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All About Cross-Border VAT: A Complete User-Friendly Guide

Dec 14, 2022 | VAT Payment

Cross-Border VAT Must Know: How To Manage

A licensed accountant who offers tax advice to his clients will already have a basic understanding of VAT and be aware of how normal domestic transactions are treated in terms of VAT.

Supplies of goods and services are typically subject to VAT in the EU at a standard rate of at least 15%. (The current EU average is around 21 per cent). There may be a reduced rate for some supplies, and occasionally there is no rate at all.

In some circumstances, even though his own output supplies do not incur tax, the business supplier can nonetheless deduct input VAT. Some transactions, however, are exempt from the VAT deduction and do not result in taxation.

Different VAT obligations depend on where you buy from or sell to

In general, so-called “cross-border supplies” should not be subject to VAT in the Member State where the provider is based. However, they typically result in the imposition of VAT in the nation where the client is based or the item is really made.

These supply minimums differ among the Member States. The distance selling thresholds for the EU Member States are released by the European Commission on a regular basis.

Yes, the provider should typically not be taxed while providing items to business clients. The client is required to know whether his customer is a “taxable person” for VAT purposes, that is, whether the customer is a business.

If the client receives a legitimate VAT identification number from another EU member state, it is assumed that this is the case. The database VIES of the European Commission can be used by the client to determine whether such a VAT identification number from another EU Member State is legitimate.

Considerations for VAT

A variety of additional facts need to be considered, such as the kind of commodities delivered, who oversees shipping them, where they are at the time of provision, whether there are any other parties engaged, etc.

All these variables may affect the location of the supply as well as the issue of whether the supply is zero-rated for the supplier. On its website, the European Commission offers some additional details regarding the source of supplies.

Be aware that invoicing and paperwork requirements are more stringent for cross-border transactions than for domestic ones to maintain zero-rated supplies of products. Also possible are additional declaration requirements.

Cross-border VAT within the EU and outside the EU

The client must either charge the VAT of the Member State where the supplier is located or the VAT of the Member State where his customer (consumer) is located for supplies of products to consumers (non-business customers) in another Member State.

If outside the EU In this situation, an export is mentioned. The supply should typically be zero-rated for customs if certain conditions for documentation and customs formalities are completed by the vendor.

Within the EU

When purchasing and receiving services from another EU member state for business purposes, you are required to use reverse charge to calculate and pay VAT on the transaction at the applicable local tax rate, just as if you were the one providing the service.

Normally, you can take this money off later when you submit a VAT return.

Outside the EU 

In general, VAT is not charged when providing services to non-EU clients.

However, if the service is utilised in another EU nation, that nation could choose to impose VAT. However, you can deduct VAT on relevant costs such as products or services bought especially for this sale.

When buying/selling services/goods to another business or a final customer

If the services are provided within the EU, VAT is typically charged where the services are rendered. The status of the client receiving the service as well as the type of services offered, nevertheless, will determine this.

A difference must be established between a non-taxable person (a private individual who is the service’s end consumer) and a taxable person operating in that role (a business acting during its business).

VAT is often required where the service was rendered if the client is a private individual who is the final consumer. Most frequently, but not always, this will be the location of the service provider’s headquarters.

In some circumstances, the service provider will use the VAT rate in the Member State where he is established to account for VAT on his services.

However, VAT can be owed in a different member state than the one where the provider is based, depending on the nature of the service.

This is true, for instance, with services related to real estate, transportation of people and/or commodities, and cultural, artistic, sports, scientific, educational, and services for entertainment. VAT is required where the customer is located if the customer is a company working in its official capacity.

VAT must be reported by the customer, not the service provider (Reverse charge).

Be aware that special regulations for billing, paperwork, and declaration must be considered.

Frequently asked question

  • Why do certain software suppliers ask for a VAT identification number when I purchase over the internet?

    Suppliers of electronic services, such as anti-virus updates, are obliged to charge VAT on the service. If the purchaser of these services is a taxable person, then in certain circumstances, it is the customer rather than the supplier who must account for the VAT.

    For this reason, the supplier may ask for the VAT identification number of the customer so that he can confirm whether it is he who must charge the VAT or whether the customer himself will account for the VAT. If the customer does not have a valid VAT number, then the supplier will charge a VAT.

  • How can I claim my VAT back after I left the country?

    You have to send an application to the authorities in the EU nation where you produce VAT. Some EU nations won’t refund you unless your company is situated in a nation that provides a comparable refund programme to enterprises in that EU nation.

  • If I want a refund, how long does it take for HMRC to process a VAT refund?

    Refunds are typically made 30 days after HMRC receives your VAT Return. If HMRC has your bank information, your payback will be sent directly to your bank account.

Conclusion 

Services that are provided to a client outside of the EU are often zero-rated, and the service provider can typically recoup any associated input VAT.

Transport services, supplies relating to land and buildings, supplies of telecommunications, broadcasting and electronic services, suppliers of means of transportation, supplies of used products, supplies of works of art, etc., are some of the supplies that may be subject to unique regulations. 

Be aware that it is likely that special rules will also apply in other member states if your clients provide goods or services that are subject to special rules in their home country.

If this is outside of your area of expertise, it may be prudent to seek expert advice on your client’s behalf prior to the transactions, additionally, for the distribution of certain products like alcohol and tobacco. For better services, contact Sterlinx and get full guidance. 

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