EU VAT Compliance & Savings Guide
There are currently 28 Member States within the EU; all are required to comply with the EC Directive, which establishes a basic framework for VAT across the EU, but local tax authorities have flexibility on several areas, including:
- Standard and reduced VAT rates
- VAT Registration liabilities
- Liability to account for VAT and the general reverse charge
- Invoicing guidelines
- VAT reclaim allowances
- Goods and services exempt from VAT
- Reporting requirements
It is necessary for international companies to meet their VAT obligations, and ensure they are not being exposed to financial penalties and liabilities. With 28 EU Member States, each with their own VAT legislation to consider, it can be a time consuming and confusing task for international business.
Most businesses are looking to identify savings opportunities and improve cash-flow but it is also important that businesses are VAT compliant to avoid risks of fines and penalties.
VAT Compliance Obligations
It is essential for firms trading in Europe to ensure that they account for the correct amount of VAT in the correct Member State at the correct time. Failure to do so can result in financial penalties being incurred and exposure to additional VAT costs which will directly affect profitability. There can also be problems with customer relationships if VAT is not accounted for correctly as companies will have to spend valuable time resolving issues which, with effective management, need not have arisen.
VAT Savings Opportunities
International businesses need to consider VAT regulations in multiple countries to avoid VAT becoming an unnecessary cost. For many businesses, savings can me made once they become aware of their VAT obligations, avoiding the payment of VAT that has been incorrectly charged and cannot be recovered, as well as taking the opportunity to recover VAT that has been charged to the business.
Get your business VAT compliant and identify savings opportunities:
1. Review your VAT liability
When supplying goods or services it is important that you understand if it is you or your customer who must account for VAT.
Similarly, when buying goods or services it is important to understand where VAT is due and who should account for it. The payment of wrongly-charged European VAT is a big issue for many firms. Serious cash-flow issues are created unnecessarily, and you have no right to recover this VAT. Instead you must get a credit note from your supplier. Additionally, you may have an obligation to account for VAT using the reverse charge.
2. Make proper use of available exemptions and the Reverse Charge
When supplying intangible services to customers in other EU Member States the reverse charge is mandatory and additional reporting requirements apply to the supplier. To comply with these additional reporting requirements you have to have your customer’s VAT number. Failing to deal with the reverse charge correctly can lead to tax authority penalties and a query from your customer.
For goods the exemption is also mandatory so long as the relevant proof is obtained – the supplier must have a relevant VAT number of the customer and proof that the goods were transported. Recent ECJ cases such as “Eurotyres” and “Facet” reinforce the need to get this correct.
3. Review your international VAT Registration profile
Where your business is trading internationally, you may need to register for VAT, allowing the reclaim of local VAT incurred through VAT returns. The use of a general reverse charge can remove the need for a supplier to be registered for VAT as a non-established trader. The rules regarding this are different from one Member State to another and within a Member State can differ for goods or services. Keeping up to date on how these rules are implemented is therefore vital to achieve VAT compliance. Where businesses cease trading in a particular country, de-registrations can be applied for, avoiding the ongoing administrative burden of ongoing VAT reporting costs.
4. Review international business contracts
International business contracts must consider multiple sets of VAT regulations; however, it is often the case that VAT is not taken into account when businesses implement contracts with new customers and suppliers. It is possible that, by reviewing contracts, VAT registrations can be avoided and VAT cash-flow improved.
5. Get VAT Reporting right
VAT Reporting guidelines vary across Europe, and it is vital that businesses understand their obligations to avoid risks of fines and penalties. In addition to VAT returns, many businesses will need to file Intrastat and EC Sales Lists, and it is crucial that compliant reports are submitted by the tax authority deadlines.
6. Reclaim VAT through the EU Refund Directive
International businesses often incur foreign VAT, but many avoid VAT claims because they believe it will be too complicated or time consuming. If your business has previously overlooked international VAT recovery, it may be easier than expected to claim back the VAT – especially because of the introduction of the electronic portal in 2010.
7. Ensure Internal ERP Systems are compliant
To ensure your international business is VAT compliant, it is essential that VAT coding on ERP systems remains accurate. Altering business flows and rapidly changing VAT regulations make this challenging, so it is vital to review systems to ensure you are up to date.