Accountants Guide for EU VAT Purchases
The EU VAT guidelines are intended to make it possible for small businesses to trade in the EU area short of needing VAT registration in all EU nations. While the regulations tend to be complex, the alternate scenario would be more bureaucracy and work.
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At its core VAT is a consumption tax. A business registered for VAT will have to pay VAT whenever it makes a purchase and then claim it back when they make their VAT returns, which includes all the purchases made. VAT registered businesses doing businesses with each other can shift the VAT to subsequent purchasers. As such, it is the final consumer who has to pay the VAT as they cannot pass it on or reclaim it. Since the consumer eventually pays the VAT, it is called the consumption tax.
EU VAT is intended to have the same effect and hence businesses registered for VAT and doing businesses with each other within the EU can transfer VAT to subsequent purchasers up to the consumer and never have to deal with the complex regulations of each country.
There are several critical distinctions to take into account though:
Business versus Consumer
EU VAT differs depending on whether the purchaser is a business or a consumer. For the purposes of VAT, it will also be dependent on their VAT registration status. Overall, a purchaser with no VAT number means they are a consumer and one with a VAT number means they are a business. As such, any business not registered for VAT will be deemed a consumer.
Services versus Goods
If you are selling or buying only in the UK then services and goods receive the same treatment on VAT returns. Any trading done outside the United Kingdom whether it be for goods or services will mean that VAT will default to place of supply VAT rules.
It is very straightforward for goods. Goods exported from the UK to other EU countries are subject to VAT rules in the UK, while goods exported from Germany to other EU countries are subject to German VAT rules. Therefore, goods will be subject to the VAT regulations of the country of the seller.
The assumption when you are providing services such as training or consulting is that these will be delivered in person. As such, the VAT rules are inverted with the place of supply being the location of the customer. For instance, a British company consulting for a French company will have the VAT rules of France applied since the place of supply is assumed to be France. UK VAT rules will not apply as the sale is deemed out of its scope given the location of the customer.
Sales to EU consumer (not registered for VAT)
Any consumer that is not registered for VAT will have to pay the final VAT either in the EU or the UK. For all intents and purposes, sales will be treated as a sale to a United Kingdom consumer. Normal practice is to add the UK VAT of 20% to the total amount.
Box 1 (VAT payable in the period on sales)
Box 6 (Total value of sales not including VAT)
Excluded on EC Sales list
This is good if only a small part of your sales are done outside the UK. But once you start making huge volumes of these sales or a significant increase in the value of such sales, you may need to register for VAT in the given EU state and be subject to the relevant country’s VAT. Each country has different thresholds.
If your EU sales value is more than £250,000 a year, you will be required to fill an Intrastate Supplementary Declaration.
Digital Sales to EU consumer
There are different processes and rules if you are selling digital services to consumers not registered for VAT within the EU. In such an instance, VAT needs to be charged using the local rate with returns made using VAT MOSS.
Sales to EU business (registered for VAT)
You need to have the VAT number of the customer for the transaction to be deemed a business transaction. If you do not have the number, then the transaction is a consumer sale. Both the customer’s VAT and the business’s VAT number have to be indicated in the sales invoice.
Any sales made by a business in the EU also needs to be indicated on the EC Sales List. The EC is a distinct quarterly or monthly return that may not necessarily conform to the schedule of your normal VAT returns. You can get this produced automatically in various accountancy packages so that all you need to do is submit.
Goods to EU business (Registered for VAT)
If you happen to be trading goods to an EU business that is registered for VAT, then you can get zero-rated for VAT, if you do not add any VAT on top of the net value. Most accounting systems will include a specific VAT specification for this. If you are selling goods, the UK is the place of supply and hence UK VAT applies but it is zero-rated. This means that the sale has to be included in the EC sales list.
VAT zero-rated – show VAT as £0.00 and charge net value
Box 6 – Total value of sales not including VAT
Box 8 – Total value EC sales exclusive of VAT
Include in EC Sales List
Services to EU business (Registered for VAT)
If you are selling your services in the EU, the obligation of charging VAT rests with the customer. If it is a service you are selling, UK VAT will not apply since the customer location is the place of supply. Goods are zero-rated for VAT, meaning that you do not add any value to the net value of goods. You will still need to include your sales of services in the EC Sales List. Most accounting software includes a category that makes this possible.
0% VAT – show VAT as £0.00 and charge net value
Box 6 – Full value of sales not including VAT
Do not indicate in Box 8
Indicate in EC Sales list
The flat rate VAT?
If you qualify for the flat rate arrangement, then input VAT will not apply. The obligation for VAT will be determined as a percentage of the gross sales turnover over the tax period. To get your gross sales add in the 20% of VAT, which means that the owed VAT is a percentage of the total, for instance, an IT consultant will have to pay 14.5%. The percentage is intended to act as cover for VAT on acquisitions but excluding the tedium of having to go through all transactions.
If you are exporting services or goods to an EU business registered for VAT, you can avoid VAT by zero-rating the sale. But how does this influence the flat rate turnover determination?
Selling goods to the EU – Add them in the EC Sales list
Selling services to the EU – Add them in the EC Sales list but since UK VAT does not apply, exclude them from the flat rate turnover.
Buying services or goods from the EU – Sales turnover is the basis for the calculation of VAT and hence it does not matter whether EU purchases have VAT or not.
What if you are buying services or goods from the EU? The same rules are applicable though now in reverse.
For imports greater than £260,000 of merchandise in a given year from the EU, an Intratat Supplementary Declaration will have to be submitted.
Consumer Purchases (VAT registration not provided to the supplier)
If a business does not give the seller their VAT number, then the business is deemed a consumer. Just like on the sales side the seller’s rate includes VAT and forms part of the final price.
As a consumer, the final VAT lies with you and you cannot pass it down the line. The item will be treated like it had been bought from the United Kingdom without any VAT applied.
Box 7 – Total value of acquisitions
Procurement of Goods from a Business in the EU (Registered for VAT)
You need to give your VAT registration to the seller who also needs to have a VAT number in their country for the purchase to be deemed a business transaction.
Buying of EU goods typically gets VAT charged just as if you made the purchase from the UK from a British supplier. As such, the 20% charged in sterling will apply. You can either use the published rate or find the exchange rate published by the HMRC to calculate how much is owed.
It might seem strange that the seller gets to charge 0% while you get to claim a VAT rate of 20%. But what you need to know is that the VAT rate of 20% is included in BOX 2 when you are submitting returns on EC acquisitions. Box 2 makes up the input VAT total. Therefore the VAT amount on the sales side cancels out the VAT on the purchases side, which results in a net effect of zero VAT. Overall, you should get a fair deal as the overall transaction will have a zero VAT impact just like that of the seller.
Box 2 – VAT owing on EC purchases during this period
Box 4 – VAT reclaimed on acquisitions during this period
Box 7 – Total value of acquisitions
Box 9 – Aggregate value of EC acquisitions plus VAT
Buying of Services from a Business in the EU (Registered for VAT)
This is the reverse of the sale of EU services as discussed previously. The place of supply for services from the EU is the customer location. Regardless of the country from which the service is bought from, UK VAT applies and you are responsible for filing VAT and not the seller.
The reverse charge is what is used to deal with such purchases. It does sound complex given that transactions are treated as both purchases and sales on the VAT return. It does look as if you are buying the service from yourself. The item is included in the VAT on purchases total and the purchases total as well as the VAT on sales total and the sales total. This will result in zero VAT except for a situation when not all purchases may be included.
The seller should have furnished an invoice excluding any VAT. Include the total amount paid in addition to the 20% VAT. The VAT amount includes the purchases (input) total and the sales (output) total, which will result in zero effect on VAT owed.
Box 1 – VAT owing on sales in this period
Box 4 – VAT reclaimed on acquisitions in this period
Box 6 – Aggregate value of sales without VAT
Box 7 – Total value of acquisitions
Excluded in boxes 2 or 9
This article is targeted at small companies with few transactions within the EU. If you run a more complicated business or are planning on large volumes or regular trade with the EU, getting specialized advice is critical.
Sale to EU (not registered for VAT) – treat as UK sale. Exclude on EC Sales list. Add 20% VAT.
Sale of merchandise to EU (registered for VAT) – zero rate VAT. Include on EC Sales list. EC sales section on the VAT return.
Sale of Services to EU (registered for VAT) – Zero rate VAT. Include on EC Sales list. Not on the EC sales section.
Buying of Goods from EU (registered for VAT) – Include on EC Acquisitions in the returns. Add 20% VAT.
Buying of Services from EU (registered for VAT) – Exclude from EC Acquisitions. Include in purchases.
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