TT209: Trading cross border and VAT

There are a lot of complexities in the VAT world. With the rise of eBay, Amazon and similar trading platforms which enable small businesses to easily globalise their business, there are many pitfalls to avoid and issues to identify to do with cross border trading.

Tax authorities are increasingly focusing on VAT to increase their revenue. This means closing the “VAT gap” – defined as the difference between the theoretical tax liability according to the tax law and the actual revenue collected. This arises for a number of reasons such as avoidance and non-payment. The VAT gap for Europe in 2011 was estimated at €193bn by a 2013 study, with the top 3 contributors being Italy (€36bn) France (€32bn) and Germany (€26bn), the UK following closely behind with €19bn. Tax authorities want to get their hands on this missing money.

As you might expect, this means that the taxman in all EU member states will be looking closely at whether businesses are paying the VAT they are liable for, as well as whether businesses should be registered in their jurisdiction but aren’t, thereby depriving that authority of the VAT revenue.

The second point is most relevant for online and export traders. The potential liability to register exists when a business:

  • supplies goods or services;
  • for consideration;
  • within the territory of an EU member state.

For trading within your member state (where your business is established – and establishment is a whole set of rules in itself!) there may be a threshold for registration, such as the UK’s current threshold of £81k. However for non resident businesses, most member states have a nil threshold for registration.

Applicable VAT rates

The VAT rate applicable to your supply (of goods or services) will depend on the “place of supply”. There are different rules depending on whether it is a supply of goods or services, and whether it is a B2B or B2C supply.

The general rules for goods are as follows:

  • Supplies without transport: place of supply is where goods are located at the time when the supply takes place (Article 31 VAT Directive)
  • Supplies involving transport: place of supply is where transport to the customer begins (Article 32 VAT Directive)
  • B2B supplies cross border: zero rated where various requirements are met (Article 138 VAT Directive)
  • B2C supplies cross border: place of supply is where the transport to the customer begins (if the supplier is responsible for transport) until the annual distance selling threshold for the member state in which the customer is located is reached (Article 32 VAT Directive). Once the supplier exceeds the threshold in another country (over a calendar year), the place of supply changes to where the goods are located when the transport ends (Article 34 VAT Directive). At this point the supplier may need to register for VAT in that member state, charge the relevant VAT rate and submit returns etc.
  • Triangulation (transactions involving 3 parties):Normally, if there is a chain of transactions but only a single movement of goods (from the first supplier to the final customer) then only one of those sales can be zero-rated. However, where a chain involves three parties each based in a different member state it may be possible to achieve two zero-rated sales within the chain (apply “triangulation” relief). In these situations it’s important to take account of the triangulation provisions and rules in the relevant member states.
  • Exports to outside the EU: zero rated, but commercial and official evidence of dispatch is required within specified time limits.

The general rules for services are as follows:

  • B2B supplies: place of supply is where the customer belongs (Article 44 VAT Directive). The VAT can be accounted for via reverse charge by the customer when certain conditions are satisfied
  • B2C supplies: place of supply is where supplier belongs. However, there is a new rule from 1 January 2015 for broadcasting, telecommunications and e-services – refer to our recent Topical Tip 202 for more information on this change.

There are, of course, exceptions to the general rules – HMRC’s guidance and documentation details the specific types of transaction which have their own rules.

Additionally, businesses should also be aware of the requirements to submit EC Sales Lists and Intrastat declarations.

It is extremely important to ensure that you are registered for VAT in the correct member states. There are penalties for non-registration and authorities may go back over your VAT records to ensure that you registered at the correct time. The documentation required for registration can vary between member states so you will also need to ensure that you have the correct advice and assistance when conducting these more complex VAT transactions.

Barnes Roffe LLP is a member of IPG (International Practice Group), an international network of professional firms. Should you need international advice, we can help put you in touch with our recommended advisors in many countries.

In summary – if you have any cross border transactions, it’s vital to understand the VAT treatment which applies. For purchases it is important to make sure you account for VAT correctly on your return, particularly if the purchase is subject to reverse charge. For sales, it is more complex and may require a detailed VAT review to ensure you are charging VAT at the correct rate – and to ensure you are registered for VAT in any member state where you have a liability to register.

At Barnes Roffe, we have a specialist VAT team to help with any complex VAT issues, and we also offer a VAT health check service, so you can be confident that your VAT affairs are in order.

Get in touch with us for more information!

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