Businesses who sell and deliver products to private individuals or non-taxable businesses in another EU member state are practicing distance selling. The most common type of distance selling is e-commerce transactions where an individual from another EU state orders a product and the product is shipped to them from a different EU state.
The Distance Selling Rules require that when a distance selling company passes the thresholds set forth in another European country, the business must register for VAT in that state and begin charging local VAT. When these limits are exceeded, the place of supply is considered the delivery location.
These rules ensure a distortion of competition does not occur between the different member states of the EU. Each country’s tax authority can set their VAT rate. If the rules were not in place, individuals who are based in a state where VAT is higher could purchase goods from countries where the VAT is lower.
For example, someone in the UK (VAT is 20 percent) who purchases products from Luxembourg (VAT is 15 percent) would save money. The Luxembourg tax authorities would have a VAT advantage and the tax authorities in the UK would be at a disadvantage.
Distance Selling Regulations
During the Christmas season, e-commerce businesses thrive and their business increases. In fact, on Mega Monday, more than £450 million in sales are expected. Of that amount, £113 million will come from online sales. Because e-commerce sales can happen suddenly, businesses can be at risk of unwittingly crossing distance selling thresholds.
Care must be taken to ensure the business does not surpass these thresholds. Each tax authority across the European Union is trying to raise tax revenues. Direct sales are a great way for these countries to increase revenues. These revenues are collected as a tax from each consumer sale that has surpassed the thresholds. VATGlobal has a good guide on this subject.
If a business does not register for VAT once these thresholds are reached, it can be subject to penalties and fines. If the tax authorities determine you have crossed the threshold before you report it, the fines and penalties will be greater than if you voluntarily report this information. This is why it is essential that you keep track of the sales in each country of the EU.
International trade is continually increasing due to e-commerce. You must be aware of the VAT regulation across the different countries where your customers are located to avoid fines and penalties. Do your research and have mechanisms in place to report your VAT obligations when you reach these thresholds to help save you money and aggravation.