This help file will guide you through everything you need to know about VAT for eCommerce companies selling in the European Union, in simple terms.
Value Added Tax (VAT) is applied to most goods and services traded in the EU. Any business whose turnover is above a certain threshold generally adds VAT to the price of what they’re selling there. That threshold used to be different for each EU country.
01 What is VAT?
Since July 2021 a EU-wide VAT threshold of €10,000 dictates VAT-subjectivity. VAT is also known as a general tax since it applies to more or less all goods and services. It’s a consumption tax, meaning it’s technically paid by the customer, not the business. But by adding VAT to the price paid by consumers, businesses effectively collect the tax on the EU’s behalf.
VAT is charged as a percentage of a product’s price; how large a percentage is up to individual EU countries. Every quarter, businesses work out the VAT they’ve collected, then take away the amount they’ve paid on their own business purchases.
02 How is VAT calculated and charged in the EU?
Whatever’s left goes to the revenue authorities. This ensures VAT is applied in a fair and neutral manner across the supply chain, rather than overburdening those lower down in the pecking order.
When the EU was created, the six founder states all taxed exports differently. Since taxes applied at each stage of the production process, it became very difficult to work out how much of a product’s final price was tax. VAT fixes this, providing a transparent, neutral tax structure which prevents EU countries subsidising exports unfairly.
03 Why do EU countries all use the same tax?
We can clearly work out how much tax gets rebated at the point of export. Of course, that was nice and simple with only six countries to account for. Nowadays, with dozens of countries, applying VAT across EU borders still takes a bit of brain work.
Each individual EU country sets its own specific rate of VAT. By law, this rate only has to be higher than 15%, or 5% for specific goods and services which qualify for the reduced rate. You can find the individual rates for each country on that country’s relevant tax authority website. The European Commission site has links to each authority.
04 How does VAT work in the EU?
However, European VAT applies in some cases and gets added to the price directly, along with an indication that the price is VAT inclusive. In other cases, VAT does not apply and should be left off the price.
How VAT applies in the EU depends on what you’re selling, and to whom. Goods and services are viewed differently, as is the distinction between selling B2B and B2C.
05 What VAT do I pay when selling between EU countries?
If you’re selling goods B2B
You don’t charge VAT if you’re selling to someone with an EU VAT number. You still deduct any VAT you paid in order to make that sale from your quarterly return. If the customer doesn’t have an EU VAT number, you apply your country’s VAT to the sale.
If you’re selling goods B2C
You apply their country’s VAT to the sale and you should register your business for VAT in the customer’s country or register for the One-Stop-Shop (OSS). You don’t need to do this if your sales to other European countries in that tax year fall below the EU-wide threshold of €10,000.
If you’re selling services B2B
You typically wouldn’t charge VAT. It gets paid by the customer themselves at their country’s rate via the reverse charge procedure. Again though, you would deduct the VAT you paid in order to make the sale each quarter.
If you’re selling services B2C
You apply VAT at the rate of your own country for most services. The exceptions are telecoms, broadcasting, or electronic services, which are taxed as per the customer’s country.
06 What if I am buying goods or services for business purposes?
You pay VAT at your country’s rate as if you’d sold the goods. This can then usually be deducted when you declare your own VAT.
The above will apply in most cases, but there are some exceptions which you may need to familiarize yourself with. For example, does VAT apply to overseas territories of EU countries? Yes and no.
VAT does not apply to:
- The Åland Islands
- The French Overseas Departments
- The territory of Büsingen
- The island of Heligoland
- Mount Athos
- Campione d’Italia
- The Italian waters of Lake Lugano
- The Canary Islands
- The Channel Islands
But VAT does apply to:
- The Isle of Man
- UK bases in Cyprus
Overseas territories straddling EU membership, as well as countries outside the EU altogether, add their own complexities to the mix.
Whether VAT applies to sales you make in the EU from a non-member state depends on whether the customer has a VAT registered number (VRN). If your customer has no VRN, they’re a regular consumer and you do charge VAT.
07 Do I pay VAT in the EU if I sell from outside Europe?
If your customer does have a valid VRN, they’re a business and you don’t charge VAT. This is because they’re effectively responsible for their own VAT via the reverse charge mechanism.
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