT ecommerce package
As part of its Digital Single Market Strategy, the European Commission wants to boost ecommerce sales within the EU as well as clamp down the estimated billions of VAT lost from online consumer transactions each year.
This is why the VAT ecommerce package has been designed. It is a series of measures applicable from 1st January 2021 which will aim to simplify the VAT rules for online sellers.
The Introduction of VAT-OSS (One Stop Shop) – 1st January 2021
In 2015 VAT-MOSS (Mini-One-Stop-Shop) was introduced to facilitate the sales of digital services to private consumers within the EU.
As VAT MOSS proved a real success in respect of the collection of VAT on digital services, this scheme is now being extended into a One Stop Shop (VAT-OSS) from 1st January 2021 to cover the supply of goods.
The VAT-OSS rules stipulate that if you sell goods to private customers located in the EU, local VAT must be accounted for based on where the customer is located, once you have exceeded a threshold of €10,000.
Where is your customer located?
In order to understand which EU country’s VAT rate to apply, you will need to collect evidence of where your customer is based.
One piece of evidence is required if your VAT-OSS sales are below €100,000 and two pieces of evidence are required if the value of your sales are over that threshold. This evidence can include the billing address, the IP address of the device used to make the purchase, and the customer’s bank details.
To avoid multiple VAT registrations in different EU countries, the OSS (One Stop Shop), allows the seller to register for VAT in one single country and submit quarterly VAT returns. The host country collects and pays the VAT due from the seller’s EU sales in one VAT return instead of the seller having to register for VAT in every EU member state where they have customers.
The VAT-OSS is an optional scheme. You can still become (or remain) VAT registered in any EU country where you have customers through a voluntary VAT registration in that country.
It is worth specifying that VAT-OSS covers private consumer supplies only, not sales to other businesses, which means you would need to be able to identify who your customers are – businesses or private consumers – and apply the relevant VAT rules accordingly.
Import One Stop Shop scheme (Import OSS)
For physical goods imported in the EU, a new import scheme will be created and accessible for both EU and non-EU businesses.
From 1 January 2021, EU and non-EU businesses selling physical goods with a value up to EUR 150 to EU consumers, will be able to declare and pay the VAT due on these imported goods in a single monthly VAT return by joining the Import One Stop Shop (OSS) Scheme.
Currently, goods with a value of up to EUR 22 are VAT exempt when imported into the EU. This exemption, however, will no longer exist from 1 January 2021 as the EU recognizes it creates unfair competition for EU businesses.
When the new Import OSS is used, VAT will have to be charged and collected when the payment for the goods has been accepted. This means that when the goods arrive at the EU border, they will benefit from a fast release at customs with the VAT already accounted for.
The online seller will then be able to declare and pay the VAT collected to a single EU country where they decide to register for the Import OSS. The VAT returns and payments will be due on a monthly basis, and the EU country of identification will distribute the corresponding VAT amounts and information to the other EU countries.
When this special scheme is not used, for any reason, a simplified import mechanism will be introduced as well and VAT will have to be collected from the end customers by the customs broker, who will be responsible for paying the VAT amount collected to the local customs authorities on a monthly basis.
Abolition of the EU VAT Distance Selling Rules
The introduction of VAT-OSS within the 2021 Ecommerce VAT package will mean the abolition of the EU VAT distance selling thresholds currently existing for when selling to private consumers from stock held within the EU. As an ecommerce business, you will be able to account for your online sales either by registering locally or using a VAT-OSS registration instead.
Please note that this change in the distance selling rules does not mean that until then, you should avoid registering for VAT – if you have breached a distance selling threshold in any EU country recently, it is very important to stay compliant and VAT register where appropriate before the changes are introduced.
Increased responsibility of marketplaces
The last new rule coming into force from 1st January 2021 stipulate that digital marketplaces such as Amazon and eBay will be, under certain circumstances, deemed for VAT purposes to be the supplier of the goods imported from non-EU territories and sold to EU customers.
Under the new 2021 rules the responsibility of charging, collecting, and remitting the VAT due to the national tax offices will shift in certain cases from the seller to the marketplace itself. This is a major change as for the first time, digital marketplaces are given a significant role in the fight against VAT fraud!
Which VAT rate applies to your goods or services?
It is important to know which VAT rates are relevant for the goods you are selling. Please note, these may differ between countries. The European Commission (EC) have published information relating to VAT rates and specific country rules.
Are your invoices compliant?
Find out if you will need to raise an invoice and what information needs to be on that invoice – again different rules apply to different countries. Also consider whether your billing system can cope with the potential variations.
Selling to non-EU customers
If you are an EU-based business and are selling to consumers outside the EU, the supply of goods is usually zero-rated provided strict rules are followed, including providing evidence of the export within three months of the sale.
It is, however, important to check the local rules and regulations of the country you are importing into.
Here are some tips to help keep you in compliance with the practicalities of VAT in the EU:
- First, make sure you have the systems in place to capture accurate sales information including which countries your customers are in, and where stock is located for onward sale to your customers.
- Make sure you include shipping/delivery costs as these are included in the final sums when calculating if a threshold has been exceeded.
- When charging your customers, make sure you add VAT to the shipping cost as well as the product price on your invoices.
- Keep up-to-date with the current VAT registration thresholds and where relevant, monitor currency fluctuations. Know when you are about to exceed a threshold including when the local currency is not in Euros. This is important even though the rules will change in the future as tax authorities are combating VAT fraud more than ever.
- Know which VAT rates apply to your goods or services. If you are based within the EU, you may be familiar with the VAT rates in your own country, but they can vary elsewhere within the EU. Children’s clothing is a good example – it is zero-rated in the UK and Ireland, but attracts VAT everywhere else in the EU.
- Once registered in another country, do not charge VAT for your own country as well as the buyer’s country. VAT should only be charged once.
- It can take approximately 6 – 8 weeks to obtain a VAT registration, depending on the country that you are registering in.
- Once registered you need to make sure your invoices comply with local regulations
- Prepare for Brexit! So far there are no changes in the way UK companies can trade in the EU. However, you need to prepare for every possible scenario after the end of the transition period which is 31st December 2020.
- Finally, anticipate the upcoming VAT regulation changes we have covered in this article, whilst staying compliant in respect of your current obligations.
Pricing is a big issue. Unlike the USA, where it is customary to quote prices without sales tax, VAT should always be included in the price shown to consumers. It is important to understand the impact of VAT on your profit:
- Should you charge different prices in different EU countries or does one price fit all?
- How badly will your margins be affected by the different VAT rates if you don’t differentiate price in each EU location?
- VAT rates vary across Europe from 17% – 27%. Can the margins you have set for your products absorb the variations?
- Will you stay competitive once you have VAT registered in another EU country?
- Is your ecommerce system set up for multi-currencies and multi-VAT rate application? If not, how easy is it to update?
- Carry out market research in your chosen markets and find out how you compare to local suppliers and how much flexibility this gives you.
The cost of compliance: penalties and fines
In 2018, the European Commission reported that EU countries were losing €150 billion each year from undeclared VAT. To stop the hemorrhaging, special measures have been put in place across the EU in the last few years.
First, in 2012, member states set up a “mutual co-operation” initiative, with special units focused on ecommerce. The authorities in each country now communicate regularly and share data.
More recently, the formal adoption of new regulations and data-sharing tools to strengthen cooperation on VAT fraud between national tax authorities means that EU countries are becoming much more pro-active and effective in identifying and dealing with online retailers avoiding their VAT obligations.
Online retailers selling abroad need, more than ever, to be aware of their tax obligations in the countries where their customers are. Unfortunately, ignorance is no defense. The “head in the sand” approach can work for a while, but it’s not a long term solution.
Tax authorities have the power to levy penalties and interest charges, which can be as high as 120% on top of the unpaid taxes in some countries.
Failing to plan is planning to fail
Preparation and planning are a vital part of the cross-border trade journey. Planning ahead avoids a lot of future headaches and can even be the difference between the success or failure of your business.
Make sure you factor in the expense of complying with local taxes like VAT, including the cost of translation, software, and expert advice. It should sit alongside other regular expenses such as web hosting and accountants’ fees.
Circumstances unique to your business will dictate which VAT rules are relevant to you. Do your homework and your sums. Many businesses who have already made the leap to international expansion find the cost of compliance is far out-weighed by the increased sales and profits.
I wish you all the very best with your international expansion plans!
This post was by Claire Taylor, CEO of SIMPLYVAT.com.– a company which helps ecommerce businesses trade across borders in compliance with complex European VAT legislation.
Contact SIMPLYVAT.com for assistance with all your VAT needs, including selling to businesses in the EU and planning for Brexit.
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European Ecommerce and VAT: The Essential Guide