This guest post comes to us courtesy of David De Souza from eCommerceGuider.com.
Studies indicate that around Euro 159.5 billion in sales tax revenue was lost to the different governments in the European Union (“EU”) in 2014.
As a result, governments in the UK and EU have increased their vigilance and really started to crack down on sales tax avoidance to boost their revenues.
This article will help you understand when sellers become liable to pay sales tax in the UK & Europe and the best way to keep track of your liabilities using Xero Accounting.
In the past VAT avoidance wasn’t really on the radar of most European governments and as a result, many people got away with it. But now times are changing.
With the development of technology and the age of big data, it is now become easier than ever for governments to collect sales data from companies and determine whether you owe them VAT.
As a result, the cost of compliance has dramatically reduced and European Governments have become a lot more aggressive in collecting VAT.
What is VAT?
But let’s wind it back a bit first. Sales tax in the EU is referred to as VAT which stands for Value Added Tax.
And similar to the US, where each individual state and territory has it’s own individual sales tax rate. In the EU, each member country determines their own sales tax rate.
The good news is that unlike in the US, in the EU, each individual EU country generally tends to have the same nationwide sales tax rate.
This makes it a lot easier for you to calculate VAT liabilities or receivables.
Understanding sales tax in the EU is all about understanding four main key components:
- The concept of sales tax registration thresholds;
- Where you store your inventory;
- Whether you’re trading entity is an EU or non-EU resident entity; and
- The concept of distance selling.
Generally speaking, if you live in the EU and trade under your own name or you have an EU incorporated entity (i.e. you start a company in the UK or another member country) you will most likely be classified as an EU resident.
Sales Tax Registration Thresholds
The next concept that you need to understand is the concept of sales revenue thresholds.
Each country in the EU has a sales tax threshold whereby until you reach the respective country’s sales threshold you will not be required to register for VAT.
For example in the U.K. you can make up to £85,000 pounds in sales before having to register for VAT. This means that up until this point you do not have to remit sales tax.
This threshold amount is different for each individual country.
The next key rule in respect for determining requirement to register for VAT is where you store your inventory.
If you store your inventory in a country that is not your country of residence, then you will normally have to register for VAT. This rule applies to both resident and non-resident sellers.
The exception to this rule is that if you are a resident of a member EU state then you can store your inventory in your home country without requiring VAT registration.
But again, if you make sales above your home country’s threshold you will need to register for VAT.
If you are a non-resident wherever you store your inventory in the EU you will have to register for VAT.
The last concept to understand is the concept of distance selling.
This rule states that once you have gotten your inventory into the UK/EU you can then sell from your home UK/EU country into another EU country without registering for VAT until you reach the sales threshold of country that you’re sell in.
(Remember, if you are a non-EU resident you will have to register for VAT in every country where you store your inventory).
For example: Say your goods are stored in UK warehouses and you are a UK resident you can then sell your goods in Germany without having to register for German VAT.
This is so long as you ship your products from the UK directly to your German customer.
This is what is often referred to as distance selling.
Each country in the EU then has a certain sales threshold where a seller can make distance sales in that country before being required to register for VAT.
Once you hit that limit you will then have to be VAT registered in the respective country.
After you’ve determined where you need to register for VAT then VAT becomes a simple but important numbers game.
However, this game is only simple if you have a reliable and efficient reporting system that can monitor your sales in a relevant region and calculate VAT amounts reclaimable or payable.
If you have an inefficient system financial reporting system, you’ll just end up spending more time on accounting rather than growing your business AND possibly risk being fined or jailed!
My System of Choice
For me the foundation that I built my business on was Xero. Xero is one of the easiest user-friendly multi currency accounting systems.
Xero is an easy to use cloud-based accounting software (this means you can use it anywhere) and run profit and loss statements, balance sheet reports or sales reports at any time.
Xero also links up with live feeds straight to your bank account and programs like A2X accounting which enables you to automate your accounting and import your Amazon transactions straight into Xero
This has for me drastically simplified and reduced the time I was previously wasting completing my VAT returns.
As a final thought, if you’re looking for some more in-depth VAT advice or information on the sales tax registration thresholds then I’d recommend checking out My Business Hacker Podcast episode 12.
In this episode I interview a VAT Taxation specialist to further understand VAT for your benefit.
For More Information
If you’ve enjoyed this article and want to learn more ways to improve running your e-commerce business in both in the US and in Europe, then feel free to check the eCommercguider blog or the Business Hacker Podcast where we hack the minds of successful eCommerce entrepreneurs to discover the secrets of their success for your benefit.