Seven steps to getting cross-border VAT right

The UK has one of the fastest growing ecommerce markets in Europe and while this may be positive for retailers trying to stay afloat in the flailing economy, there is a warning attached.

So often ecommerce companies aren’t aware of possible tax and commercial risks they face for failure to comply with the VAT distance selling regulations. If they aren't followed correctly, penalties and interest may be imposed, which can vary between 5 and 300 percent of the VAT due.

To avoid possible fines and penalties when trading cross-border, it is important that businesses are aware of and comply with relevant VAT obligations across the countries where their customers are based.

Successful and sustainable international trade depends on getting VAT compliance right, so here seven key steps to follow to ensure you are getting VAT right for your business:

1. Know your VAT liability
Most businesses will know that not all goods are subject to VAT but while many goods are liable to the standard rate of VAT, each member state also has its own reduced VAT rate and zero-rating system. It’s crucial that you understand whether you need to apply the standard, reduced, or zero rate of VAT to your sales in each country where your customers are based, as well as the VAT rules of the country your business is based in. Each member state has its own set of conditions that need to be met to get the VAT rate right.

2. Know your territories and what the thresholds are
European VAT distance selling regulations require companies to register for VAT as non-resident traders in each country where they exceed the VAT distance selling thresholds. Distance selling thresholds vary between each member state and are liable to change each year. Keeping on top of all the information that you need, especially during times of expansion into new territories, is crucial.

3. Keep an eye on sales figures
This is essential because the distance selling thresholds apply on a calendar basis and sales must be monitored on a country-by-country basis. It can take up to six weeks to get VAT registered, so it’s a good idea to be prepared. If you don’t know which specific country your goods are going to, it will create problems for VAT compliance.

4. Monitoring by tax authorities—don’t get caught out
There’s been a key development during the last 12 months with European tax authorities increasingly monitoring businesses and contacting those--or HMRC--that they think have exceeded the distance selling thresholds without being VAT-registered. If the tax authorities identify your business needs to be registered, there can be significant impact on the level of penalties that can be applied so it is essential that thresholds are monitored.

5. Know how to file VAT declarations
Once your business is VAT registered and you are charging local VAT, you must submit local VAT declarations. Each EU member state has its own frequency for filing VAT returns meaning that depending on each country you are required to submit declarations to, you may submit them monthly, quarterly or bimonthly. Also, depending on the size of your business you may have to file additional declarations such as Intrastat. If your trade in goods within the EU exceeds £260,000 in a calendar year then you are required to submit monthly Intrastat Supplementary Declarations to HM Revenue and Customs.

6. Language issues must be taken into consideration
VAT declarations usually need to be completed in the native language of the countries that you are required to report in. In addition, where problems arise with your VAT treatment in a particular country, you’ll probably have to deal with the tax authorities of that country in their own language.

7. If in doubt, get help
Whether you are an already large international business or a small start-up company, international VAT experts will be able to help you establish if you need to register and can deal with your ongoing reporting requirements.

As the standard rate of VAT across the EU is steadily increasing, the cost of VAT can be up to 27 percent of any one transaction. The risk of getting VAT wrong can put a great deal of stress on the profitability and ultimately the success of any ecommerce business, so making sure that your VAT treatment is correct is absolutely vital in order to succeed and grow.

Andy Spencer is head of consulting at Accordance, a VAT compliance and consulting practice, with a focus on cross-border transactions.