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.
Contents
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- 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.
Compliance tips
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 tips
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.
Comments
Hello,
What useful advice you have for the scenario where an US-based webstore is using an European dropshipping company to deliver goods to end customers?
Would it be right to assume that the drop-shipper is the one to take care of VAT charges and everything else, or the US webstore is in some way responsible for VAT? If so, how? Thanks!
Who has the VAT liability depends on who is invoicing the end customer. If the end customer is a private individual and the USA webstore sells direct to the private consumer, the drop-shipper does not have any of the liability. However who is liable between the USA website and private customer depends on who is the importer. If the customer is the importer, they are liable for all the import duties and VAT unless the goods sold are below the country’s low value consignment relief threshold. If this is the case, no VAT and duty is due. If the USA… Read more »
A very informative article, thank you.
If a micro business in the Cayman Islands (a British Overseas Territory) intends to
ship their product( gourmet sea salt which is 0% duty) to a UK fulfilment centre ie: FBA, does the business still need to register for VAT? MOSS?
Hi Monique The import of goods into the UK which are then sold to UK business or to private individuals represent a taxable activity and therefore the import will have to register for VAT in UK. However, if gourmet sea salt qualifies for zero rated VAT in the UK that applies to general food then you may not need to be registered for VAT, this is called “Exemption from Registration”. You will need to apply to HMRC for exemption from registration and, if granted, you will not be able to reclaim the input UK VAT you pay when you buy… Read more »
Hello Good morning. As a customer if I were to buy electronic goods from a Chinese retailer who has a European Warehouse, and I purchased goods from said European Warehouse will I be covered by European Union laws regarding warranty? Also, if said Chinese retailer states that the only way they will refund me is if I return the damaged goods to China and not to the European Warehouse is that legal? Surely if I purchased the goods from an European Warehouse within the EU I should only be obliged to return the products to said location and not to… Read more »
Hi Rogerio, thanks for posting. I don’t think there’s any VAT aspect to your question so it’s not really one for Claire. Also I’m not sure if you were buying as a consumer or a business, which makes a big difference. The EU has very clear laws for selling to consumers e.g. see here for the UK implementation but selling to businesses is something else. If you were buying as a business I recommend you get specific legal advice. Perhaps you will have some general legal recourse if their marketing was misleading, but otherwise I suspect it will come down… Read more »
Great article!
I am an Irish eCommerce website that sells to customers all over Europe B2C.
My suppliers are in France and the Netherlands and ship to my customers on my behalf.
For “distance selling” I am under all the thresholds and therefore do not need to register for VAT in my customers country.
My question is, the VAT that I do charge, is it based on the Irish VAT rates and paid to the Irish government or is it based on the rates of my suppliers countries and paid to their respective governments on MOSS?
Kind Regards
Ignore my MOSS comment, I see this cannot be used as stated above
“VAT MOSS (Mini One-Stop Shop) relates only to the sale of services and is not relevant to the sale of physical goods”
Interested to hear an answer to Philip’s question as I have the same scenario
Hi Roni
Can you give me a little more information about your circumstances? Do you sell goods or digital services?
Hi Philip. Can you please tell me if your suppliers are charging you French and Dutch VAT?
HI, I AM AN NON EU NATIONAL AND RESIDENT OF POLAND ,I AM PLANNING TO OPEN MY OWN E -COMMERCE BUSINESS IN EUROPE,I WILL EXPORT SHOES AND BAGS FROM ASIA TO SPAIN AND GERMANY THEN SELL IT THROUGH E COMMERCE WEBSITE ALL OVER EUROPE. IF I IMPORT GOODS FROM NON EU COUNTRIES CAN I DIRECTLY EXPORT TO SPAIN OR GERMANY UNDER MY ESTONIAN COMPANY/ VAT ONCE I EXPORT AND PAID VAT AND IMPORT DUTIES IS IT NECESSARY TO KEEP MY STOCK IN ESTONIA ,OR I CAN MAKE WAREHOUSE ANYWHERE IN EUROPE AND SELL IT THROUGH E-COMMERCE UNDER ESTONIAN VAT SYSTEM… Read more »
I am launching an e-commerce website for Europe, no services just all kind of shoes and leather bags.
The goods will get export from non eu countries and then sell through e-commerce ,my concern is do i have to keep stock in the same country i will register vat and Llc after paying custom duty and vat , or i can keep stock anywhere i want in eu and do shipping from there.
Thanks
Hi Saf You will have to VAT register in the EU country where you keep stock for onward sale to private consumers. You can keep your stock in 1 country eg. the UK and then use the EU distance selling rules, whereby you can deliver orders from the UK until you hit set thresholds in the other EU countries ie. Euros 35,000 in all EU countries except Germany, Netherlands and Luxembourg where it is Euros 100,000. Also if you ‘distance sell’ into the UK, the UK threshold is £70,000. This means you can test the European market without a heavy… Read more »
Dear SAF Thanks for getting in touch. If you import directly from Asia to Spain and Germany and then sell the goods from Spain and German to private individuals you will have to register for VAT in Spain and Germany and charge Spanish VAT or German VAT on the sales. The import VAT you paid to Spanish and German customs can be deducted on the VAT returns you will have to file in Spain and Germany. You cannot use your Estonian company VAT number for the above transactions. If you have goods stored in a warehouse in any EU country… Read more »
Drop shipping is different.
If you don’t have s warehouse but purchase the goods from a company who invoices you but supplies them to your customer is the vat charged in the country where you are registered?
Hi Roni
If, for example, you are a UK company buying from a Spanish supplier who delivers to a German customer, you may have to register either in Spain or in Germany. It depends where you take title of the goods, and whether the supplier charges VAT.
How do you set it up to “take title” so that you don’t have to register in the other countries?
Hi
For chain transactions – An Irish company A buys goods from Irish company B and requests that B delivers the goods directly to its customer C who is resident in the UK.
Which of the two transactions is zero rated
Hi Rachel
One of the conditions for zero rating an intra-community supply of goods is that the customer gives a VAT number of an EU country other than the country from where the delivery is made. As the company A is in Ireland and the company B is also in Ireland, the sale from A to B cannot be zero rate because both have an Irish VAT number. Therefore, the sale from B to C has to be zero rate if C gives a valid UK VAT number.
I’m afraid you may have missed the point
Company A is in Ireland company B in Ireland
Company A buys the product from Company B and sells to the end user without vat because the product is zero rated in Ireland
Company B ships the product to Company A’s customer. This transaction is billed to the customer by Company A
No vat is charged to the customer because the product is zero rated in Ireland despite the product having been drop shipped by Company B from the UK anywhere in the World
I’m going to try and intermediate here, I hope it doesn’t cause further confusion! Rachel’s examples sounds like a dropshipping arrangement although she doesn’t call it that. To quote, “An Irish company A buys goods from Irish company B and requests that B delivers the goods directly to its customer C who is resident in the UK.” In this example A (in Ireland) buys from B (in Ireland) then C (in the UK) buys from A. The first sale is from B to A and the final sale is from A to C. But I don’t see why that would… Read more »
Hi Roni /Rachel
Unfortunately what you have stated is not possible in relation to VAT compliance – the sale of goods is considered to be from the UK and because of this, the ROI company has an obligation to VAT register in the UK and the UK VAT rate applicable to the products will be applied to any sales until the distance selling thresholds are exceeded in other EU countries.
Hi Claire Thank you for your reply Andy is correct it is a drop shipping arrangement – all businesses in this instance are VAT registered. Therefore i assume the sale from A (Ireland) to the end Customer C (UK) is zero rated as the UK customers VAT number has been provided and goods are being shipped from Ireland to England by company B (Ireland) If the end customer was not VAT registered/a private customer in that instance am i correct in stating that company A would charge Irish VAT to customer C up until such as time as the STG£70,000… Read more »
On the opposite side – again a dropshipping arrangement – if company A in Ireland ordered goods from company B in the UK to deliver goods to company C also in the UK (all VAT registered entities) in this instance i assume the Irish company would need to register for and charge UK VAT on the end sale to customer C as place of supply and customer both in the UK and company A does not have an establishment in the UK? If customer C in the above scenario was a private individual located in the UK – i assume… Read more »
The last paragraph is the scenario So from what you say, company A in Ireland can supply private customers anywhere in the EU by drop shipping by Company B in the UK to these private individuals anywhere within the EU and charge the Irish Vat on the transaction to these individuals. If in the case of these particular products they are zero rated in Ireland then no vat should be levied to individual customers within the EU If Company A in Ireland and Company B in the Uk are registered in their own jurisdiction for vat, then the transactions between… Read more »
Please find comments as follows: To Rachel: The 1st paragraph of Rachel comment at 10.03 am is correct however the 2nd paragraph is not correct because as the goods don’t leave UK i.e. purchased from B in UK and sold to C also in UK then UK VAT (not Irish VAT) is due and company A in Ireland has to register for VAT in UK in order to charge UK VAT to company C (in UK). This also applies if C is a UK individual, a registration is required by Irish company A as the sold goods did not leave… Read more »
Hi Rachel Great article. My situation is more B2B related, so hopefully you can weigh in here. Currently our company is based in Cyprus (EU). Here we supply 95% B2B, and 5% B2C with our products. Our products are currently sourced from the UK (however in the future we may source directly from China, but that’s not any time soon.) We are VAT registered in Cyprus. We are now looking at selling in Malta (EU). We have found a distribution centre in Malta who will handle all our distribution and money handling etc, so logistics wise, we are good. Our… Read more »
Hello,
A Company registered in Europe that do drop shipping products from China straight to the end customer should register for VAT?
The products go from China straight to the customer through postal curriers.
Who will be liable for VAT, the company that do drop ship (actually acting like an intermediary between seller and customer) or the customer that get direct from china the product.
Thank you