Note: this article does not cover selling business to business within the EU when VAT numbers are exchanged and sales can be made at EU zero rate and declared accordingly (see Part 2) but concentrates on the selling of goods and services to private individuals where the rules have changed over the past two years and are about to be updated again for a 2018 implementation.
Distance Selling Part 1 - Selling online to private individuals within the EU
Selling to private individuals seems on the face of it to be quite straight forward – if you are VAT registered and sell to a non VAT-registered consumer in another EU country then do you simply add VAT as normal and declare it on your VAT return as a standard UK sale?
Yes – this applies in some instances but once a business becomes involved in selling to private individuals across EU borders, the following terms become relevant and must be considered:
Distance selling, POSS, VAT MOSS, and now a new one – VAT OSS
Not surprising as dealing in selling anything to private individuals within Europe can complicate the VAT treatment for that sale considerably.
With the rapid increase of online selling, cross border sales are increasing and the system is expensive to implement. The EU has estimated that it costs each business around €8000 per year for each country into which it sells to operate an EU wide VAT system in order to comply with the current regulations.
The EU is therefore taking steps to simplify the process and to provide an easy introduction for new businesses in a rapidly increasing market.
The following sections explain the rules as they have developed over the past number of years.
Selling products to EU private customers
If you are VAT registered in the UK and you sell to private EU customers, you must charge them VAT.
Up to a certain level of sales you treat the customers as if they were based in the UK and charge the normal UK rate of 20%.
VAT is reported as part of the normal VAT return and the VAT will appear in box 1 and box 6 of the return. These sales do not count as EC sales (which is used for business to business inter-EU sales and not business to consumer sales), do not appear in box 8 and no EC sales list is required.
Possibly. But with the increase of online selling, the value of goods sold to individuals in other EU countries has increased greatly and more and more businesses are now in a situation where they may no longer simply charge UK VAT on their EU sales.
If you have a client who sells products to private EU customers on a regular basis then you need to examine if the total net income from such sales takes them over the distance selling threshold in each country in which they have customers.
The distance selling threshold for online sales varies for each country but basically ‘hovers’ around €35,000 of sales in any one year. The full list of individual thresholds can be found at:
Once sales to any one country within the EU have exceeded the relevant level in a year, then the business must register for VAT in that country and charge VAT to the customer at the correct VAT rate for that country (rather than the VAT rate for the UK). They must then submit a VAT return to each country in turn for which they are registered and pay the relevant VAT to the different authorities accordingly.
This is time consuming, complicated and very costly. Also dealing in euros or other local currencies can become expensive when considering any possible effect of currency fluctuations.
Selling a service
When a business provides a service rather than selling goods, the charging of VAT is based on the country where the service is provided. So a business based in the UK who supplies a service (such as the service of a physical machine, or the supply of a consultancy service) to a German business, VAT is charged at the rate applied in Germany. For the UK based business this means that the transaction is counted as out of scope within the UK VAT system but is within the scope of VAT in Germany.
However, once the ‘service’ becomes digital or ‘online’ then the additional rules apply.
Place of supply of service - POSS
Certain telecommunications businesses were selling items such as mobile telephone chips, online, to private EU customers from countries where the VAT rate was lower than in others which kept the price down. Due to the low price of the chip these businesses tended to keep below the distance selling threshold in each country and hence did not need to register under the scheme.
Business that are based outside the EU but who sell to individuals who reside within the EU do not charge any VAT on their invoices but the individual may have to pay import duty on the goods before they can be received. Goods that are valued at less than €22 are exempt from import duty so many sold items are ‘valued’ at below this level to avoid the tax implications. Some business sell mobile telephones and tablets at a price below this exemption level to avoid the charging of VAT. This has historically put EU businesses at a clear disadvantage to non-EU businesses.
However, although the chip itself is a product, because it is used for the provision of a service (and the service was the actual telephone service supply), such items were included in the definition of selling of a digital service and the regulations were changed to protect those businesses who were selling within their home country.
In 2010 it was decided that in this circumstance, VAT should be charged at the rate that is current in the country where the customer resides. This then took away the advantage that the supplier based in a low VAT-rate country had when compared with a similar supplier in the customer’s home country.
Hence when selling such a service to a private consumer in another EU country, you need to consider if the service takes place in the UK or in the other country. This is known as considering the place of supply of the service or POSS. If it can be confirmed that the service is supplied within the UK then normal UK VAT rules apply. However if the place of supply is an EU country (not the UK) then the business may need to register for VAT in the country where the customer is based from the first supply, charge VAT at the relevant rate and make VAT returns to the appropriate tax authority in that country.
In many cases registration must take place at the time of the first sale and there is often no threshold to consider (as in the case of the distance selling of goods).
As with the sale of goods this is a time consuming and costly system to implement. To simplify the selling of such services the EU have introduced a new system called the VAT Mini One Stop Shop (MOSS).
Selling of digital services - MOSS
Since January 2015 the definition of what constitutes the selling of a digital services has been widened from the supply of mobile telephone chips with the attached service, to include broadcasting, telecommunications services, video on demand, downloadable music, games, apps and software, e-books and other downloadable content.
All sales of eligible online digital products to non VAT-registered customers in ‘another’ EU country must now have VAT charged at the rate in the country where the customer is located and not the rate charged in the UK. Note - in this instance the distance selling threshold does not apply and all sales that fall within the newly designated category must be reported.
It is still possible to register with each country and make relevant separate VAT returns as above but the rules for selling digital services and reporting VAT were simplified from January 2015.
This is when the EU set up the VAT Mini One Stop Shop (VAT MOSS) whereby the supplier registers for VAT under the scheme with their ‘home’ country, declares all such sales (which are split by country and level of VAT charged) in a single return to their appropriate revenue body (in the case of the UK this is HMRC) and pays a single VAT amount each period. The relevant VAT is then ‘transferred’ by HMRC to the appropriate country as an inter-government payment.
However it is vital to understand that if you have a client who is in this situation then to register for VAT MOSS they must first register for VAT in the UK, even if their UK sales are below the current VAT registration threshold. They will have to make a nil UK VAT Return until their sales pass the UK VAT registration threshold (currently £83,000 in any rolling year). However it is possible to reclaim VAT paid on business expenses and purchases relating to VAT MOSS qualifying sales in which case the business can use the UK VAT Return to make the claim instead of submitting a nil return.
However, if your expenses to do with the VAT MOSS sales were incurred in the relevant EU country then these expenses cannot be recovered as part of a UK VAT return and must be reclaimed through a VAT cross border reclaim application.
View the relevant legislation:
By clicking the above link you can also find a very useful flow chart to help you to decide if your client is affected by this.
Remember, it is the place of supply of the service (POSS) that determines the VAT treatment. With certain exceptions, when taking the decision on the POSS then two items of non-contradictory information must be provided. Examples of such proof could include the billing address of the customer, the IP address of the customer using the service, the customer’s bank details or the country code of a SIM card used by the customer.
It is important to also note that suppliers in non-EU countries also have to register under the scheme. This means that they are also having to charge VAT at the rate in force in the country of the place of supply is located and must sent the VAT to their chosen country of registration.
This article looks at the current system for selling to non-VAT registered customers in another EU country (B2C). Part 2 of this series will look at the current system of selling to VAT registered businesses (B2B) whilst Part 3 considers the proposed changes that are currently being invested to both simplify the system and to prevent VAT fraud.