If you’re a small or medium-sized business, joining the global marketplace is easier today than ever before thanks to the Internet, which gives you access to customers all over the world.
Businesses that are VAT registered already understand the complicated paperwork required for paying and collecting taxes – though in the UK it is a pretty straightforward process for business owners. It is when UK businesses begin selling to EU customers outside of the UK when VAT becomes more complex and time-consuming. This article will give a brief explanation as to why VAT rules are so complicated, and will also cover why hiring an e-commerce accountant to handle these issues might be a good move.
E-commerce Under EU Regulations
on January 1, 2015, new regulations for selling across borders went into effect that requires businesses selling services or products to customers within the EU to be registered for VAT in those countries. Each country within the EU has a threshold limit in place. If your sales are below this threshold you aren’t required to register, just like in the UK. However, if you sell high-priced products, it likely won’t take long to reach this threshold. This is true if you hold your own stock or are using a service such as FBA.
Basically, what this means is you’ll have to register for VAT in each individual country if you sell enough product there to reach the threshold for that country. As your business and consumer base grows, your sales to different EU countries will increase as well which means you must be up to date on the filing rules required for each individual country.
Regulations Differ For Each EU State
Even though countries within the Eurozone all have a unified currency, each state within the EU maintains its own sovereignty in regards to taxation rights, which results in various VAT rates throughout the EU. These rates are as low as 17% in Luxembourg to as high as 25% in Sweden and Norway. Hungary is even worse with a rate of 27%. To make matters worse, each country expects each EU business owner to keep up with and maintain a record of the taxes paid by their citizens.
As a result, business owners are often faced with the difficult decision of whether or not they should engage in sliding scale product pricing in order to maintain business margins. This means you may take a loss on sales in one country so that you aren’t alienating the lower rate markets. Many businesses may not be able to take such a hit.
And still other companies have no idea whether or not they can afford to take such a hit. This is why it is so important that businesses keep excellent records and have their registrations for each country in order. Otherwise, they could be facing redress from multiple authorities from several countries over revenue discrepancies, which would be massively expensive. And just like VAT, each EU country sets its own penalty rate, some of which are as high as 120% on top of the amount you owe.