Charging the Right VAT in the European Union

VAT in european union

European issues may be a difficult subject at this moment in time, as no one can be exactly sure of what the future will bring within the European Union. But laws of taxation are fixed for a period and are unlikely to change in the near future, so these should be carefully adhered to by all. For VAT registered businesses it is important to ensure that VAT regulations are closely followed, to avoid overpaying or underpaying, and also to avoid the penalties and interest that traders may be subject to in the case of any errors made.

What is VAT?

Value Added Tax (VAT) is a levy that is taken at each stage of the supply chain by sellers of goods or services. This means that VAT is paid on purchases by all parties from the manufacturer, supplier, distributor, retailer to the consumer. In other parts of the world, such as the US, tax is only paid by the consumer.

What are EC Services?

These are services that UK businesses provide to businesses and consumers in EU countries outside of the UK. For EU tax purposes, ‘businesses’ are the parties that are VAT registered, while ‘consumers’ those that are not.

Under this definition, consumers are subject to UK VAT, but businesses are beyond this because they are assumed to have already accounted for VAT within EU regulations.

As of 1st January 2015, certain services supplied to consumers within the EU will be subject to VAT in the particular area the consumer is located.

Which goods and services are Zero Rated?

When goods are sold to VAT registered businesses that are based in the EU, they can be zero rated so no charge is due. When using the accounting software Xero, these can listed as ‘Zero Rated Goods Income’.

Similarly with services, no VAT is payable and services can be rated as ‘Zero Rated EC Services’ in Xero. However, in this case the buyer may be responsible for charging VAT and registering it as per the rules of reverse charges.

To report zero rated EU sales, registered traders in the UK are required to complete three separate forms. These are two sections of the normal tax return, the EC Sales List (ESL) and the Intrastat Supplementary Declaration if sales of goods amount to more than £250,000.

What is the VAT Reverse Charge?

The reverse change is accounting for VAT on services bought from businesses in the EU and outside of the UK. This only applies to VAT registered businesses and not consumers.

This is equivalent to the amount of VAT that would have been charged on a service if it had been purchased in the UK. This needs to be paid to HMRC, but also reclaimed so there is no resulting charge, though it must be reported.

What is a Distance Sale?

This is the term used for supplying goods to customers in other EU countries who are not VAT registered, when the delivery is the responsibility of the seller. Examples of distance sales include internet shopping or mail order purchases that are ordered by and delivered to private consumers.

Distance sales can be charged at UK VAT rates as usual, but there is a ‘distance selling threshold’ for each EU member state. If this is exceeded then the trader must register for VAT in that country, and charge the rate of VAT accordingly.

When is VAT payable on transported goods?

When transferring goods from the UK to an EU member country, for the purposes of storage or the need to another location, the same is applied as to a supply from the UK and an acquisition in another country. This means that if the trader is VAT registered in the particular EU country then the goods can be zero rated. If not then the usual UK VAT rules will apply.

In the case of goods for which excise duty is payable on supplies to non VAT registered consumers in another EU country, the VAT charged will depend on whether the goods were delivered by or collected by the consumer.

When is VAT payable on supplies to countries outside the EU?

Countries outside the EU are listed as ‘third countries’. Goods exported to these countries can be zero rated provided evidence is kept of their purchase, the departure and export, and the goods leave the EU within a certain time limit.

Services supplied to countries outside of the EU are beyond the UK VAT rules. However, both goods and services may be subject to duty imposed by the third country.

Knowing the right VAT rules to follow can be a complicated business. But for businesses of all sizes, paying the right amount can make a big difference to revenues, as well as future plans and strategies. Following the rules carefully is a way of keeping your business efficient, productive and legal.

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