Every day, we speak to small businesses who are just beginning to sell to international customers through e-commerce, or who are looking to expand their cross-border trade, and one of the most common problems they mention is handling VAT for international orders. From if and what to charge international shoppers, to confusion around the administration required, different VAT rules for products and services, B2B versus B2C VAT rules, and rate variations within the EU Member States, staying on the right side of the tax authorities can seem like a daunting and costly task.
Luckily, we’ve put together a simple guide that should clarify the general rules and guide you on how to manage VAT, while minimising the time and financial burdens on your business, so you can concentrate on the bigger picture (like acquiring new customers and increasing your website sales).
For businesses in the UK, if your turnover for the previous 12 months is under £82k, you are NOT REQUIRED to register for VAT. However, once your reach this level of turnover, you must register immediately. Once you are VAT-registered, you must adhere to the following rules:
Selling goods within the UK:
- You charge UK VAT rate
Selling goods outside the EU, whether B2B or B2C:
- You do not charge VAT, but you should collect and retain evidence that your shipment went outside the EU.
Selling goods B2B within the EU (outside the UK):
- Make sure that your customer has a VALID VAT number and that you keep a record of this. You can verify the validity of any VAT number on the European Commission’s VIES website: http://ec.europa.eu/taxation_customs/vies/.
- You do not charge VAT (your customer handles the VAT in their country through the reverse charge mechanism)
Selling goods B2C within the EU (outside the UK) – Distance Selling Regulations:
- You charge the UK VAT rate and pay it to HMRC, until such time as your B2C sales in any individual EU country reaches that country’s thresholds (listed below), at which time, you must register with the local customs authority in that country and file tax there in accordance with their local regulations. Once you reach this point, there are several important facts to remember:
- VAT rates in the EU are not uniform across all member states, and variation between countries may impact the profitability of your business. For example, Luxembourg has a VAT rate of 15%, while in Sweden and Denmark, it’s 25%.
- Once registered to pay VAT in additional countries, you must file in accordance with their local requirements and schedules (monthly, quarterly etc.), which will differ from how you file in the UK.
- In each country, tax returns will have to completed in the local language
- As all of the above is likely to be complicated, it is recommended that you use a third-party company who can handle all of your VAT registrations and file your returns for you.
- Note that if you hold stock elsewhere in the EU to fulfil your international orders, regardless of whether your sales in that country reach the thresholds below, you must register for VAT in the country where that stock is held. This rule will apply to companies using Amazon’s FBA programme, if your stock is held in an international warehouse.
Selling services, including digital services (digital downloads etc.) B2C within the EU (outside the UK):
- The Distance Selling Regulations, explained above, apply only to goods, not services.
- For selling services, including digital services and downloads, as of 2015, you charge VAT at the applicable rate of each country to which you sell, from the time of YOUR VERY FIRST SALE (i.e. You do not wait until your sales to a given country reaches a threshold).
- This would normally require businesses to register for VAT in each country to which they sell, and charge their customers according to the specific tax rate in the individual country where their customer is located.
- Recognising the burdensome nature of this for small business, the VAT Mini-One-Stop-Shop (VAT MOSS) has been established. This allows businesses to do a single registration and make a single payment, which is then remitted to the relevant Member States.
- To learn more and register for MOSS, visit https://www.gov.uk/guidance/register-and-use-the-vat-mini-one-stop-shop.
Hopefully this guide has helped you begin to understand the complexities of VAT when it comes to cross-border sales, but as with everything there are exceptions and complications, and legislation and rates are both subject to frequent change, so we recommend that you speak with a qualified tax specialist to make sure that you understand exactly how all the laws apply to your individual business and to ensure you stay compliant.
VAT Distance Selling Thresholds
You can find the thresholds for each country on the European Commision website.