With the advent of the web comes fantastic opportunities for a global audience – but is it as easy as selling in your home market? If you have customers abroad you need to understand that you may have international VAT obligations to fulfill. If in doubt, do your homework – understand what's involved, how it impacts your business and how much it will cost you. Preparation and planning will be key to your international expansion plans.
What to think about?
Different rules apply whether you are selling goods or services. Different rules also apply whether you are located inside or outside the European Union (EU) and different rules apply depending on where your customers are – inside or outside the EU and who they are – businesses or consumers.
This blog concentrates on selling directly to private consumers.
Non-EU businesses selling goods into Europe
If, for example, you are a USA based company selling into Europe, who accounts for the taxes and duties depends on who is the ‘importer of record’. It is usually the consumer who, usually via the courier, will be asked to pay the import charges before the goods can be delivered. This is not always the best customer experience especially if it is unexpected. The additional import costs may even negate the benefits of buying abroad and result in a high number of returns for the seller from disgruntled customers.
To avoid this, you may want to consider VAT registering in the first port of entry into the EU for your goods, for example, here in the UK. By keeping ownership of the goods, you will be the importer of record, VAT will be charged on the cost price of the goods on entry, the import VAT is reclaimable on your VAT return, the customer pays the full price – including VAT at checkout – so no nasty surprises for them - and you will profit from a reduction in the number of returns.
Inside the EU and selling goods to non-EU customers
If you are located inside the EU and are selling to consumers outside the EU, the supply of goods is usually zero-rated provided strict rules are followed which include keeping evidence of the export within 3 months of the sale.
The EU distance selling rules
The rules stipulate that you can supply goods to consumers in other EU member states without having to VAT register there until you exceed the set thresholds. The thresholds vary – in most EU member states – it is set at €35,000 (or equivalent), however for France, Germany, Luxembourg and The Netherlands – it is €100,000 (or equivalent), and in the UK it is £70,000 (or equivalent).
Before you have exceeded a threshold elsewhere in the EU, you apply domestic VAT to those sales (if you are VAT registered), otherwise no VAT should be applied.
Once another EU member state’s threshold has been exceeded you will have to VAT register there, charge the right rate of VAT and file the ensuing VAT returns at the frequency and at the deadlines set by the country where you have registered. You stay registered as long as your distance sales exceed threshold every year. If your sales drop off and you want to deregister – check the rules in the local country – how soon you can deregister differs from country to country.
Using the marketplaces are a great way to test the international waters without much initial investment. The infrastructure and global reach offered by the likes of eBay and Amazon are a brilliant way to exploit new markets.
In terms of your international VAT obligations, these sit firmly with you, the seller. Keep an eye on the volumes of sales in each EU country and know when you are about to exceed the VAT registration thresholds.
You may decide you want to house your stock in a fulfillment center or warehouse in the UK (or another EU member state) in order to fulfill your European orders more cheaply and efficiently. Be aware - as the stock is now held within the UK (or another EU member state) 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.
For those based outside the EU, once you have registered here in the UK or another EU member state, you become governed by the VAT distance selling rules. The same distance selling rules which also apply to EU sellers selling to other EU member states.
The penalties & fines
The European tax authorities set up mutual co-operation to combat losses from undeclared VAT. They have the power and ability to request data from other EU tax authorities, as well as the marketplaces if they suspect violation of the tax laws. They talk to each other and share data.
AND unfortunately ignorance is no defence - the tax authorities can, and do, levy penalties and interest charges.
Compliance - the practicalities
- Firstly - It is important to make sure you have the systems in place to capture accurate sales information including which countries your customers are.
- If you are using the marketplaces, make sure you extract the correct data and make sure you account for the VAT on the full selling price and not just the amount remitted from the marketplace.
- Include shipping/delivery costs when calculating if a threshold has been exceeded
- Add VAT to the shipping cost as well as the product price on your invoices.
- Monitor your sales – know when you are about to exceed the thresholds.
- Know what VAT rates apply to your goods. Don’t make the assumption that because a good has a certain VAT rate here, it will be true across Europe. For example children’s clothing is only zero rated in the UK and Eire – elsewhere it attracts VAT. The EU has published a list of country-specific VAT rates.
- Once registered in another EU country, don’t charge domestic VAT as well. Do not charge VAT on the same sale twice Once you are registered make sure your invoices comply with local regulations.
Pricing is a big issue – should you charge different prices in different 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 member state?
It’s always a good idea to do some market research in your chosen markets and find out how you compare to local suppliers and how much leeway this gives you. Is your ecommerce system set up for multi-currencies and multi-VAT rate application? If not, how easy is it to update?
Planning ahead avoids a lot of future headaches and can even mean the success or failure of your business.
The cost of compliance?
Preparation and planning are a vital part of the journey. Factor in the cost of compliance, whether it be an internal cost of language capability and IT needs or the cost of using experts to take on the compliance process for you. The cost should sit alongside other staples in your cash-flow such as web-hosting or 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-weighted by the increased sales and profits.
We wish you all the best with your international expansion plans!