Selling online? Avoid innocent VAT mistakes and penalties by understanding the basic rules.
What is distance selling?
Distance selling applies when a VAT registered business based in the EU sells goods (not services) to a non-VAT registered customer (non-taxable person). The non-taxable person can be an individual, a charity or a small business not registered for VAT.
Distance selling VAT rules apply when goods are sold or bought without a simultaneous physical presence of a seller and customer at the same location at the time of the transaction – the customer buys delivered goods.
Distance selling VAT rules do not apply to sales to or from a non-EU country, for example where a UK company sells goods to a consumer in India, or a company in China sells to a consumer in the UK, where different rules apply.
VAT rules (distance selling)
Distance sales made by a supplier based in one EU country to a non-taxable person in another EU country are subject to VAT in the country of the seller, until the total annual value of such sales exceeds the VAT registration threshold of the country to which the sales are made. When this happens, there is a mandatory requirement to register for VAT in the country of the customer, unless an earlier, voluntary registration has been made.
This means that the place of supply in relation to distance selling changes: until annual distance selling thresholds in the respective countries are exceeded (see below), the place of supply is the country of the seller. When the seller becomes liable to register for VAT in the country of the customer, either due to the thresholds being exceeded or due to a decision to voluntarily register, the place of supply becomes the EU country where the customer is located.
From this point all further sales are subject to VAT in the country of the customer. If voluntary registration is withdrawn (see below re when this may apply), the place of supply reverts back to the country of the supplier.
Distance selling registration thresholds
The VAT registration thresholds for distance sellers vary between EU countries and are between €35k and €100k, expressed in respective local currencies. The thresholds apply to annual sales made during the calendar year (from January to December). If the threshold is not exceeded from January to December, the calculation of distance sales re-starts each January. It is not applied on a rolling, cumulative basis.
The following are examples of some of the distance selling thresholds:
Threshold for distance selling
|Czech Republic||CZK 1,140,000|
The annual threshold does not apply if sales are subject to customs duty. Such sales are not subject to any thresholds.
Distance selling from other EU countries to UK customers
A seller based in an EU country, making sales to customers in the UK, is subject to VAT rules in their EU country only, for as long as such sales do not exceed £70k in that calendar year (the distance selling VAT threshold for the UK). When the sales value exceeds £70k, a UK VAT registration is mandatory and VAT needs to be charged and paid to HMRC. The UK VAT registration is effective from the day on which the EU business becomes liable to register.
Notification requirements applying to EU sellers are:
- notify HMRC within 30 days of the date on which the business became liable to register, either due to thresholds being exceeded or a decision to register voluntarily
- if an EU business is already registered for VAT in the UK (not due to distance selling), any distance sales generated subsequently to the original registration already in place need to be reported on the UK VAT return, even if the UK distance selling threshold (£70k) has not been exceeded.
- UK VAT return
Box 1 – output VAT
Box 6 – value of the supply
- EC sales list: no requirement to report
- UK intrastat: include the VAT exclusive amount on the arrivals intrastat declaration.
Withdrawal of UK VAT registration:
An EU seller can withdraw a UK VAT registration once:
- it is clear that sales in the relevant calendar year have not exceeded £70k
- HMRC are satisfied that such sales will not exceed the threshold in the following year
- sales are not subject to excise duty.
A German VAT registered business sells goods solely on Amazon. From January to December 2015, the total value of sales to consumers in the UK amounts to £65k. In 2016 total sales to UK consumers amount to £85k, with £70k of this value exceeded on 1 July 2016. In 2017 the total value of sales falls to below the registration threshold.
The company does not have to register for VAT in the UK in 2016 as thresholds are not exceeded, unless the registration is voluntary. In 2017 the registration threshold is exceeded and the company should register effective from 1 July 2016 (the company has 1 month to do the registration). As in 2017 the total value of sales is below the threshold, the seller can withdraw the registration as of 1 January 2018.
Distance selling from the UK to other EU countries
Distance sales by a UK business to non-VAT registered customers based in other EU countries are subject to UK VAT until the value of such sales exceeds those countries’ annual distance selling thresholds (see above), or the UK business registers for VAT in other EU countries voluntarily.
Notification requirements applying to UK sellers are:
- in case of a mandatory VAT registration, notify the tax authorities of the EU country where VAT registration is to be made within 30 days of becoming liable to register
- if a voluntary VAT registration in another EU country is opted for, the UK business must:
- notify HMRC and the other EU country’s tax authorities, at least 30 days prior to the first supply to be reported in the other EU country’s VAT return
- within 30 days of the first supply after the option to voluntarily opt for the VAT registration in the other EU country, provide HMRC with a proof that the business informed the other country’s tax authorities.
- UK VAT return (Box 6 – value of the supply)
- EC sales list – no requirement to report
- Intrastat: VAT exclusive amount to be included in a dispatches declaration
- relevant EU country VAT return:
- the UK seller can deal with the other EU country’s tax authorities directly or can consider appointing a tax representative in the relevant EU country where registration is required.
Withdrawal of VAT registration
A voluntary option to account for VAT in another EU country can be withdrawn following a written notice to HMRC. The withdrawal can be made:
- no earlier than two full calendar years after the first sale, made following the option to voluntary register (as long as this is 30 days after a notification of the withdrawal has been received by HMRC) and
- no later than 30 days prior to the date of the first intended supply after the withdrawal
From January to June, a UK business made €70k sales to VAT registered businesses in Germany and €132k sales to non-VAT registered German consumers, of which €100k (VAT registration threshold) was mad from January to May.
The UK company ignores sales to German VAT registered businesses for the purposes of German VAT registration when assessing the distance selling VAT registration threshold. Until May (when the registration threshold is reached) the company has no requirement to register for VAT in Germany, although it can do that voluntarily. If it does, the UK business will charge a lower 19% VAT rate applicable in Germany on its sales to German customers, instead of the UK 20% rate it would need to charge if it continued without German VAT registration until it is mandatory to register.
If the company does not register for German VAT voluntarily, it will report all German sales made and the corresponding UK output VAT in the UK VAT return as normal – in box 1 and box 6.
When the company registers for German VAT, it will only report net German sales on the UK VAT return (box 6) and no corresponding UK VAT. In addition it will submit a German VAT return, per requirements of the German tax regime, including the German Output VAT within the German VAT return.
Late registration penalties are generally a percentage based on the VAT amount that should have been remitted to the tax authorities. The ways in which penalties are calculated differ by member state. In the UK, penalties are calculated on the basis of the length of time which has passed since you should have first registered for VAT, and range from 5% to 15% of the VAT due.
Sellers using Amazon and eBay marketplaces have the legal responsibility to comply with UK or the relevant country’s VAT law. Until recently Amazon and eBay did not enforce VAT compliance; however, non-compliant sellers were likely to be delisted from Amazon until they met the compliance requirements. It is anticipated, however, that the measures taken by online sales platforms will become stricter as HMRC tries to tackle VAT evasion (please see below).
While this article deals with distance selling VAT rules, applying strictly within the EU, it is important to understand that had the sales been made to or from overseas (non-EU countries) the VAT regime would be different.
Traders based in non-EU countries selling online directly to consumers in the UK, rather than via a fulfilment centre, do not add UK VAT on the sales invoice. Instead import VAT applies and is payable by the UK consumer at the point the goods enter the UK for the goods to be released.
If, however, an overseas trader brings goods to the UK to store them at a local fulfilment centre, in addition to the import VAT payable at the point the goods enter the UK, normal VAT needs to be charged at the point of sale to the UK consumer. No VAT registration thresholds apply to sellers based outside the EU. Overseas traders need to register for UK VAT immediately, and submit VAT returns, paying over any VAT due to HMRC. The import VAT suffered is recoverable.
In April 2017 HMRC published ‘Investigation into overseas sellers failing to charge VAT on online sales’, which highlights concerns over overseas traders not complying with the above rules and lists measures HMRC plans to take to tackle VAT fraud.
In September 2016 the following measures were introduced in the legislation to address VAT evasion:
- online marketplaces may be held jointly and severally liable for future undeclared VAT of online sellers, once HMRC had spotted cases of non-compliances and reported the seller to the online marketplaces
- gave HMRC the power to impose on companies from outside the EU that engage in online sales in the UK, a requirement to appoint a UK based VAT representative
- imposed new regulations on fulfilment houses, with effect from April 2018.
Distance selling vs other types of the online marketplace sales: VAT differences
Finally, the following examples may help illustrate how distance selling VAT rules compare against other online market place initiated sales.
1) Your business sells goods to private consumers (not VAT registered), is established in the UK and it:
|Stores goods in the UK and sells to UK consumers||Register for VAT when such sales reach £85k or earlier if registration is voluntary|
|Stores goods in the UK and sells to EU consumers||Distance selling VAT rules apply for registration and VAT obligations in the EU county of the customer – see above|
|Stores goods in an EU country to be sold to that EU country consumers||Moving goods triggers immediate VAT registration requirements in the country where goods are moved to. VAT thresholds for registration do not apply.|
2) Your business is established in an EU country (other than UK) and it:
|Stores goods in that EU country and sells to UK customers||Distance selling VAT rules apply.
Register for VAT when such sales reach £70k or earlier if registration is voluntary
|Stores goods in the UK to be sold to UK consumers.||Moving goods triggers immediate VAT registration requirements in the UK. VAT thresholds for registration do not apply.|
3) Your business is established outside of EU/UK and it:
|Sells online directly from overseas to UK or EU||You may need to register for VAT in the overseas territory sales are made from. Import VAT will be payable once goods reach the destination country.|
|Stores goods in the UK (to be sold to UK customers).||Moving goods triggers immediate VAT registration requirements in the UK. VAT thresholds for registration do not apply. Import VAT and customs duty will need to be paid in most cases. Import VAT is normally recoverable provided the seller will comply with the VAT registration requirements in the country where the goods are declared to the customs authorities.|