How will the proposed new EU VAT rules for online, cross-border sales of goods impact businesses?
Gareth Bevan 8 December 2016 No comments
Further to our earlier blog posts, we take a more detailed look at the implications of the new VAT proposals relating to intra-EU, online cross-border sales of goods to consumers.
Current Rules – Distance Selling Regime
At present EU businesses supplying goods to consumers in other EU Member States are required to apply “Distance Selling” VAT rules. These rules were designed to create a level playing field within the EU. There would be distortion of competition if a consumer located in a high VAT rate jurisdiction could choose to purchase goods from a supplier established in a Member State with a lower VAT rate. If not for the Distance Selling rules the consumer would only be charged the lower overseas VAT rate.
Under the Distance Selling regime, a supplier based in one EU country must register for VAT in the EU country of its overseas customer once an annual threshold has been exceeded. Under EU VAT law, each Member State can choose a distance sales threshold of either €35,000 or €100,000 (or the relevant equivalent in their own currency).
For example, in the UK the threshold is £70,000. Prior to the threshold being exceeded customers are charged VAT of the EU country from which the EU supplier is fulfilling the sales.
A UK business selling goods delivered from the UK to B2C customers located in Italy (cross-border sales) would charge 20% UK VAT on its sales up to €35,000. Once annual sales to customers in Italy have exceeded the Italian €35,000 distance sales threshold, the business is required to register for VAT in Italy and instead charge Italian VAT at 22% on all future sales to their customers in Italy.
Problems with the Current Distance Selling Regime
The distance selling rules however proved burdensome for many businesses to deal with, in particular because:
- They have to monitor their business to consumer (B2C) sales of goods to customers in every EU country where they are not VAT registered – up to 27 overseas Member States in all.
- They need to know which threshold applies in each country and sometimes convert from a non-Euro currency to the local base currency.
- Once a threshold has been exceeded, the cost of complying with VAT rules and obligations is estimated to cost an average of €8,000 per EU country. This expense soon adds up.
- If registrations are required in all 28 EU countries, then businesses would be submitting well over 250 VAT Returns per annum.
It is commonly believed these factors have deterred many start-ups and SMEs from entering the online market place.
Proposed new EU Rules for Online, Cross-Border Sales of Goods
The distance selling rules were put in place long before there was widespread use of the internet and the boom in online sales. They are now considered outdated for a Digital Single Market. The complexity and cost of complying with the current rules has led to an estimated €5 billion of lost VAT revenue due to non-compliance by businesses. This is forecast to rise to €7 billion of lost VAT by 2020.
On 1st December the EC announced proposals to completely overhaul the VAT rules applying to e-commerce. The rationale is to promote cross-border trade and enable businesses to deal with all their VAT obligations in one place. The Commission intends to change EU VAT law to remove the Distance Selling regime for goods and have a common set of rules applying to cross-border online sales of both goods and services to consumers.
The VAT rules for digital services sold to consumers were revamped in January 2015. Under these rules businesses selling cross-border digital services are required to apply VAT of the Member State where the consumer is located from the first sale.
To simplify compliance with the rules and avoid businesses having to VAT register in every country in which they had sales, a One Stop Shop (OSS) system was introduced. Through OSS businesses can make a single quarterly VAT Return and payment for the VAT due on its sales throughout the whole EU. The VAT payment is then redistributed to the Member State tax authorities where the services are consumed.
In a move to support e-commerce and online businesses, the EU now plans to:
- Extend this OSS system to goods from 2021 so that EU businesses can take care of all their VAT obligations via an online portal hosted by their home tax authority and in their own language.
- Introduce a €10,000 threshold below which online businesses with cross-border sales (services and goods) can continue to apply domestic VAT rules, i.e. they don’t need to worry about charging VAT based on where the customer is located.
- Ensure the first point of contact for online businesses will always be the home tax authority and they will no longer be audited by each Member State where they have sales.
- Extend registration of OSS to trustworthy sellers from outside the EU (click here for further information).
What this Means for Businesses
On the face of it these changes will be good for businesses and encourage growth in online markets. The EC estimates that compliance costs will be reduced by 95%. However, at this stage there are few details available on exactly how the new rules will operate. It is unknown how businesses with cross-border sales online will transition between the existing Distance Sale regime and the new e-commerce rules.
The types of issues affected businesses will need to contend with include:
- Whilst there will only be a single threshold to monitor before businesses need to deal with charging overseas VAT, it will be an EU-wide threshold. This will be set at a much lower level than the existing Distance Sales thresholds and, therefore, there will be far more businesses which have to charge overseas VAT than is the case at the moment.
- It is not known how a business with existing overseas distance sales VAT registrations will be able to transition to the One Stop Shop system.
- It is presumed that businesses holding stock overseas will still require local VAT registrations and, therefore, will be unable to take advantage of the One Stop Shop.
- The extent to which UK businesses are likely to be affected will be determined by the outcome of the Brexit negotiations. At this point in time, the post-Brexit landscape is still a huge unknown factor.
These are just a few initial thoughts and no doubt further issues will come to light as more detail on the plans are made available. Businesses operating in the online arena need to keep up-to-date with developments so that systems and commercial issues resulting from the rule changes are dealt with in plenty of time.
If you are interested in further information on these proposals or receiving future updates, please get in touch and we’ll be sure to keep you in the loop!