BHP12 – Understanding UK & European VAT (Sales Tax) For E-commerce Sellers

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Sean Chow

UK/European VAT (Sales Tax) Decoded

Episode Overview

In episode 12, I interview Claire Taylor of Simply VAT who breaks down how sales tax operates in Europe and the UK. Learn when both Eurozone and non-zone sellers need to register for VAT.

Gain your exclusive 5% discount when you sign up with Simply VAT using my affiliate link.

Simply VAT (Sales Tax) Podcast outline

 ➤ The Simply VAT Story

➤ Learn what is ‘VAT’ and how is VAT collected;

➤ Discover when EU / UK residents are required to register for VAT;

➤ Learn when Non-EU Based Online Retailers are required to register for VAT;

➤ I ask what the main VAT registration thresholds are for the Amazon countries; 

➤ I ask is it preferable for sellers to register or not register should they have the choice;

➤ Outline of the VAT Registration process and filing obligations;

➤ Outline of post registration seller obligations;

➤ Find out if sellers are able to de-register from VAT;

➤ Learn when you have to provide a VAT invoice as a seller;

➤ Outline of how Simply VAT can help you and the services provided; and

➤ Outline of the Simply VAT bonus offer.

 

 Resources

Xero: Is a user-friendly cloud-based accounting software that Claire mentions. You can operate Xero from anywhere in the world and integrate it with programs like A2X Accounting Software to import all your Amazon transactions directly into Xero. Test Xero out with this free 30-day trial.

 

 Bonus

Gain your exclusive 5% discount when you sign up with Simply VAT using my affiliate link.

Transcript

 

David De Souza:
This is episode 12.

Announcer:
Discover the key components of business success as we hack the minds of successful entrepreneurs. Welcome to The Business Hacker Podcast. Here’s your host, David De Souza.

David De Souza:
Today we have VAT specialist Claire Taylor of Simply VAT, who is going to explain what VAT is, and help EU and non-EU based sellers gain clarity on their VAT obligations. Lastly, we’ll wrap up with how Simply VAT can help simplify VAT for you, so you can spend more time actually running your business. Welcome Claire.

Claire Taylor:
Thanks David. Thanks for having me.

David De Souza:
Thanks Claire, it’s a pleasure to have you on the show. Now Claire, as I like to do with a lot of my guests, why don’t you share a little bit about yourself and your background with e-commerce and assisting sellers with VAT?

Claire Taylor:
Well, I’ve actually been in the international VAT industry for about 19 years now, which is quite shocking to think about. And I realized in 2013 that none of my industry was speaking to the online retailers directly in lay person’s terms about their EU VAT obligations. And internally, online retailers are sitting on ticking time bombs, because if a seller is caught out by the EU tax authorities, they will issue penalties and interest charges for late and non-compliance. So I launched Simply VAT to give online retailers a go-to place for expert, simple, easy to understand information.

David De Souza:
Yeah, I myself as an accountant know how crucial it is to obey your taxation obligations. But I guess for the people out there who do not know what VAT stands for, how it’s collected, why don’t we actually dial it back and start there?

Claire Taylor:
Yeah, definitely. The clue is actually in the name, VAT stands for value added tax, and this means that VAT gets charged whenever value is added in the supply chain. So for example, when the raw material supplier sells to the manufacturer, there’ll be VAT on that sale. Then VAT is added on the sale from the manufacturer to the wholesaler to the retailer, and then to the final consumer. VAT range actually varies from 17 to 27% across the EU. There’s a standard VAT rates and it’s actually a transactional tax is favored in over 140 countries worldwide. Governments get revenue every step of the supply chain, so it’s a really popular tax for governments to implement. It’s not actually supposed to be a burden to businesses. I know that doesn’t seem like it sometimes, but any VAT that you collect on sales, is offset against VAT that you’ve paid if you are a VAT registered business, so you can get that VAT back.

Claire Taylor:
The burden is actually with the final consumer, and this is really why the tax authorities are focusing their attention on e-commerce sales, because the VAT paid by the customer in any EU country is revenue the tax authorities get to keep, they don’t have to pass it back to the business. That’s why the tax authorities are really focusing on handing down on online sellers at the moment, and there’s been lots of lobbying and changes throughout the EU to make sure that the under declared VAT from online sales is actually being collected. They reckon something like 10 billion pounds of VAT is under declared from actually non-EU noncompliant online sellers. So it really is big, big focus on it now.

David De Souza:
Wow. I actually didn’t realize the number was that big, and so I guess for new sellers and existing sellers, would I be correct in saying that it’s very much not something that you can afford to ignore anymore, because governments are making a concentrated effort to go ahead and drill down on sales tax avoidance?

Claire Taylor:
Completely. The e-commerce explosion is so young, historically, relatively. It’s so neat, it’s like 20 years since the first online sale, and the tax authorities have been trying to keep up with it, but somehow people selling online think the normal societal rules of taxation don’t apply to them. You wouldn’t open a bricks and mortar shop and not think that you’re going to have to pay VAT and business rates, et cetera, et cetera, and it’s completely the same when selling online. The tax authorities they’ve set up mutual cooperation, they share data, they talk to each other, and they will go to Amazon and eBay in the marketplaces and collect data about sellers. So for example, there’s a rush on German VAT registrations at the moment, because the German tax authority have gone to Amazon.de and asked for seller information. So in this age of big data and data sharing, there is no place to hide. You really need to take it seriously.

David De Souza:
Oh wow. I actually I didn’t know it was getting that advanced. That’s actually quite crazy. I guess that begs a question, “Who exactly is required to register for VAT?” And I think maybe perhaps to make it easier, if we split this segment into firstly EU based online sellers, and then non-EU based online sellers, it might make it easier?

Claire Taylor:
Yeah, we can look at that. There’s actually a couple of pieces of EU legislation which really affect the online retailers. Both pieces of legislation actually are relevant to both EU and non-EU sellers, it’s just a matter of when they kick in. So firstly, I’ll talk to you about what’s known as the EU VAT distance selling rules. These rules relate to anybody who’s based in an EU country, has an established business in an EU country, or holds stock in that country. So this is really obviously relevant to using the Amazon fulfillment services. They also … these rules relate to you if you’re not a registered business, and you’re not VAT registered, you’re not a registered business, et cetera. So I’ll explain these rules and then give you an overview of how they’re used. The rules state that VAT should be accounted for locally, until the VAT registration threshold set by each EU tax authority are exceeded in that country in a calendar year.

Claire Taylor:
So, for example, if you’re based in the UK, if you’re not VAT registered here, you wouldn’t charge VAT, as you’d have no mechanism to be able to report it. However, you must still monitor your distance sales. So you would be charging … say you are VAT registered here, you’d be charging UK VAT until you hit the set thresholds. In most countries, EU countries, it’s 35,000 euros or the equivalent. There’s exceptions to this, Germany, Netherlands and Luxembourg, it’s 100,000 euros. And say you’re a German company or you’ve got stock in Amazon fulfillment, amazon.de fulfillment, it’s 100,000 euros for Germany, Netherlands, and Luxembourg. And then if you’re selling … say you’re delivering stock from Germany to the UK, the UK has a distance selling threshold of 70,000 pounds. So it gives you the ability … so you start in the UK, and it gives you the ability to access all 28 EU countries from just one location, without a really heavy cost of compliance. If you are, for example, looking at Amazon, if you use the Amazon VAT European fulfillment network service, this would mean you would have your goods in one FBA center, say the UK, and you could use the distance selling rules. Amazon would advertise your goods on the other marketplaces throughout the EU, but you could use the distance selling rules to test those markets without having to VAT register, because you would be monitoring your distance sales.

David De Souza:
If I was to ask you for an example, just to clarify my understanding, does that mean if you are registered, or if you were based in the UK, you could distance sell to say Germany and so I guess up to 100,000 euros worth before you’d have to register for VAT?

Claire Taylor:
Yeah. As long as the goods were delivered from the UK to Germany, that is correct.

David De Souza:
Okay, great.

Claire Taylor:
So that’s the distance selling rules. The second piece of VAT legislation that is really relevant, especially to Amazon sellers, is when you put your stock in an EU country, it actually creates a taxable supply. So what does this mean? In plain English, it means that the seller has to VAT register immediately in that country, there is no threshold to exceed as a non-resident. And this applies to both EU and non-EU sellers. So we’ve got, for example, Chinese-American companies who are using Amazon Pan-EU for example, and they have to have VAT registrations in the seven countries where Amazon hold the stock under this service. So just to really reiterate this, if people are using the Amazon Pan-EU service, it triggers a seven country VAT registration obligation. And once your goods are in those countries, for example, your goods will be sat in the UK, France, Italy, Germany, Spain, et cetera. You monitor your sales from each location, your distance sales from each location. So it does get a little bit complicated when there are that many VAT registrations to manage.

David De Souza:
Okay. So if I can just sum that up, and just correct me if I’m wrong. Effectively, to use the example of the UK, if you were selling from the UK and you reached the distance threshold in say Germany, you could just basically sell in Germany up to 100,000 in euros, and then you’d have to worry about VAT. But if you decided to store your stock in Germany, you’d actually have to then worry about VAT registration, because you’re storing your stock in that country?

Claire Taylor:
Exactly. Yeah. So up until 100,000 euros you would be charging, say UK VAT, however once your stock went into Germany and was being delivered to customers from the German warehouse, you would have to be VAT registered immediately. There are no thresholds to exceed.

David De Souza:
Okay. And then just finally, and we’ll delve into I guess how Simply VAT helps later on, because clearly it can get a little bit complex, but there is different thresholds for different countries in the EU.

Claire Taylor:
Yeah, there is a rule of thumb, there’s two bands, really. The 35,000 euro bands in most countries apart from Germany, Netherlands, Luxembourg and UK. So I think when these were set, the euro to GDP exchange rate would have meant 70,000 pounds was 100,000 euros. So you’ve got those at the 100,000 euros or equivalent level and then the 35,000 level.

David De Souza:
Okay, great. And now I guess we’ve covered the rules for EU based sellers. What is the rules, or how does it affect non-EU based online retailers, and when are they required to register?

Claire Taylor:
The rules I’ve just told you about really apply to the non-EU sellers as well, because if they’re putting their stock in Europe, they have to register in that country. Their stock is in immediately, and then their goods will come under the distance selling rules. Where the rules actually differ, is that in some EU countries, they will require non-EU companies to have a fiscal representative. So a fiscal representative is somebody who is jointly liable for the VAT that the seller will owe. So obviously they don’t want to expose themselves to any risk, so they’re going to want a bank guarantee in place and there might be higher charges, et cetera. A way around this for non-EU sellers, is to establish a company in the EU. At the moment the UK is really attractive place to do this, and once you establish an EU company, it takes away the fiscal representation obligation.

Claire Taylor:
Obviously establishing the company comes with it’s own then reporting requirements, like filing annual accounts, corporation tax exposure, etc, etc. But it’s really a matter of doing the sums, and working out what will suit your business model. But this is really the sticking point. As I said before, the distance selling rules and the rules about using fulfillment centers, warehouses, apply to the non-EU sellers just as much as it applies to the EU sellers.

Claire Taylor:
The other difference is, probably not a difference but something that again is relevant to people in both locations, is when you import goods from outside the EU, they’ll be subject to input VAT at the first point of entry. So once a business is VAT registered … say an American business is bringing goods into the EU, they might be charged a UK import VAT, and once VAT registered, this company reclaimed back on the VAT return. And also say a European company might be importing directly from America or China for example, and again, any import VAT can be reclaimed on the VAT return of the local country where they’re coming into.

David De Souza:
Okay. That’s actually really helpful information, and just I suppose to conclude this section, I just want to confirm now, if you’re a sole trader so you don’t have the company, is a sole trader impacted by these same distance selling thresholds? Or does it differ between if you’re a company legal structure and just trading under your own name?

Claire Taylor:
No, no difference. You could be sat in your bedroom, just minding your own business or so you think. And people are doing it all the time, the tax authorities are really wise. These rules absolutely apply to anybody that is selling goods online. You don’t have to even be registered as a sole trader. People are selling on Amazon and eBay all the time, but these rules absolutely apply to you.

David De Souza:
And would I be correct in saying that it is something that you need to worry about, especially if you’re a sole trader, because you could be potentially accruing liabilities in different countries under your own personal name?

Claire Taylor:
Yeah, completely. There is no limited liability with a sole trader. That’s absolutely true.

David De Souza:
Okay, that’s great, and I think that’s really a point of note for my listeners to go ahead and take note of them. Just finally, do you know what the thresholds are for the main Amazon European sales VAT registration thresholds?

Claire Taylor:
Yeah. So France, Spain, Italy, Czech Republic and Poland, they come under the 35,000 euro threshold, and then Germany is a 100,000 euros, and then the UK is 70,000 pounds. But you can find up to date information about every country’s threshold on our website. And also if you can email us at heretohelp@simplyvat.com, we can send you a copy of the thresholds.

Claire Taylor:
Yeah, so you to understand as well, with Amazon you might be selling into these countries using the European fulfillment network for example, but if you’re using the Amazon multi-country inventory service, or the new central European fulfillment service, or the Pan-EU, your stock is going to be in another EU country, so the thresholds only apply to distance sales from another EU location into that country. Otherwise you’ve got an immediate need to VAT register. I’m sorry to really push the point home, but it’s quite crucial. Also, just as a matter of interest, we’re launching a software very shortly, it will be able to pull Amazon data automatically once we’re given permission by the sellers, and the software will have the ability to monitor the distance sales automatically. We will let people know as soon a really good time before they’re going to breach the distance selling thresholds, to get them compliant on time.

David De Souza:
Yeah look, that sounds very handy and removes another thing off your plate, and can enable you to focus on actually running your business instead of worrying about VAT and trying to be a part time accountant on the side.

Claire Taylor:
Yeah. Do you know what we say to people? You don’t know what you don’t know until you know it, and it comes and bites you on the nose.

David De Souza:
Yeah, you’re definitely not wrong. So Claire, I guess we’ve now figured out the reason why you need to worry about registering for VAT. So if you have realized you need to register for VAT, what’s the process, how long does it take, and is there typically a cost involved?

Claire Taylor:
A VAT registration takes between about four to six weeks, depending on the country. At the moment I said there’s a rush on the German VAT registration, so they’re taking a bit longer, about eight weeks. Certain documentation is required by the tax authorities. It’s an official process, so they’re going to want verify you’re a valid person and it’s not VAT fraud, etc. So they want evidence of ID. The VAT … the tax authorities do not charge for VAT registrations, however we do. We provide the service, we will charge our fees for providing the service, and prices really depends on the country, the filing obligations, each tax authority, again, with the EU one set of rules is being interpreted 28 different ways, so there’s different frequencies, different deadlines. Poland has just gone monthly, and now they want what’s called SAF-T reports. Czech Republic wants control lists monthly. Spain you can file quarterly, but it needs an annual return, etc. So we obviously charge a fee for these services, and it really depends on what you need. And also there’s economies of scale. If you’re registering in multiple countries, we can apply a volume discount.

David De Souza:
I guess that begs the question, if you’re a seller and you have the option between registering and not registering, apart from the administrative costs, would it be better to … is it in the seller’s interest to register for VAT, generally speaking, or is it not really in their interest, if they have the option?

Claire Taylor:
If they have the option, it’s something obviously to think about. For example, here in the UK you don’t have to register for VAT until your sales, your turnover reaches 85,000 pounds from the start of April. You can voluntarily register, sometimes people want to do that because they want to look like a bigger business than they are, or they want to be able to reclaim the import VAT. But we always say to people, “If you don’t want to register yet, that’s fine, but absolutely factor the VAT percentage into your margins, and this way you don’t put a ceiling of limitation on yourselves.” Because a lot of the time people aren’t VAT registered, they don’t worry about the 20%, they hit the turnover when they have to register, and all of a sudden that extra 20% and they either have to put their prices up, which doesn’t make them competitive, and it negates the reason why they were selling that product in the first place. So people can choose … if you’ve got the choice, it’s really up to you about the way you want to work. But again, just to reiterate, put the 20%, even if you’re not going to register, put the 20% or the … whichever country you were thinking of going, and put that VAT amount aside so you’ve got enough room in your margins to stay competitive.

David De Souza:
Yeah, I think that’s a very crucial point there. So now I guess … So let’s assume we’ve decided we have to register, what happens next? How often will we typically have to submit a VAT return? And what information is required to be provided?

Claire Taylor:
As I said, filing frequency depends on the country. In the UK, you can actually file annually instead of quarterly. In Germany it’s monthly, in France it’s monthly. So once you’re registered, in order to be able to do the VAT return you’ll have to supply the sales data, and then the purchase invoices or input documents, and you compile the VAT return and submit it to the VAT authority. There’s also, if you’re using for example, the Amazon Pan-EU service or the multi-country inventory service, there might be additional reporting requirements such as EC sales lists, and these are compulsory reports that recall the movement of stock between the countries. Again, frequency depends on the country, et cetera. There also might be other reporting obligations such as interest VAT reports, and these become really relevant as your volumes of sales increase. And again there’s an interest at threshold.pdf on our website, or again email us at heretohelp@simplyvat.com for up to date thresholds. So really sales and purchase data is really what you need to supply, and you need to be able to prove the information, so you need to backup documents in case you’re audited.

David De Souza:
I’ll just confirm. So sorry, what is the interest.document?

Claire Taylor:
Interest and declarations. They actually stands for intra community statistics report, or statistical reports. And these are used … it’s data collected by the EU governments, and it’s actually really important data for the governments actually to set economic policy. For example, they might influence interest rates, etc. So they’re looking at the movement of goods, whether they be sales or transfers, the type of goods, the commodity code, etc. So they’re compulsory, and actually not to file them is a criminal offense. I don’t know if anyone’s gone to prison for not filing them yet, but they are used by the tax authorities to set economic policy, really.

David De Souza:
Yeah, no, that’s great. And I guess Claire finally, is a seller able to de-register once registered, say they’ve made a mistake or is that a very hassle-free process?

Claire Taylor:
It is hassle-free. How soon you can de-register really depends on the country. Most countries you can de-register usually I think in something like 30 days from the point it doesn’t become relevant. But some countries, you might have to be registered for a year before you can de-register. I think people have to take it seriously, it’s about paying taxes and the tax authorities are going to want to know. They’re not de-registering you just to register you again maybe a few months later. So they want to know that you’re coming below the distance selling thresholds or that your stocks moving out of the country for a substantial time, not to waste the admin time of processing the VAT registrations, etc.

David De Souza:
Yeah, definitely. I think, you’re definitely not wrong there. And I actually have a question from one of my listeners, and they asked, “When are sellers obligated to provide VAT invoices to customers?”

Claire Taylor:
The VAT invoice can only be provided by a VAT registered business. A non-VAT register company can’t provide a VAT invoice. And in some countries invoicing is compulsory. Germany, France and Spain, it is. In others like the UK, you only have to provide it if the customer asks for it. I’ve actually heard recently that Amazon have just launched an invoice facility, so the invoice is going to show the breakdown between the net price and the VAT for the relevant country, and this is going to be automatically raised which I think is going to save so many headaches for so many Amazon sellers, especially because of the Pan-EU service with people selling in France and Germany where it’s obligatory to raise invoices. I think that’s launching just as we speak, we know clients who already have access to this.

David De Souza:
Yeah, I think that’s a really handy tip. So I guess moving on, you’ve definitely highlighted that this can quickly become a very complex procedure, just from even a compliance perspective with some countries requiring monthly and then quarterly and annually, and other countries having different thresholds. Tell me a little bit about how Simply VAT can actually help sellers with this problem, and simplify this whole conundrum.

Claire Taylor:
Yeah. We provide VAT registrations in all the 28 EU countries. Obviously the Amazon hotspots, Germany, France, Spain, Czech Republic components in the UK and other territories like Canada, etc. We’ll also manage the ensuing VAT returns, and the other reporting requirements which I have just talked you through in VAT speak. And we’re relaunching our software, which we’re really excited about and which is going to make it easier for so many of our customers through automatic data collation, from the likes of Amazon and eBay and other channels, and the distance selling monitoring. So yeah, we are absolutely there to help and I think all the time it’s … I’ll say again, you don’t know what you don’t know until you know it, and we really want to help you. Our customers sleep at night. It’s one thing they don’t have to worry about.

David De Souza:
Yeah, I mean it’s definitely, as I mentioned before, but I totally agree with you and if you can take this problem off your plate, you’d be crazy not to. Now Claire, those services sound very comprehensive, but I understand you also have a special bonus discount for my listeners. Why don’t you tell us a little bit more about that?

Claire Taylor:
Yeah. We’d obviously really like to help people with their European expansion plans, and we’re really grateful for the opportunity to educate through your podcast, so we wanted to be able to offer something in return, and we’ll offer anything that comes by your podcast, we’ll give a 5% discount on any services people buy for the first 24 months of a contract. So there’ll be a discount of our prices for two years, and hopefully that will help.

David De Souza:
Yeah, that’s really generous of you. So thank you very much and Claire, you’ve left no doubt in my mind that … I suppose sellers who try to save business costs by trying to complete and lodge their own VAT returns themselves, can easily end up costing their business a lot more in lost sales. However, if any of my listeners want to engage your services, what’s the best way for them to go in and contact you?

Claire Taylor:
Well, visit our website simplyvat.com. You can fill out a form there which gives us the information we need to be able to quote, or you can email at heretohelp@simplyvat.com, or there’s my email address on the website as well, Claire.Taylor@simplyvat.com, or you can phone us again, all the information’s on the website, so please do get in touch.

David De Souza:
That’s great, Claire, and just as a final comment, is there actually any way for sellers to reduce the costs associated with complying with their VAT lodgements, if they were to say engage Simply VAT?

Claire Taylor:
We ourselves are working to reduce the costs through automation, et cetera. VAT is a really strange one. People are always looking to reduce costs, they don’t like the cost of paying people to do it. But it’s just paying for their expertise, which I know isn’t a fashionable words at the moment, but there’s a real cost in providing the expertise and maintaining the knowledge, cross borders, et cetera. I don’t know, I find it a strange one because you wouldn’t ask an electrician to come out to your house and then they fix your fridge and you say, “Oh, that was easy, I don’t want to pay you”.

Claire Taylor:
So we try and keep our prices absolutely as competitive and as accessible as possible, because the online retail market is full of small and medium sized businesses, entrepreneurial businesses. So we completely understand the pain of cashflow in getting your business to any kind of sustainable state. So I don’t really know what to say in terms of what the seller can do, all I can say is that we’re working really hard to be able to get the cost down so that you should see some reductions from ourselves in the next few months as well. But I really don’t know what to say in terms of what sellers can do, because we’ve got our costs right down to the bone really.

David De Souza:
So I guess where I was going with that question was more, I mean in terms of record keeping on their end, if they use accounting softwares and things like that, as opposed to say maybe giving you a lot of invoices and things like that. I suppose that would then directly influence the cost that you’re going to have to charge in relation to the work that needs to be done, right?

Claire Taylor:
Yeah. Oh, sorry, I completely misunderstood. But to be honest, we do a lot of work off Excel, et cetera. Because of data coming down from Amazon, it’s not like we have boxes and boxes of invoices to go through and imports. Those people we work with, just don’t … that’s not part of the process these days with online sales. So using software is great, you can use softwares like Zero, and it does help collate the data coming through, but especially because you can pull data from the likes of Amazon, et cetera, it’s not so labor intensive as if you were inputting off individual invoices. But I think just as a matter of good management, just for people to keep their bookkeeping absolutely up to date, it’s crucial, crucial to be able to run a healthy business to know exactly the health of your business at any point in time. Your profit margins, your cost,et cetera. You need to be on top of your bookkeeping in any case.

David De Souza:
Yeah, look, I mean, I totally agree with that. If you don’t know what your profitability is, you don’t even know if you’re making a profit or your business is costing you money. And while you want to pay somebody to take your money in ordinary life, so why let your business do that to you?

Claire Taylor:
Yeah, yeah, completely. Really understand and again, the entrepreneurial sellers are working so hard, it’s not easy. And you don’t take yourself down with friendly fire at all, make sure you’ve got really solid foundations in place to grow your business from.

David De Souza:
Claire, that brings us to the end of today’s Business hacker session. Just want to say thank you very, very much for coming on the show. It’s been a pleasure having you, and a big thank you to all my listeners. If you found this useful, please, please, please leave me a review on iTunes.

Claire Taylor:
Oh, thanks David so much for the opportunity to educate. It’s really important that people get this right and breathe longevity into their businesses.

Announcer:
The Business Hacker Podcast has come to a close. To access the free training or discounts offered by today’s guest, head to www.ecommerceguider.com/businesshacker, or join our Facebook group community by searching e-commerce guider.

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