Today, as an e-commerce merchant, it’s much easier to expand your customer base globally than it's ever been. The internet breaks down borders and an online business operated from Southeast Asia can easily reach consumers in the U.K., for example.
However, when it comes to regulatory requirements and processes like taxes, it can be a little more challenging to sort out. VATs in particular can be a big stickler for first-time sellers to the European Union.
How do you stay compliant with the VAT regulations (especially as they differ in every country)? How do you set yourself up and where do you begin?
Our friends at 1Office help companies from all over the world get set up and running in Europe – so they were the perfect people to talk to about what e-commerce sellers need to know about VAT (Value Added Tax) in the EU.
While this article is not a replacement for professional accounting or legal advice, it will give you a good starting place to understand what you need to know about VAT in order to start selling in Europe.
What is VAT?
VAT is Value Added Tax, and essentially the name for consumption tax in the EU. Businesses collect VAT when they charge their customers, and then pay it back to the government when they declare taxes.
This process differs in each EU country – and the VAT rates vary by country.
In many places, like the U.K., VAT is included in the final sale price that the customer sees and pays. For example, you might purchase a book priced at £10, wherein the actual unit price of the book is £8 and VAT accounts for the added £2. In other places, you may see that same book priced at £8, and the £2 in VAT is only added on at checkout.
Getting started: VAT registration
If you want to sell to European customers, you’ll have to register for a VAT number first, so you can properly charge tax.
In some EU countries, like in the Netherlands, you get a VAT number during the company registration process.
In other places, however, like in the U.K., Spain or Estonia, you’ll have to apply yourself for VAT number, which registers you officially into the tax system. That being said, in most EU countries, your business has to transact at a certain volume before you need to register for VAT. For example, local businesses in the U.K. only have to register for a VAT number once sales reach £85,000 per year.
This threshold differs depending on the country. For instance, in Estonia, the threshold is €40,000, in Finland it’s €10,000, and in Sweden, you’re required to register VAT before you sell anything at all.
If your company isn’t an EU incorporated company, however, and you’re looking to sell your products to European customers, the threshold doesn’t apply to you. Foreign companies are required to register before they get started. For example, if you’re a Hong Kong company looking to sell to UK customers, instead of waiting until you reach sales of £85,000 yearly sales, you’d register from the get-go, before you start selling.
In terms of processing time, it can take anywhere from 1-2 weeks in some countries (like Estonia) and up to 3 months in others (like in Sweden)), in order to get your VAT number.
A company may need to register for a VAT number in several countries depending on where the goods are stored and sold, e.g. the same UK company may need VAT numbers in several EU countries.
How to know which countries you need a VAT number in
If you’re selling goods, the locations you’ll have to get a VAT number in is related both to where you’re selling, and also to the location of the goods (i.e. where they’re stored).
Firstly, you should have a VAT number for any country where you plan to sell.
Secondly, depending on where you store your goods, you may have to register for a VAT number in that EU country as well. For example, you may be a UK company selling goods that are located in another EU country – in this case, your UK company would also have to register the VAT number in that EU country and pay the VAT there, in addition to the UK.
So, if a UK company stores their goods in the UK but sells them in France and Italy, they'd need VAT numbers in the UK and France and Italy.
As an aside, it’s important to also note that when importing goods from outside Europe into the EU, you’ll also have to register for an EORI number: Economic Operator Registration and Identification. This identifies the importer in customs procedures.
Declaring and paying the VAT
On average, VATs in Europe are around 20%, like in the U.K. and France. They do vary however, from 17% in Luxembourg to 27% in Hungary.
Once you have a VAT number, you now have the obligation to declare:
- Sales and revenues received. This is the VAT you collected from your customers
- VAT paid. This would be any VAT you paid when purchasing goods or services as a company
Usually, the VAT reports are submitted monthly, but in some cases, it is possible to do it quarterly or even annually.
Consider enlisting the help of a professional accountant or service provider
Ideally, any competent local accountant or bookkeeper should be able to prepare and submit a VAT declaration in that specific country. However, if you also deal with foreign VAT, or aren’t an EU-incorporated business, then there are many more complexities that come into play when navigating each country’s own regulations and approaches to VAT.
You’ll want to make sure to enlist the help of a professional who has the following expertise:
- has an experience with cross-border business transactions
- knows how the VAT works in the EU (also is familiar with MOSS)
- has partners who can help with VAT declarations and reporting in other EU countries
- can advise about EU tax questions in general
Choosing to partner with a service provider like 1Office means letting them sort out VAT when you’re establishing your business, and on an ongoing basis as well. They can also offer different consultations, help you with establishing a company, consult on legal issues and legislations or do your accounting and annual accounts.
Key takeaways about VAT in the EU
- In the EU, the VAT rates and thresholds differ by country.
- There may be multiple countries you’ll have to register the VAT number in
- The VAT regulations and conditions can be different in case of B2B and B2C sales.
- Having a VAT number means you have to submit declarations and pay the VAT to the local government regularly.
- Every new aspect of how you operate your cross-border business can change the circumstance and requirement regarding VATs. Make sure to evaluate if you could use the help of o a local tax consultant or tax office to get advice on your specific case.