Prepare your eCommerce for the holiday selling season
You’re getting your eCommerce business ready for a busy and productive holiday sales season, identifying the next top products, placing your orders, planning your marketing, and overhauling your logistics process so that you don’t miss out on lucrative sales opportunities. Don’t forget to add your foreign VAT obligations to your long to-do list.
No one enjoys paying taxes, but it’s vital to prepare ahead of time to meet your VAT requirements. You don’t want to see your profit disappear in VAT fraud charges. Foreign VAT rules can be bewildering, especially if you’re new to cross-border sales, and tax authorities across the EU are cracking down on online sellers.
The EU currently loses an estimated €5 billion each year to eCommerce fraud. This means that if you make a mistake in your VAT return, you are more likely to be fined for attempted VAT fraud than to find a sympathetic ear. VAT applies to all eCommerce sellers, whether you’re selling through your own website or blog or through an online marketplace like Amazon or eBay. It’s crucial to make sure that you have the right processes in place to pay your VAT requirements correctly.
Here are some of the things you need to know to get your eCommerce shop VAT-ready.
Where do your VAT obligations lie?
The first thing you need to clear up is to understand where you are liable for VAT payments. This isn’t as simple as it sounds, because different countries have different rules regarding VAT liability.
For example, if your business is in the UK, but you sell to customers in Poland, do you have to pay VAT to the UK tax authorities, or to the Polish tax authorities? What’s more, if you keep your goods in a warehouse in Germany, you might have to pay VAT in Germany instead. How do you find out where to pay your VAT? It all relies on the ‘distance selling threshold’.
Understand distance selling rules
Under current EU regulations, you’ll need to pay VAT to the country of origin if your sales are under the distance selling threshold for that country, and in the destination country if your sales exceed that threshold. So for example, the distance selling threshold for the UK is £70,000. If your total sales to customers in Poland come to less than £70,000 this year, you’ll need to pay VAT in the UK. If they come to more than that, you’ll need to pay VAT in Poland.
However, keeping your goods in a warehouse in another country changes your VAT obligations. If you store your products in an Amazon fulfilment warehouse in Germany, for example, you’ll need to follow the German distance selling threshold of €100,000 instead. Until you pass this threshold, you’ll pay VAT in Germany, and after you cross the threshold you’ll pay it in Poland.
Know where you’re NOT obligated in VAT
Due to the complexity of foreign VAT regulations, it’s not uncommon for eCommerce companies to be charged VAT by suppliers – VAT that they are not obligated to pay.
Let’s go back to your eCommerce business in the UK. If you order goods from a supplier in The Netherlands, you have no requirement to pay VAT on those goods, and the supplier should not be charging you. From an oversight or misunderstanding in the supplier’s accounting department, however, VAT may be accidentally added to your invoice. For this reason, it is wise to always double-check your invoice to make sure you’re not being accidentally charged or overcharged on VAT you’re not obligated in.
If you do realize that your eCommerce company has been charged – and has paid – unnecessary VAT, it is not the end of the story. Through the foreign VAT reclaim process, your company can receive a VAT refund for the overcharge.
Set up your VAT reporting system
If you set up your VAT tracking system in advance, you’ll find it much easier to keep on top of your VAT requirements. First of all, it’s a good idea to make sure that you have a bank account in every country where you need to pay foreign VAT, so that you can pay in local currency and be ready to receive any VAT refund on your expenses.
Take a few minutes to check the VAT rates on your products for every country where you might make a sale, as well as your country of origin (this is either where your office is located, or where the fulfilment warehouse that stores your goods is located). Each member state can set their own VAT rates, so they vary across the EU. Pay attention to whether standard or reduced rates apply to your products, because that’s also different in every country.
You should also prepare an easy-to-use system for recording your VAT input and expenditure, so that you don’t lose track of how much VAT you owe. This will make it faster for you to pay VAT on time, and also means that you won’t need to panic if you face a VAT audit and the tax authorities demand to see your records.
Within the EU, 18 countries have online or digital VAT reporting options, to make it faster and easier for you to report and pay foreign VAT. These include the UK, Germany, and Italy. Register for digital reporting whenever the option exists.
When you’re informed about your VAT obligations in advance and already have the right system in place, handling your foreign VAT requirements doesn’t have to be a headache. Then you can focus on your marketing, logistics, and all the other components you need to make this your highest-revenue holiday season ever.
If you realize that your company has been charged unnecessary VAT by a foreign supplier, be in touch for guidance on how to receive a refund through the VAT reclaim process.