When you take your first steps as an eCommerce owner setting up shop in Europe, VAT registration is probably the last thing on your mind.
From marketing to sales growth and customer service, there’s a ton of other (and let’s face it, sexier) tasks to think about—but like it or not, you can’t afford to ignore your VAT responsibilities.
Because VAT is a big deal in the business world, especially for companies that sell goods. Traders were responsible for 72% of taxable income in the 2019/20 UK tax year, and you better believe governments will come to collect. To avoid legal headaches and penalties (which can easily reach five or even six figures), you’ve got to get prepared.
The upside? Even though it can feel like a headache at first, you’re set to inherit some excellent benefits with VAT registration.
There’s a lot of ground to cover, but we’ve got your back. So, let’s delve into the key facts, figures, and action steps to help you nail your VAT game plan.
Need a multi-currency account to support your global expansion? Find out more about our Digital Wallet.
What Is VAT? What We’ll Cover:
- VAT 101: A Complete Guide
- What Is VAT?
- What Is VAT Registration?
- What Happens If I Don’t Pay VAT?: The Unsettling Reality
- The Highs and Lows of VAT Registration
- How to Get Your E-commerce Business VAT Ready
- A Game Plan to Make Your VAT Journey Stress-Free
VAT 101: A Complete Guide
VAT is important to your eCommerce business’ bottom line and when approached right, it can feed cash back into your company that would have otherwise gone into the government’s pocket.
But improper calculations or failure to add VAT altogether will slice straight into your margins, and can even turn a profitable product into a loss. There’s no way around it, if you want to keep VAT in check, you’ll need to account for it in your pricing.
When it comes to VAT, it (literally) pays to understand what you’re signing up for before you set your prices and financial game plan.
To kick things off, here are a few need-to-know facts about VAT:
- VAT isn’t the same worldwide. There are different rates, thresholds, and payment requirements depending on where you’re registered. For example, in countries like the UK, France, Austria, Estonia, Ukraine, and Slovakia, the standard VAT rate is 20%, while the average for Europe is 21%.
- Hungary and Luxembourg have the highest standard VAT rate in Europe at 27%.
- Switzerland has the lowest standard VAT rate in Europe at 7.7%.
- Certain businesses can claim a VAT refund in select countries for business travel expenses.
- The US doesn’t have VAT. Instead, it has a Sales Tax that differs across states.
What Is VAT?
VAT (Value Added Tax) is a charge added to most products and services as a percentage. The majority of businesses must pay VAT when their turnover hits a certain level (more on this in a minute).
The funds then get handed over to the government through a dedicated body. For example, in the UK, the relevant service is Her Majesty’s Revenue and Customs (HMRC).
There are 3 types of VAT with varying amounts:
- Standard – 20%
- Reduced – 5%
- Zero – 0%
For more information on what UK VAT type applies to a particular good, check out GOV.UK’s in-depth guide.
There’s also a VAT-exempt category that’s not the same as the zero VAT category. Although you don’t pay any VAT in both circumstances, their responsibilities are different. If you only sell VAT-exempt goods, you don’t have to register for VAT even when you hit the registration threshold, but for zero VAT items you must register when you hit the limit.
Need a virtual account to manage cash for your tax and expenses? Learn more about our Digital Wallet.
What’s VAT Registration?
VAT registration is the process of enrolling your business with the government to sell goods and services on which you’ll pay VAT. As a rule of thumb, you must register for VAT when you’re engaged in taxable activities in that territory.
Ecommerce businesses have a little more flexibility when it comes to VAT. In some countries (the UK excluded), they can charge VAT in the end destination territory or the business’s home territory. For more details, check out this informative post by Marosavat.
From the moment you complete VAT registration, your responsibilities will be to:
- Charge VAT on all eligible goods and services you sell.
- Ensure you bill the correct amount of debt (i.e, excluding VAT-exempt products).
Duties specific to the country you are registering in will also apply. For example, for the first two years of your registration in Germany you must:
- Submit a monthly VAT advance return
- Send in an annual VAT return
Whereas in the UK you need to:
Regardless of which country you sign up for VAT in, you must take these duties seriously as they are permanent and can directly affect your profitability.
What’s a VAT Number?
Once you’ve registered for VAT, the government will send you a VAT number unique to your business. This is a tax identification number for that country’s tax system. But note, this number is only for tracking VAT, and nothing else.
Through your VAT number, the government can see your:
- Input VAT: The VAT collected on purchases you’ve made for your business. You’ll collect this from your customers and then hand it over to the government.
- Output VAT: The VAT you charge on your goods and services. You can deduct the input VAT bill from your output VAT bill to reduce your VAT liability (more on this later).
The government will assess the information you give via your tax number and calculate whether it’s correct. They’ll take action against your business if it’s not and the consequences can be harsh, so ensure your information is correct before you hit ‘submit’.
Now you’re over the registration hurdle, it’s time for some more admin.
You need to pick a VAT scheme which is a system that tells the government how much:
- VAT you’ve billed
- VAT you’ve paid
There are few VAT schemes out there. Let’s zoom in on some of them:
- Flat Rate Scheme: You pay a percentage of your revenue as VAT. Your bill depends on your business type.
- VAT Annual Accounting Scheme: You send in your VAT returns once a year instead of the typical 4-part payment schedule other schemes subscribe to.
- VAT Cash Accounting Scheme: You pay VAT on your sales once customers have paid you. Then you recoup VAT on your inventory purchases after you’ve paid your supplier.
- VAT Retail Schemes: There are three types of retail schemes: Point of Sales, Apportionment, and Direct Calculation. However, these aren’t an option for eCommerce sellers, as they apply to retail sales (selling in a physical store) with no non-retail sales, like online sales.
- VAT Margin Scheme: If you sell goods like antiques, collectibles, or art and use this scheme, the government will tax the change between what you’ve paid for goods and how much it sold for, not the entire sales price.
What Happens If I Don’t Pay VAT?: The Unsettling Reality
While you won’t get hit with a penalty fine straight away if you fail to pay, you will be subject to fees. The government will put a default on your account, and you can go into a surcharge period.
This procedure applies if you don’t make a payment at all or don’t pay in full. Penalties highlight the seriousness of your duties as a VAT-registered business.
For example, there’s no surcharge fine for your first default in the UK (and the second default if your annual revenue is under £150,000). However, all subsequent non-payments incur a charge which is a percentage of the due VAT bill for the first 6 defaults. After this period, the government will begin applying penalties which can range between 15%-100% of the unpaid VAT bill. The UK government can also slap your business with a penalty if you under-declare or overclaim tax, which can be as high as 100%. 😲
In France, the penalty is even harsher. Not only does the French government charge 5% of the due VAT bill and penalty, but they also apply 40% of your VAT statement as a punishment if they discover an error.
Even making an honest mistake can result in you being out of pocket, so think carefully before you volunteer your business for VAT, and ensure you have the time and energy to fulfill these responsibilities.
The Highs and Lows of VAT Registration
Now you know the tough duties you need to fulfill when you become VAT registered, you may ask why anyone would put themselves through it.
VAT registration is the ultimate mixture of highs and lows. The pros of VAT registration pull you in and make you want to know more, but the cons will make you step back and deeply assess whether it’s worth the risk for your business.
Let’s take a closer look:
The highs of VAT registration 😁
- Save, save, save: Once you list your business for VAT, you can charge it on your products and pass the bill to your customers, instead of you forking the bill. You can also reclaim VAT on items you purchase for your business, like inventory and supplies. This makes VAT registration a must if you want to save your coins.
- Earn your business some clout: When you hit the VAT registration threshold, it sends a clear message that you’re an established business and ready to expand. This is not only a confidence boost, but you’ll also look every inch the part of a professional seller, which can earn you some brownie points when you need to impress an important supplier or apply for external funding.
The lows of VAT registration 😩
- Your items will become more expensive: If your business can’t or doesn’t want to absorb the VAT charge into its original pricing, you’ll have to add it to your prices. This change will make your products more expensive and possibly non-competitive in your market, affecting sales.
- Additional admin, you could do without: The accounting and admin duties that come with VAT registration are no joke. You must submit files on time, and they’d better be right or you risk a costly slap on the wrist. If you choose to keep the task in-house, that’s time you’ll take away from other important tasks in your business.
How to Get Your E-commerce Business VAT Ready
Get ready to pay VAT internationally with a borderless business account
To ensure you don’t get caught out by lengthy admin or sky-high fees which could delay payment, sign up for a multi-currency account that allows you to store and transact funds.
- A business banking account that uses the real mid-market rate.
- Made for eCommerce businesses.
- From a reputable and transparent provider.
(Psst! Our Digital Wallet ticks all these boxes and more 😉).
Remember to collect VAT on purchases in separate pots, so it’s easy to distinguish the money you must pay to the government and the money you can use to run your business.
Automate record keeping
If you throw all the burdensome VAT obligations onto your already hectic eCommerce management schedule, it won’t be long before you regret it.
There’s little room for error (as we’ve seen, governments aren’t forgiving of slip-ups), so you’ll need to stay on top form by digitally automating your VAT accounting. There are tons of providers that fit the bill, like Xero, QuickBooks, and FreeAgent. Remember to have a professional check over your records before you submit them.
Use a prepaid card to track expenses
Don’t waste time trying to figure out how much you’ve spent on supplies and inventory for your business, use a prepaid business card for each purchase. This will help you prevent operation-expense leakages and develop a trail of statements to cross-reference expenses in your accounting tool.
When you combine a dedicated business card with a multi-currency account that allows you to build different pots, your VAT accounting will run like clockwork and your data will remain controlled and accurate. 👌
A Game Plan to Make Your VAT Journey Stress-Free
There are only two things certain in life: death and taxes.
You can’t dodge your VAT responsibilities when you hit the threshold, but you can make the process less painful.
First off, get prepared and have all the necessary information ready to go so you’re able to submit files before the deadline, no matter what’s going on in your business.
Be strict when you separate funds to spend from your operational cash, to avoid any mishaps that will leave you short on your VAT bill. (With our Wallet and Business Card, you can make this a seamless process. 😉)
Educate yourself on the requirements before you hit the VAT registration limit, so you’re ready to go when you make it official, and stay up-to-date with changes and developments so you can respond in a timely and cost-effective manner.
Every company’s different. Whether you want to jump on the VAT bus early or when you absolutely need to, seek professional help from a tax adviser to make sure it’s the optimal time for your business. Good luck!
Want to learn how to make your VAT journey hassle-free? Explore our Digital Wallet and Business Card.