One of the most complicated areas of VAT for many businesses is cross border transactions. Many businesses, particularly those who trade over the Internet, will often make sales to customers who are based in a number of different countries. Often referred to as “distance selling”, there are certain VAT regulations and responsibilities for businesses to understand. Failure to do so could leave you exposed to investigations and potential fines.
Distance selling refers to a VAT registered business within the EU, selling goods – not services – to a customer in a separate EU member country who isn’t VAT registered. The various VAT liabilities and charges will vary depending on the location of your customers.
Non VAT Registered Customers within the EU
If your customer isn’t VAT registered then you’ll most likely have to pay UK VAT on goods you export to customers. Examples of non-registered VAT customers could include private individuals, charities, public sector organisations and some small businesses.
In an attempt to reduce the administrative burden on companies and to encourage trade across Europe, there are national VAT registration thresholds that are set by each country within the EU. If you’re selling below these thresholds, you do not need to register for VAT in the country where your customers are located.
Each country within the EU has a choice between setting an annual distance threshold of either €35,000 or €100,000. When a business exceeds the distance selling thresholds above, you will need to register for VAT as a non-resident trader in each applicable country.
For example; when sales to non VAT registered customers in Italy exceeds the threshold of €35,000 in any given calendar year, there is a legal requirement to obtain an Italian VAT registration and begin charging Italian VAT on all subsequent sales.
You can however choose to register for local VAT prior to exceeding the distance selling threshold if you wish. Once registered for VAT, there will be EU compliance regulations to follow that will ensure invoices are issued according to the local laws. Regular VAT returns will also have to be submitted to the respective countries.
It’s important to note that each EU country has its own frequency for filing VAT Returns, so it’s important to understand the appropriate timings and requirements.
VAT Registered Customers within the EU
If you’re selling goods to EU business customers who are VAT registered then these goods are zero rated for VAT. As long as the goods leave the UK, your customer will pay the equivalent VAT for the goods at their country’s local rate. You will however need the necessary paperwork that proves the goods have been sent within certain time limits, and you’ll also need your customers VAT registration number for your VAT return.
There are special rules on registering for VAT if you sell digital services to consumers in other EU countries. There are however no distance selling thresholds for electronic or digital services to consumers under the new 2015 MOSS VAT Rules. You will need to register for VAT in each country where you’re supplying your digital services.
Digital services will include things like:
- Telecommunications services
- Video on demand
- Downloadable music
The various distance selling thresholds and VAT requirements can be a complicated process for many businesses and they’re subject to change at a moments notice. It’s important to keep on top of all the information to ensure your operations are fully compliant with the VAT regulations in the EU.