Avoid Late Registrations For Distance Sales

Mail order and internet sales to private individuals (‘B2C’) in other Member States of the EU are known as distance sales. The basic rule is that these sales are initially subject to UK VAT and treated in the same way as domestic sales.  

However, if a business’s sales exceed certain thresholds, it has to register for VAT in that EU member state and account for domestic VAT at the appropriate rate on its sales in that country. The varying VAT rates in the member states will need to be taken into account when considering the pricing policy. The relevant turnover to each member state is measured over a calendar year rather than on a rolling 12 months with a normal UK VAT registration.  

Businesses in this position will have to be aware of the various VAT rates applicable in each member state they are registered in, so they can account for the correct amount of VAT on their sales. The EU has laid down two possible registration thresholds (i.e. either €35,000 or €100,000), and each member state can decide which of the two thresholds it will apply.

Austria   €35 000 

Belgium €35 000 

Bulgaria €35 791 (70 000 BGN)

Croatia €35 293 (270 000 HRK) 

Cyprus €35 000

Czech Republic €41 510 (1 140 000 CZK)

Denmark €37 508 (280 000 DKK) 

Estonia €35 000

Finland €35 000

France €100 000

Germany €100 000

Greece €35 000 

Hungary €35 000 

Ireland €35 000

Italy €35 000

Latvia €35 000

Lithuania €36 203 (125 000 LTL) 

Luxembourg €100 000

Malta €35 000

Netherlands €100 000

Poland €38 307 (160 000 PLN) 

Portugal €35 000

Romania €26 419 (118 000 RON) 

Slovakia €35 000 

Slovenia €35 000 

Spain €35 000 

Sweden €35 935 (320 000 SEK)

UK €84 541 (£70 000)

With the increase in internet based sales, many more businesses are affected by these rules and it is essential to keep a close eye on the level of sales so that you know if and when you have to register for VAT in another EU member state.

It is quite feasible that a business could have to register for VAT in each member state of the EU - 27 in all! The administrative burden of this can be considerable. In addition, if a business fails to monitor its distance sales and exceeds one of the national thresholds without informing the tax authorities, back tax and penalties may be due.

If a business does not monitor its turnover in each of the member states there is a good chance that it will miss its requirement to register for VAT. Even if the business misses it, their accountant may pick it up, or worse, HMRC may identify it during an inspection. If HMRC spot it, they will inform the other member states tax authorities and then they will contact the business directly requiring them to register for VAT.

So once sales to non-registered customers in, say, Spain exceeds the Spanish distance selling limit of €35,000 in any given calendar year, there is a compulsory requirement to obtain a Spanish VAT registration and begin charging Spanish VAT on any further sales made to Spanish non-business customers. This treatment is mandatory and although it may be tempting for some businesses who breach the thresholds to continue charging UK VAT on all these sales in the hope that the tax authorities in that country do not discover this, this would not be recommended (as well as being against the law) as it could lead to major issues down the line if the issue is discovered.  

Having to obtain a late foreign VAT registration and correcting the VAT charged on sales going back would not be recommended.

Let’s say a business exceeded the distance sales registration threshold in Spain in the year ended December 2013, and did not realise this until November 2014 when it gets a visit from HMRC and they contact the Spanish tax authorities. The Spanish tax authorities will compulsorily register the business for VAT in Spain and backdate the registration to 1 January 2014.  

The total VAT inclusive sales to Spain during the period January to November 2014 amounted to £68,000, and they have accounted for VAT of £11,333 (£68,000/6) to HMRC.  

Ignoring it and hoping it will go away is not an option, as HMRC will enforce any requirement to register and any VAT debts due on behalf of the Spanish tax authorities. 

The business has already accounted for UK VAT at 20% on the sales and now gets a bill for £11,801.65 (VAT at 21% - the Spanish standard rate) from the Spanish tax authorities. 

The UK company now has to make a claim to HMRC for the overpaid VAT it has already accounted for as well as having to pay a slightly larger sum to the Spanish tax authorities, along with any interest and penalties due.

Although there are rules against double taxation we have heard of businesses in this position that made a claim to HMRC for overpaid VAT and they delayed the claim under the ‘unjust enrichment’ rules. HMRC said they would only make repayment of the overpaid VAT if the business agreed to repay it to their customers, failing to take account of the fact that the tax was still due to another member states’ tax authority.

I would advise any businesses making a claim in these circumstances to state at the time they make a claim that the ‘unjust enrichment’ provisions do not apply as the VAT is still due to the other member state’s tax authorities. If possible back this up with correspondence from the other member state’s tax authorities.

Another point to remember is that there is now a deemed supply from the UK VAT registration to the VAT registration in the other member state and a corresponding acquisition in the other EU member state. So the UK business will need to raise a ‘dummy’ invoice to its registration in the other member state in order to zero-rate the supply. It will need to show its VAT registration number in the other member state and complete an EC Sales List showing its overseas VAT registration as the customer. It will also have to account for, and reclaim, acquisition tax in the other member state.  

If the registration is late all this will have to be done retrospectively. The administrative and cash-flow burdens of late registrations can be considerable.

If you make B2C internet sales to other EU member states monitor your sales to make sure you register on time. If you don’t, you will still have to pay the VAT in the other member state and may have a long fight with HMRC to get back your overpaid UK VAT!