Andrew Needham looks at the distance sales thresholds, and what happens if you fail to register on time.
Mail order and Internet sales to private individuals (‘B2C’) in other Member States of the EU are known as distance sales. The basic rule is that these sales are initially subject to UK VAT and treated in the same way as domestic sales.
However, if a business’s sales exceed certain thresholds then it has to register for VAT in that EU member state. The EU has laid down two possible registration thresholds, either €35,000 or €100,000, and each member state can decide which of the two thresholds it will apply.
Monitor your sales
With the number of internet-based sales businesses affected by these rules it is essential to keep a close eye on the level of sales, so that you know if and when you have to register for VAT in another EU member state.
It is quite feasible that a business could have to register for VAT in each Member State of the EU, 27 in all. The administrative burden of this can be considerable. In addition, if a business fails to monitor its distance sales and exceeds one of the national thresholds without informing the tax authorities, back tax and penalties may be due.
Registering late
If a business does not monitor its turnover to other member states, there is a good chance that it will miss its requirement to register for VAT, but HMRC may identify it during an inspection. If HMRC spot it, they will inform the other member states tax authorities, who will contact the business directly requiring them to register for VAT.
Example: Distance sales registration threshold exceeded
Let’s say a business exceeded the distance sales registration threshold in Spain (€35,000) in June 2015, and does not realise this until November 2016, when it gets a visit from HMRC and they contact the Spanish tax authorities. The total VAT inclusive sales to Spain during this period are £68,000, and they have paid HMRC VAT of £11,333 (£68,000/6). Ignoring it and hoping it will go away is not an alternative, as HMRC will enforce any requirement to register and any VAT debts due on behalf of the Spanish.
The business has already accounted for UK VAT at 20% on the sales, and now gets a bill for £11,801.65 (VAT at 21%, the Spanish standard rate) from the Spanish tax authority.
The UK company now has to make a claim to HMRC for the overpaid VAT it has already accounted for, as well as having to pay a slightly larger sum to the Spanish tax authority, along with any interest and penalties due.
Although there are rules against double taxation, it can sometime be difficult and time consuming to obtain repayment from HMRC for overpaid VAT, and they can delay the claim under the ‘unjust enrichment’ rules. HMRC have argued that they would only make repayment of the overpaid VAT if the business agreed to repay it to their customers, failing to take account of the fact that the tax was still due to another member state’s tax authority.
Businesses making a claim in these circumstances should state at the time they make a claim that the ‘unjust enrichment’ provisions do not apply, as the VAT is still due to the other member state’s tax authority. If possible, back this up with correspondence from the other member state’s tax authority.
Practical Tip :
If you make B2C internet sales to other EU member states, monitor your sales to make sure you register on time. If you don’t, you will still have to pay the VAT in the other member state, and may have a long fight with HMRC to get back your overpaid UK VAT.
