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.
View Top International Ecommerce ProvidersThe 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.
