Don’t let cross-border VAT regulations leave you feeling confused and frustrated. In this blog, we will answer “What is Cross-Border VAT?” and other underlying topics you need to understand. So keep reading to learn more.
What is Cross Border VAT: A Complete Guide
What is Cross Border VAT? When goods or services are bought or sold across international borders, it can be challenging to determine how VAT should be applied and how much businesses have to collect and pay.
In this blog, we will provide a comprehensive guide on cross-border VAT, including what it is, different VAT obligations, rules within the EU and outside the EU, and key considerations for businesses that engage in cross-border transactions.
Whether you are an importer or exporter, this guide will help you understand your obligations and responsibilities regarding cross-border VAT and how to ensure that you remain compliant with the relevant regulations.
What is Cross Border VAT?
Let’s start with the basics. Cross-border VAT refers to the value-added tax (VAT) when goods or services are bought or sold across international borders. VAT is a consumption tax, meaning that it is levied on the final consumer of the product or service.
However, when goods or services are sold between businesses in different countries, it can be challenging to determine the correct VAT rate and who is responsible for paying the tax.
What is Cross Border VAT per Supplier Location?
If you are a business owner who buys goods or services from suppliers in different countries, you need to be aware of the VAT obligations that apply depending on the location of your supplier. In general, there are three scenarios:
If your supplier is located within the European Union (EU), they should charge you VAT at your local rate. However, if you are a VAT-registered business, you can often reclaim this VAT through your VAT return.
You should not be charged VAT if your supplier is outside the EU. Instead, you may be liable for import VAT and customs duties when the goods arrive in your country.
If you are buying digital services, such as software or streaming services, even from a supplier outside the EU, they may be required to charge you VAT under new rules that came into effect in 2019. Read more of these VAT rule changes on the HMRC website.
In addition, you can ask help from a tax advisor to clarify this for you, especially if you usually avail digital services for your business.
Cross-Border VAT per Customer Location
If you are a business owner who sells goods or services to customers in different countries, you must also understand whether you will charge VAT depending on their location.
If your customers are located within the EU, you should charge them VAT at their local rate. To do this, you need to register for VAT in the EU countries they are located, and this is a requirement before actually selling your goods and services.
However, if you sell to multiple EU countries, it may be a hassle for you to register for each, so you have the option to use the One-Stop Shop scheme for easier compliance. This is discussed in a separate blog post. You can also consult a tax advisor for further guidance.
If your customer is located outside the EU, you should not charge them VAT. Instead, you may need to provide evidence that the goods have left the EU to support a zero-rated VAT sale of a registered business.
Cross-Border VAT per Customer Type
The VAT rules can also vary depending on whether you sell goods or services to another business or the final customer. Here are some key points to keep in mind:
Selling Goods and Services to Another Business
When selling goods or services to another business, cross-border VAT rules will depend on several factors, including the customer’s country, the nature of the transaction, and whether the customer is registered for VAT.
In general, if both the seller and the customer are VAT-registered and are both EU countries, the transaction will be considered an intra-community supply and subject to the reverse charge mechanism.
This means that as a seller, you still need to charge VAT, but your customer can claim this through their VAT return to lower their VAT liability.
This will continue even if your customer sells them again to another VAT-registered business, and the final customer will eventually pay the VAT.
Selling Goods and Services to the Final Customer
When selling goods or services to a final customer, the VAT treatment will depend on whether the customer is located within or outside the EU.
Suppose your customer is located within the EU. In that case, the VAT treatment will depend on the distance selling threshold of the country where the supplier is situated and the country where the customer is located.
If your sales exceed the distance selling threshold in your customer’s country, you should register for VAT in that country and charge the local VAT rate.
If the customer is outside the EU, the transaction is generally treated as an export and is zero-rated for VAT purposes.
However, some countries may require the supplier to charge local taxes or duties on the sale, depending on the nature of the products or services sold.
Frequently Asked Questions
Do I need to register for VAT if I only make occasional sales to customers in another country?
It depends on the country where the customer is located and the volume of sales. In some countries, there are thresholds below which VAT registration is not required, while in others, registration is required for any sales to customers in that country.
Can I recover VAT on expenses incurred in another country?
In most cases, you can recover VAT on expenses incurred in another country as long as your business is registered for VAT in that country.
This process is called VAT reclaim, and it allows you to reclaim the VAT you have paid on goods or services purchased for business purposes.
How do I know which VAT rate to apply to my products or services?
The VAT rate that applies to your products or services will depend on the country where the sale occurs.
Each country has its own VAT rules and regulations, and it’s important to understand the applicable rates and exemptions for each country where you do business.
Generally, goods and services are classified into different categories for VAT purposes, and each category may have a different VAT rate.
Navigating the waters of cross-border VAT can be a challenging task for businesses trading internationally, but by grasping the basics and referring to this post to answer “What is cross-border VAT?” you can easily avoid any potential issues and get through with your taxes.
Seeking professional help from a tax advisor can also be a good way to comply with complicated regulations confidently. Consult us at Sterlinx Global.