3% of Sales Coming from the EU? Say Hello to the EU VAT Bomb
If your business has been happily taking orders from around the EU and even if this is as low as 3% to one EU country hot-spot for a £1M turn over business, then you could be sat on an awkward issue regarding VAT.
This was another one of those ‘ah-ha moments’, although quickly followed with ‘wtf’ and ‘omg’ that’s going to be fun. In this article I do my best (as I’m not an accountant) to bring this topic into plain English.
This is certainly an issue that hasn’t been highlighted to businesses from either Amazon or eBay to my knowledge and is quite concerning eBay has been in such a push for Cross Board Trade (CBT) in recent months with statements that it fuels half a billion export boom and pushing the international site visibility upgrades and featuring eBay UK listings on the EU sites.
Firstly lets clear a few points:
- #1 I’m not an accountant
- #2 I’m not a VAT expert
- #3 I’ll never be #1 or #2.
- #4 If you are #1 or #2 or have experience of this topic with your business, then fell free to comment and I’ll amend this article accordingly as needed.
That said lets dig in and take a look a potentially nasty issue for medium to larger eCommerce businesses, because its really easy to go past the VAT limits, as they’re sooo low!
The UK VAT System
Starting from the beginning, VAT in the UK is pretty much a given. At around £73K of gross turnover or if expected to exceed this, a business is pretty much required to register to become a VAT tax collector and give the HMRC 20% of sales (and to be able to claim back the VAT on purchases and on expenses). This may not be technically correct, as there are deviants of this, but that’s the crux of it for most product based businesses.
So if you exceed or ‘expect to’ exceed ~ £73,000 of sales in one year, you normally need to register for VAT in the UK. Relatively straight forward so far. Yay!
The EU VAT Thresholds
Now this is where it can get nasty. As that expectation to exceed the threshold in the UK, also applies to business delivering products from the UK into the EU member states (called distant selling), but these states don’t all have such high thresholds when compared to the UK. In fact some of them are really low at around £30,000!
Lets say you’ve been happily running a £1M p/a business that uses the marketplaces and also a couple of other sales channels. As you’ve been processing your orders from the UK, in most circumstances you’ve also bee taking orders from a wide variety of countries outside of the UK too.
The shocking reality is that if as little as 3% of these orders have come from one of the EU countries such as Austria, Belgium, Cyprus, Estonia, Finland, Greece, Ireland, Malta, Portugal or Sweden. You have an issue.
Each of these countries have a VAT threshold of €35,000 (approximately £30K), when you hit this threshold then apparently you’re then required to register for VAT in those countries locally.
VAT Thresholds For European Countries (Sept 2011)
Doing some homework prior to writing this article, I found this document on the European Commissions website under Taxation & Customs Union. The middle section shows the thresholds for each of the member states in this document and I’ve extracted this to form the table below and highlighted the thresholds in bold.
|Member State||Threshold for application of the special scheme for distance selling|
|Bulgaria||70.000 BGN (€35.791)|
|Czech Republic||1.140.000 CZ (€46.570)|
|Denmark||280.000 DKK (€37.557 )|
|Latvia||24.000 LVL (€34.052)|
|Lithuania||125.000 LTL (€36.203)|
|Hungary||8.800.000 HUF (€32.257)|
|Poland||160.000 PLN (€40.293)|
|Romania||118.000 RON (€28.012)|
|Sweden||320.000 SEK (€36.232)|
|United Kingdom||70.000 GBP (€81.843)|
Even with the approximation that €35,000 is £30,000, for a £1M p/a business, this is only 3% of sales and actually very easy to achieve by sheer accident into one or more of these countries.
Its reassuring to know that the more likely culprits to top the £30K limit such as Germany, France & Italy have a much higher threshold of €100,000 or approximately £83,000, although in some circumstances, this could also be easily achieved without a second thought.
The aim of this article was purely to highlight and bring this topic into a ‘plain English’ format. I hope I have done that successfully.
If you even suspect that you’re likely to approach these figures to any of the countries above in your trading year, then please consult expert advice, such as from your accountant.
PS: If anyone knows how this applies to Amazon FBA items that are held in say France or Germany, I’d love to hear from you and please post a comment in the comments section below.