E-commerce business owners know all too well that international e-commerce and VAT can be a tricky pairing. The rules are many, and with each new country comes a new set of VAT rules. Selling internationally may be the next step to scaling your e-commerce business, but without the correct guidance, you may struggle to report correctly.
Throughout Europe, Value Added Tax or VAT is added to sales if you have registered for VAT. While accounting for VAT within the UK may seem fairly simple, especially with tools such as Xero at your disposal, it is worth noting that for each new country your e-commerce trades with, your VAT will get more complex.
Ahead of the game
Forewarned is forearmed, so we’re here to help you with the pitfalls, and hopefully avoid them. Each European country has its own VAT rules that must be adhered to, including some dramatically varying basic VAT rates.
It’s not just Europe
There are more than 160 countries in the world that use VAT, so if you are set on global sales it’s time to study your international e-commerce and VAT information. VAT rates can be as changeable as 5% for Bahrain and 27% for Hungary so analyse each country’s VAT rate before you expand to check the market will be profitable for you.
Large markets such as Canada, Australia, India, and China all use VAT. In fact, most of the trading world has its own VAT rules.
Across the pond
While most immediate markets you are likely to expand into use VAT, the USA uses Sales Tax. While this is similar to VAT, it is charged at the point of sale only, allowing resellers and wholesalers to avoid paying it altogether. The customer will pay the same with sales tax as if they were charged VAT at a comparable rate, but for your e-commerce business, the results can be very different.
What to consider for international e-commerce
While international e-commerce and VAT may not be as simple as you had expected, some fundamentals will decide whether you need to pay VAT in a country or not. This can be affected by where you are based, where your customers are based, who you are selling to (business or consumer), what you are selling, and, of course, whether you are over the VAT threshold for the country in question.
Each country must be looked at separately and thoroughly. Just as in the UK, you must register for VAT in a country as soon as you pass the VAT threshold, or when you realise you are going to if that is beforehand. This means keeping a close eye on your sales figures in every country you start trading in.
The VAT rate in some countries could price you out of the market if you maintain the same level of profitability so you may wish to avoid trading in certain countries if the profit margin just isn’t there.
Once you know which countries you need to register your e-commerce business in for VAT, you will need to check the filing requirements. Again, these can differ in each country. While in the UK, the Making Tax Digital initiative (MTD) changed VAT submissions to a wholly digital format in 2019, many countries still require additional paperwork to be submitted.
The payment itself needs to be done correctly too. Some countries require a direct debit, some allow manual payment, and some insist on being paid in the local currency, which can increase the bill depending on exchange rates.
While international e-commerce and VAT can be a minefield, it is an area you will inevitably have to face if you are looking to scale your business. Even if you have been successfully filing your VAT returns within the UK, we strongly recommend using an accountant who specialises in e-commerce, in the countries in which you are selling for the most accurate advice on how to account for international e-commerce and VAT. We are able to ensure you are complying with all the relevant VAT rules in the UK. It’s a complicated area, that can be time-consuming if you don’t have the experience; if you would like to chat with our team about international VAT please get in touch.
The best time to act is now.