Companies in EU or that have some of their customers in the EU have to know how VAT (Value Added Tax) applies to them. Keeping your business in good books with the VAT man is crucial for not only legal matters, but also matters for cash flow. Understanding VAT will enable you price your service correctly.
This Dummies’ Guide to EU VAT will help you understand what the tax is about, how it is applied and which businesses it affects.
VAT (Value Added Tax) is a type of consumption tax that is levied on most goods and services in European Union countries. The tax applies to all goods and services that are produced for consumption within the EU countries.
- As a seller. goods or services sold to customers from non-EU countries are not charged VAT.
- As a buyer. goods imported from non-EU countries attract VAT tax.
But services rendered by suppliers from non-EU countries are not taxable. Example: if you are paying AWS USA for the services as a customer in Europe there is no VAT applicable.
Should You Register for VAT as a business?
If you run a business whereby the goods or services you provide fall under “taxable supplies” i.e. they are liable to be taxed, you need to register for EU VAT. Registration is done in your respective EU country and you do not need to register elsewhere even if you are serving customers in another EU country.
Businesses need to charge tax on all their taxable supplies from the date they need to register for VAT. Examples of taxable supplies include:
- Admission fees to exhibitions or events
- Providing a service, for example decorating a home, hairdressing, etc.
- Using business stock for personal purposes
- Hiring out or renting goods
- Selling new and used goods.
VAT on Downloadable Goods or Online Services
Vendors who sell downloadable media (e.g. software) or offer other online services that do not require physical delivery should quote the EU VAT number of the customer on the invoice if the customer is a VAT registered business. In such a case, VAT will not be charged. For goods or services sold to individuals or businesses that you cannot supply a VAT number, VAT is charged based on the value of your good or services in your EU country.
Here is a simple flowchart to explain this.
EU businesses selling to customers in non-EU countries do not have to indicate or charge VAT for their online sales. VAT only applies when selling to customers in EU countries.
For more information about EU VAT, check the following links:
What do you need to know about invoicing?
We all know paper invoicing is a hassle. VAT man allows you to do electronic invoicing and you need not get prior approval from them before starting this process.
However, HM Revenue & Customs (HRMC) advises you to put controls in place which will ensure the accuracy, security, authenticity and integrity of electronic invoices. That does mean that the payment service that you’re using should be secure and compliant.
There is no restriction on the ways you would deliver your electronic invoice. Most of the payment systems will allow you to Email invoices or place it as a download on the website (self-service portal).
Also the bureau requires you to store electronic invoices in a safe manner. That includes keeping all the original invoice data and preventing them from getting corrupted. Please bear in mind that the invoices should be produced at any time if asked and should be in a readable format. So when you are selecting your payment service, be sure to ask them about the disaster recovery that they have in place, which may prove crucial in the long run or during natural calamities. Please understand that even when you are outsourcing invoicing to a 3 rd party payment service provider, it is your legal responsibility to make sure you meet all the requirements for invoicing electronically.
Another question that is common when dealing with VAT is what should a VAT invoice show. It should have
- An Invoice number that is unique and follow from the previous invoice.
- Seller’s trading name and Address
- Seller’s VAT Registration number
- Invoice Date
- Customer’s trading name or Name and address.
- Description of the goods supplied to the
- Discounts, if any.
- Total amount of VAT charged in pound sterling.
Example of checkout with VAT
Buyers who are in the EU can enter the VAT number when making a purchase.
Sample Invoice with VAT
Here is as sample invoice format to use with VAT.
For invoices that contain exempt or zero-rated goods or services, the invoice should indicate that no VAT is applicable to those items, and the total amount of the items.
Summary – General EU VAT Characteristics
- If the buyer and merchant are from the same country, then the EU VAT is applied and the buyer will be charged regardless of whether they provide a valid VAT number or not.
- For buyers in the EU but outside of your own country, EU VAT will be applied if the buyer does not provide their EU VAT number. If the buyer wants to be exempted from EU VAT, they need to provide their EU VAT number.
- Buyers from outside the EU will not be charged with VAT.
Selecting a Billing System for your business
Having understood the invoicing part for VAT, it is ideal for your billing system to do the invoicing for you as well. It is even more important for a subscription business to get a billing system that will support VAT. If you are going to just settle with a payment gateway to process your payments, then you need to build a system for your business using their API. For a subscription business it is even more difficult as they need to look at other important features that will be happening on a recurring basis. Build vs Buy is a critical decision that you need to take.
There are many billing systems in the market that will help you to launch your business with EU VAT support. Here is the list.
ChargeBee offers subscription and recurring billing solutions to businesses across different industries. With its plug-and-play capability, businesses can automate billing, invoicing and improve communication with their customers.
If you are a subscription business and you are looking for a full-fledged trial management with metered billing, dunning capabilities, this is the right way to go. ChargeBee supports general tax and EU VAT. To learn more, please visit http://www.chargebee.com/docs/tax.html
(Disclosure: Author is the co-founder of ChargeBee)
FreshBooks is an online invoicing, time tracking and expense management service that helps people save time, get paid faster, look professional and focus on what they love to do – their work. It is aimed at freelancers and small businesses.
There is not much information on the website about EU VAT but I found a blog post saying they do support VAT. http://www.freshbooks.com/blog/2010/03/23/new-release-vattax-numbers/
You can accept payment by credit card, PayPal or any one of 12 payment gateways. Be sure to check the fees for online payments before you go with this option.
Kashflow provides online accounting software for small businesses with focus on the UK.
Kashflow has a full-fledged VAT support and it has all the necessary tools to invoice your customers. It also has an option to handle everything a small business needs from within their software. And they have loads of integrations arounds CRM, payment processors etc.
The software supports Standard VAT, the Flat Rate Scheme, Cash Accounting and EC Sales Lists. VAT Returns and EC Sales lists can be filed directly to HMRC from within the software, which is a big plus if you are looking to solve your EU VAT.
SAASY provides all-inclusive Subscription Ecommerce Billing. SAASY provides a solution that bundle all the features including payment-processing capability for a percentage of the transaction.
With SAASY you can manage EU VAT, invoicing and Payments collection all in one place. To learn more please visit http://saasy.com/features.php
Xero is an online accounting software, providing business owners with real-time visibility of their financial position in a way that’s simple, smart and secure.
You can invoice your customers online and get paid faster with easy payment options right from the invoice. You can also accept credit card payments through payment gateways or PayPal.
QuickBooks is a cloud accounting solution for small finances. It helps you to organize your business and financial information all in one place and be ready at tax time.
With QuickBooks, you can electronically file your VAT return to the HRMC.