How to handle VAT registration for a UK online retail business starting to trade in the EU?

11 June 2024

As the proprietors of a UK-based online retail business ready to branch out into the European Union (EU) market, you're stepping into an exciting phase. But with that stepping into a new market comes a slew of rules, regulations, and, most notably, a new tax landscape to navigate. One of the chief concerns for any business moving into the EU sphere is the issue of Value-Added Tax (VAT).

VAT is a type of consumption tax that's added to the cost of certain goods and services. As a business, dealing with VAT involves several steps, including getting a VAT number, registering your business with the relevant tax authorities, and learning how VAT returns work. This article will guide you through this process, breaking down the key points you need to know to ensure your business complies with all the necessary VAT regulations in your new market.

Understanding VAT and its Implication to Your Business

Understanding VAT is crucial as it impacts multiple aspects of your business operations, from sales to goods sold and customer interactions. In essence, VAT is a tax that's charged on most goods and services that VAT-registered businesses provide in the EU. It's also charged on goods and some services that are imported from non-EU countries.

The rate at which VAT is charged varies from country to country within the EU, but it's typically charged at the standard rate of the country where the customer is based. As a business, you'll be expected to add this VAT to your sales, and then report and pay this to the relevant tax authority. Failing to do this can lead to significant fines and penalties, so it's essential to understand how it works and what your obligations are.

Obtaining Your VAT Number

The first step to becoming VAT compliant is to obtain a VAT number. This is a unique identifier that you'll use when dealing with the tax authorities in the EU country where you're doing business. This number is required for VAT registration and for filing VAT returns.

To obtain a VAT number, you'll need to apply to the tax authority in the EU country where you plan to do business. The application process can vary, but it generally involves providing details about your business, such as your company name, address, and the nature of your business. Once your application is approved, you'll be given a VAT number that you'll use in all your VAT-related dealings.

Registering for VAT in the EU

Once you have your VAT number, you're ready to register for VAT. This involves informing the tax authorities in the country where you're doing business that you'll be making taxable supplies in that country.

The process for registering for VAT can differ between countries. However, it generally involves filling out a form with details about your business, including your VAT number, and submitting it to the tax authority. Some countries may require additional documentation or information, such as proof of your business operations or details about your products or services.

Once you're registered, you'll be given a certificate of VAT registration, which is an official document that confirms you're registered for VAT and shows your VAT number. You'll need to keep this document safe as you'll need it for various VAT-related tasks, such as filing VAT returns.

Understanding VAT Rates and How to Charge VAT

With your VAT number in hand and your business registered for VAT, you're now ready to start charging VAT on your sales. The VAT rate you charge will depend on the country where your customer is based and the type of goods or services you're selling.

Generally, each EU country has a standard VAT rate that applies to most goods and services, but there can be reduced rates or exemptions for certain types of goods or services. It's important to research the VAT rates in the countries where you'll be doing business to ensure you're charging the correct amount.

To charge VAT, you'll need to add it to the price of your goods or services when you sell them. You'll then need to show the VAT amount on your sales invoices, along with your VAT number and other required information.

Managing VAT Returns and Payments

Finally, once you start collecting VAT, you'll need to report and pay it to the tax authorities. This is done through VAT returns, which are usually required on a monthly or quarterly basis.

A VAT return is a form that shows how much VAT you've charged on your sales, as well as how much VAT you've paid on your business purchases. The difference between these two amounts is what you'll either pay to the tax authority or claim back if you've paid more VAT than you've charged.

Filing VAT returns can be complex, especially if you're doing business in multiple EU countries. It's important to keep accurate records of all your sales and purchases, and to ensure you file your returns on time to avoid penalties. It may be beneficial to use an accounting or tax software, or to hire a tax professional to assist with this process.

Whether you're selling goods on Amazon or offering digital services, understanding the VAT landscape in the EU is critical to your business success. Navigating VAT registration, keeping up with different VAT rates, and managing VAT returns may initially seem daunting, but with careful planning and adequate support, these processes will soon become second nature. As with any significant business endeavour, it's all about being well-informed, prepared, and diligent — your business's smooth expansion into the EU market depends on it.

Distance Selling Regulations and Thresholds in the EU

In a world where online selling is becoming increasingly common, it's essential to understand the concept of distance selling and how it affects VAT. The Distance Selling Regulations apply to online retailers selling goods to customers in other EU countries. These regulations stipulate that if your sales to a particular EU country exceed a certain threshold, you're obliged to register for VAT in that country.

The exact distance selling threshold varies from country to country. For example, in France, the threshold is €35,000, while in Germany, it's €100,000. If your sales to customers in a particular EU country don't exceed the distance selling threshold for that country, you can charge VAT at the UK rate. However, once you cross the threshold, you must register for VAT in that country and charge VAT at that country's rate.

To ensure compliance, it's crucial to monitor your sales to each EU country. If your sales to a particular country are approaching the distance selling threshold, it would be wise to begin the VAT registration process in that country. Remember, it's not just about crossing the threshold; you must also consider the future growth of your business and anticipate which markets you may exceed the threshold in.

How Brexit Impacts VAT Registration and Payments

On 1st January 2021, Brexit came into effect, bringing several changes to how UK businesses handle VAT when selling goods to EU customers. One significant change is the removal of the distance selling thresholds for UK businesses. This means that UK businesses must now register for VAT in each EU country where they make sales, regardless of the value of these sales.

Also, the UK no longer has access to the One Stop Shop (OSS) system. OSS is an online portal that allows businesses to register for VAT in multiple EU countries simultaneously. Without access to OSS, UK businesses need to register for VAT separately in each EU country where they sell goods.

Additionally, the rules for importing goods have also changed. For goods valued at €150 or less, VAT is due at the point of sale, and for goods valued at over €150, VAT is due at the point of importation. Therefore, if you're a UK retailer selling goods to EU customers, you'll need to consider these changes when dealing with VAT registration and payments.

Expanding your UK online retail business into the EU market is an exciting step. However, it also involves additional responsibilities, particularly around VAT registration and payments. From obtaining your VAT number to understanding how to charge VAT, and managing VAT returns, the process can seem complex. However, by breaking it down into manageable steps and keeping yourself informed about the different VAT rates and distance selling thresholds in various member states, it becomes a lot more manageable.

While the post-Brexit VAT landscape has posed new challenges for UK businesses, with the right preparation and understanding, these can be navigated successfully. Remember, the key is to keep accurate records of all your sales and purchases and to ensure you file your VAT returns on time. Don't hesitate to seek professional help if needed, as this can save you time and prevent costly mistakes. By doing so, your business will be well-positioned to thrive in the EU market.