What You Must Know About VAT If You Have Customers in Europe
If you’re a business anywhere in the world and you have customers in the European Union, listen up!
It is correct time to get severe about VAT. For those who don’t understand, that’s Value-Added Tax, the tax you ought to be applying to almost every single sale you make in the EU. Along with the tax you ought to be submitting back into the EU each quarter.
For decades, many businesses selling goods and services into the EU have thought that as long as they pay taxes in their home country, they’re as good as gold. But that’s not the case anymore.
As a supplier of digital products to EU customers, you’re responsible for charging, collecting, reporting, and submitting this Europe-specific tax to individual governments. Yes, this means across all 28 EU member states and their various VAT rates.
But never fear! We’ve made VAT simple for you. We’ve gathered all of the essential information, answered all the questions we imagine are kicking around in your head, and laid out everything about VAT for non-EU businesses in one place.
Let’s get started.
What is VAT?
We can answer the most obvious question first. VAT stands for “Value-Added Tax.” It’s a consumption tax that applies to all goods and services, whether physical or digital. That means every time a customer purchases a good or service in the EU, they pay VAT on the spot.
The vender (your business) gathers the VAT from the customer and pays a few or every last bit of it to the government. In this way, you can consider yourself to be a sort of tax broker. It’s not your cash paying for the VAT, you’re simply gathering and submitting the customer’s cash to the government.
That’s why it’s important to know when to charge VAT to your EU customers. Because if you don’t charge the customer for VAT, then actually it will be your money paying for it. The government will still expect the taxes from you, whether you knew to add VAT or not.
Why are non-EU businesses responsible for EU VAT?
Since European governments need to guarantee they get taxes on all products and enterprises consumed by their residents, even merchandise and services originating from other parts of the world. Physical items are taxed at customs. Digital items clearly don’t cross any borders to go through customs, so digital items have VAT added.
If foreign businesses weren’t required to charge VAT, imagine the disadvantage that would place on EU-based businesses. Their products would cost more. Their local customers would look outside the country to find something cheaper, and EU businesses would suffer. Then, when the EU businesses suffer and make fewer sales, their governments collect less tax.
So, requiring non-EU businesses to charge VAT evens the playing field for native vendors, and it increases the EU governments’ tax revenues.
How should a non-EU business handle EU VAT?
Register your company for EU VAT.
Verify your customer: Who are they? Where are they?
Charge VAT, if you need to.
Provide detailed VAT invoices (and keep record of them, too!)
Submit quarterly VAT returns.
We’ll break it all down for you.
Step 1: How does a non-EU business register for EU VAT?
If you sell Digital Products: You can register for VAT in the EU member state of your choice. That gives you 28 countries to choose from! If you need an English-speaking base, the obvious option is Ireland.
Once you’ve chosen where you want to base your EU tax operations, you register for a VAT Mini One-Stop Shop (MOSS) with that local tax authority. You can do this online. Find the “non-Union scheme” option, as this process is designed for non-EU businesses.
A MOSS allows you to consolidate all of your EU VAT in one single tax return, even if your customers live in multiple different countries. The MOSS option however is an option only when you sell Digital Products.
Let’s say you choose to register in Ireland. You apply for a VAT MOSS on the Irish Tax and Customs website. You sell to customers in France, Germany, The Netherlands, and Italy. When tax season comes around, you submit one VAT return to your MOSS in Ireland. Your Irish MOSS then calculates how much VAT should be returned to the tax authorities in France, Germany, The Netherlands, and Italy — and distributes all of that for you.
Quick recap of how to register for EU VAT:
Choose an EU country
Go to their MOSS website
Look for the “non-Union scheme”
Receive your VAT number!
If you sell Physical Products, then you need to VAT register in the country that you are going to store those products.
That means that if you store your physical products in your country and you ship them to the destination country you do not need to VAT register in the country that you ship your goods (unless you exceed the threshold limit see more information below).
This however means that you are going to have higher shipping costs, longer periods to deliver your goods and if you are outside of the European Union customs are going to apply.
All those factors are going to make your product less competitive. That’s why you should consider storing your goods in the European Country that you want to sell too.
If you are from overseas, storing in one European country and selling and shipping from there to the rest ones is something that is going to make your business much more competitive as it is now.
A German customer for example is going to be way less reluctant to order your item from the UK for example because he knows he is not going to have to pay customs and because he knows he is going to get his item delivered within some days and not weeks.
How you can do that? By having a fiscal representative on the country of your choice.
Is it difficult for you to do that? The answer might surprise you. Click here and book a free consultation with us.
Step 2: What should you verify about your customers in the EU?
You have to check two things about your EU customers: who they are and where they are. The first decides whether you charge them VAT, the second decides how much.
Figure out who they are:
When you make a deal in the EU, ask for the purchaser’s VAT number. Businesses will have one, private people won’t. Sadly, a few purchasers may endeavor to imagine they’re a business just to keep away from the tax charge, so they’ll present a fake VRN. For that reason, check to ensure each VRN legitimate. You can utilize this straightforward VIES approval device from the European Commission.
Figure out where they are:
Notwithstanding asking for the purchaser’s VAT number, you additionally need to ask for confirmation of their area. Their area will decide the rate of VAT you add to the deal, since each EU member state has its own particular rate.
Next, to demonstrate to the government that you’re charging enough VAT, you additionally need to demonstrate where your customer is found. Along these lines, when making a deal, generously ask for two of the following bits of confirmation:
– Billing address
– Location of the customer’s bank
– Country which issued the credit card
– The IP address location of the buyer’s device
– Country of the SIM card (in cases where the purchase was made on a mobile device)
Finally, document this location evidence and keep it on record for 10 years.
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Step 3: When does a non-EU business have to charge EU VAT?
Not always. It depends on where your customer is and whether your customer has a valid VAT registered number, or VRN.
If they don’t have a VRN, you do charge VAT.
This implies your customer is an ordinary end-purchaser. It’s your normal B2C exchange. You should charge VAT on the deal, and then follow the rest of the protocol we explained above.
If they do have a valid VRN, you do not charge VAT.
This means your customer is a fellow business, and therefore you’re exempt from charging VAT. You don’t have to worry about it. The transaction is covered by the reverse-charge mechanism.
Reverse-charge mechanism? This also makes your life easier as a seller, if you are selling B2B. With the reverse charge mechanism, the buyer is totally responsible for filing VAT on the transaction. Since European companies can be reimbursed for any VAT they spend on products to help run the business, it’s more efficient if they simply keep the money in the first place — rather than pay it to you and later claim it back from the government.
Step 4: What is a proper VAT invoice? What are the best practices for VAT invoicing?
A VAT invoice includes quite a bit more information than a normal invoice. Each invoice should contain:
Your business’ name and address
Your business’ VAT number
Invoice sequencing number
Buyer’s name and address
Buyer’s VAT number. If you are using the reverse charge mechanism, you must also add the text “EU VAT reverse charged”
VAT (amount and rate) applied to each item
Final amount after VAT is added
The currency used
Step 5: What’s the deal with submitting EU VAT returns?
For digital products: You submit one EU VAT return to your MOSS at the end of each quarter. Every three months, four times a year, you get the idea. From the last day of each quarter, you have 20 days to file and pay. So the deadlines are as follows:
– 20 April, for first quarter ending 31 March
– 20 July, for second quarter ending 30 June
– 20 October, for third quarter ending 30 September
– 20 January, for fourth quarter ending 31 December
You submit your return online. You’ll need your records of VAT invoices to complete the filing.
Something to keep in mind: if you made any sales in a different currency (i.e. – in the Danish Krone, but your MOSS uses the Euro), you will need to convert those amounts to the official currency of your MOSS. Use the European Central Bank’s official exchange rates.
Based on the information you enter; the MOSS website will automatically calculate how much VAT you owe. Then you’ll receive instructions on how to complete the payment.
Are non-EU businesses eligible for EU VAT refunds?
Sure, you are. If you overpay VAT through the VAT MOSS scheme, then you’ll get the money back. But it won’t be from your MOSS; the refund will come directly from the various tax authorities where your customers are located. So, you’d get a partial refund from France, from Germany, from The Netherlands, or from Italy.
The great thing is that refunds are directly deposited to your bank account, whichever bank information you provided in your MOSS registration. So just make sure those details are up-to-date!
Can a non-EU business just ignore EU VAT?
Legally, no. If you choose to not comply with EU VAT law, you risk getting caught by tax authorities. With that comes paying for years of back-taxes plus penalties for not following the rules. A blow like that could potentially ruin a small business. Moreover, if it turns out you’ve intentionally broken the law, you could find yourself in court. No one wants to be convicted of fraud, right?
If you sell Physical Products, once you do your VAT fillings, all the VAT that you paid in the country (for example the VAT for importing the goods in one country) is going to be deducted from the VAT you collected from your clients. In each country that you are VAT registered you are going to do the same procedure either quarterly or monthly (depending on the country that you are VAT registered).
If you are selling Physical Products in the EU the complexity of paying VAT is bigger than when you sell Digital Products, however if you compare the benefits that you are going to have its worth it.
Imagine if you could sell your products directly in the European Union country of your choice? In Germany for example or in France. Huge markets with huge potential to generate a respectable income for you. Think just on the fact how much less competition you are going to have in Europe and how much you could save if you could avoid Distributors and the channel. If you could sell your products directly to your potential clients. It is not as difficult as you think. . Click here and book a free consultation with us.
Threshold limits (one more reason why you need to VAT register in Europe)
If you are a company outside of the European Union and you surpass these limits within the same calendar year, you must VAT register in the country where you exceeded this limit, regardless if you store in this country or not. The Threshold limits in Europe are as follows: