How to stay on the taxman's side when exporting
When you're selling abroad, it's vital to make sure that you comply with any necessary rules and regulations. A big part of this is tax and VAT - just because you're selling outside of the UK doesn't necessarily mean you don't have to pay it.
Claire Taylor is the founder of Simply VAT, supplying services to help businesses trade internationally. They're experts in guiding startups through the often-confusing world of international VAT - here are Claire's top tips for ensuring you stay on the taxman's side.
Selling to other countries does not excuse you from the societal rules of taxation, and the taxman is still entitled to a piece of the pie. As a transactional tax, VAT is applied every time value is added along the supply chain – from the raw material supplier to the end consumer.
Ignorance of the VAT rules is no defence. Not accounting for VAT properly or not reporting it at all can cost you your business. So, what are the things you need to think about before embarking on your retail campaign of global domination?
Don’t put your own glass ceiling on your business
We hear a lot of stories about businesses who are victims of their own success. Mr Online Seller is making a really decent income. His domestic sales have suddenly come close to the UK VAT registration threshold of £82k. When he has to add 20% to the sale price, any competitive advantage is lost. Mr Online Seller has created his own glass ceiling and spends the next 20 years hovering below the £82,000 to ensure he never has to add the 20% VAT in order to retain his customers.
The best way to avoid this is to plan ahead. When working out your margins, always add 20% to your costings long before you ever have to think about VAT registering. Right from the start, make sure you choose products that give you enough room in your margins to remain competitive when you do reach the threshold. You will learn later how this strategy also helps with your international sales.
Don’t avoid registering for VAT if you do exceed the £82k threshold
Not paying your taxes deliberately is tax evasion, and the tax authorities will view it as such. Just because you sell online doesn't mean they can’t see you – they can. Data sharing is rife; for example, HMRC are now able to approach the marketplaces to ask for transactional data of sellers they believe should be registered. There have been a couple of high-profile court cases where eBay sellers have had incomes of over £1 million from selling online and didn’t think the tax man would be interested - he is!
3. Know the differences between selling in the EU and outside
There are two types of customers when you are selling goods online to private consumers – those within the EU and those outside the EU.
Inside the EU
By selling to private consumers in Europe, you are now governed by the EU Distance Selling Rules. These rules apply to you even if you are sole trader, a limited company, or an individual selling online.
These rules state that you charge UK VAT on any EU sales to private consumers until you exceed set thresholds set by the different countries. The thresholds for most EU countries are only Euros 35k or equivalent, except for Germany, Luxembourg and Netherland – whose thresholds are Euros 100k. Once your sales (include delivery costs in the calculation) reach the thresholds in any country, you have an obligation to VAT register there and comply with the ensuing VAT return requirements. Failure to do so will lead to interest and penalties being applied.
If you are not VAT-registered here in the UK, you don’t charge VAT. Though you do have to monitor your EU sales, as if you do exceed the threshold in another country you will have to VAT register there (even though you are below the UK threshold here) and charge that country’s VAT on those sales.
Also be aware that a different VAT rate may apply. For example, in the UK children’s clothing is zero-rated, whereas elsewhere in the EU it may attract a country’s standard rate.
VAT rates range from 17% (Luxembourg) to 27% (Hungary) across the EU – again, accounting for the variations within your margins from the start can ensure you remain competitive in every country.
Holding Stock in a Fulfilment Centre in the EU
Using fulfilment centres within the EU has become very popular. It can make commercial sense by giving you the competitive edge by ensuring cheaper and quicker delivery to your EU customers. Be warned, however, that by moving your stock to another EU country, you have now created a taxable supply and will have to register in that country immediately. There are no thresholds to exceed.
The EU tax authorities have been extremely pro-active in approaching marketplaces for sales data for UK companies holding stock in their fulfilment centres. Clients have been approached and in some instances, the EU tax authorities have even approached HMRC for information on a particular UK company. Please be aware of your exposure, as the tax authorities communicate with each other and share data.
Outside the EU
If you get customers outside the EU, as long as you can prove the export happened, you do not charge VAT on that sale. Keep records of all your transactions and associated paperwork such as receipts.
Don’t let VAT be a barrier to your expansion plans
If you recognize yourself in some of the scenes we have painted, please don’t bury your head in the sand. There is help out there to ensure you become compliant even if it might be a little late in some instances. The tax authorities are much more lenient if you own up to them, then if they have to find you.
Our advice is to plan ahead. If you know what triggers your VAT obligations, you can add the cost of compliance into your cashflow along with other staples such as web-hosting or accountancy fees. By doing this you will understand the true cost of expanding both locally and internationally and you will know whether your business can afford it.
If you want to know more, please download our free guides from www.simplyvat.com or get in touch to discuss how we can help you.