Selling goods within the EU? Why distance selling rules matter

Retailers selling goods to customers from “a distance” (meaning online, by mail order, or over the phone) which are then sent to individuals in EU member states need to be aware of the distance selling rules for Value Added Tax (VAT). These rules may apply whether or not you have a store in the EU and are becoming an increasing compliance burden for many businesses.

A lack of awareness of these rules can lead to financial penalties, interest being charged by EU member states, and a loss of access to online marketplaces, as well as the requirement to cease trading in those territories. This can all result in significant costs to the business, so it is well worth understanding your responsibilities.

If you are labelled as a business that is not compliant, your brand could be irretrievably damaged across the EU market. Therefore, ensuring that you are completely compliant with all EU taxes is crucial.

What are distance sales?  
Where goods are sold and delivered to private individuals (as well as charities and public bodies, and businesses in the EU which are not VAT registered) sales are known as “distance sales”. They have special rules in respect of VAT.

So what are the rules?
Assuming that your business operates from the UK or is using a UK marketplace, when goods are sold, UK VAT will need to be accounted for at the standard rate of 20%. This is of course unless you are selling goods that are zero-rated for VAT purposes.  

However, when you sell and deliver the same goods in another EU member state, you must continue to pay UK VAT until you breach the distance selling VAT registration threshold in that country. Once the threshold is reached, UK VAT must no longer be applied to the goods sold and instead VAT registration must be applied for in the EU member state. This means that you will adopt their VAT rate and accounting rules.  

Each EU country has its own distance selling threshold, but most thresholds are set at €35,000 per calendar year – quite low when compared to the UK’s £70,000 distance selling threshold. So potentially you could be required to register for VAT in many, if not all, EU member states if you are selling across the EU.

It is also worth noting that thresholds can change. For example, France used to have a threshold of €100,000, but this was reduced to €35,000 as of 1 January 2016.  It is therefore important to keep an eye out for any changes so as to not be caught unawares and liable for any missed payments.

How will each country know that I have exceeded the limit?
The European tax authorities have demonstrated a more thorough approach recently, sharing and requesting information regarding businesses carrying out trade in other EU member states. In addition, most online marketplaces have open channels of communication with the tax authorities and in many cases, they are jointly liable for any non-compliance by overseas entities.  

What happens if I don’t register in time?
You are required to register as soon as you breached the relevant threshold. This also applies retrospectively, so for example if you breached the threshold in France in 2015, you would be required to register for French VAT and account for the VAT from the date in 2015 on all subsequent French sales.  

In addition to under declaring VAT due to the respective country, penalties for late registration and late payment may apply in each country as well as interest being charged. 

You may also experience difficulty when trying to obtain a refund for any overpaid UK VAT from HMRC at the same time. This means you may be potentially paying VAT twice (at least in the interim), which can restrict cash flow.

You may require the help of professionals in the relevant countries to deal with the tax authorities on your behalf, which will need to be factored into your spending and financial plans when looking at EU markets.

Ultimately it is imperative that you keep records of any distance sales you make, ensuring that you keep a separate tally of the value of sales in each country that you sell in. Also, remember to check the EU thresholds periodically to ensure they haven’t changed!

Once you are nearing a particular country’s threshold, register for VAT as soon as possible to avoid any penalties or interest. If you discover that you have already exceeded the threshold and not registered, don’t panic. Seek professional advice on how best to manage this to protect both your bottom line and reputation.

RBTE takes place at London’s Olympia, 2-3 May 2018.

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