If you’re a small business selling goods or services online and are based outside of the European Union, we need to talk about VAT.

(This guest post was originally published by Quarderno)

As of January 1st 2015, all businesses are required to collect and pay VAT on digital goods sold to EU customers.

What Is VAT?

The Value Added Tax, or VAT, is a tax on consumer spending, which is paid by the consumer at the time of purchase of a product or service. This is implemented on all goods and services sold within the European Union.

The rates vary across the different member states and for digital goods range from 17% to 27%.

The VAT charge is paid by the consumer, but it is up to the seller to collect it, report on it, and file it. This means that it should be built into the final price of any goods or services you sell to customers in the European Union.

Businesses of all sizes and revenue levels are now required to comply with VAT. That means that even if you sell just one or two ebooks to an EU customer, VAT applies to your transactions.

Even if you sell just one or two ebooks to an EU customer, VAT applies to your transactions. Click To Tweet

In short, you may be required to:

  • Charge VAT based on the requirements of the location of the customer.
  • Register your company for EU VAT.
  • Provide detailed sales receipts showing VAT rate used, amount charged, and requirements of the individual country of the consumer.
  • Submit quarterly VAT returns.

The following table explains when VAT should be charged on digital goods:

Can I Just Ignore VAT?

That is not a really good idea because the tax authorities can catch up with you, and you are held accountable for missed VAT as well as penalties.

Currently, every country in the EU enforces tax requirements themselves via audits, which can include receipts sent in by consumers (who send them in because they are entitled to tax reductions on certain goods). This is where your non-compliance could be picked up.

If you are based in a country outside of the EU, of course enforcement of the tax laws would involve some cooperation via the authorities in your home country.

Potentially, you could be held liable for years of back-taxes and penalties should that cooperation with European authorities come about. Additionally, if you’re found to have intentionally broken the rules, you could find yourself answerable to a court.

Difference Between A Business And A Consumer

The two are treated differently under EU tax law. VAT is to be charged in transactions with consumers (private individuals and non-business organisations), however transactions with businesses are exempt with a “reverse charge” (0%) mechanism.

Usually, a business should provide you with their VAT registration number to prove that they are a business, but in some cases other evidence such as a company website or commercial documents are acceptable proof.

What You Need To Collect From Your Customers

There are some information you are required to collect in order to be compliant with your reporting and invoicing.

This information includes:

  • Which country they reside in (you need to collect two pieces of non-contradictory proof of residence).
  • Their VAT number (to determine if they are a business). This tool will help you to confirm the number is valid.
  • The total amount of the sale.

The VAT amount and percentage charged. Remember, different states will have differing invoicing requirements, so you’ll need to ensure compliance with each.

What Is a VAT MOSS?

A MOSS (Mini One Stop Shop) is authorised to administer your VAT returns and distribute VAT collected to applicable member states (those in which your customers reside). This is designed to make the process a little easier for sellers, as otherwise you’d need to file a return in each applicable country.

This means that the VAT MOSS system allows you to pay all the VAT for your sales in the wider EU through one single return in the EU member state of your choice.

To help to understand how the process works, we have written an article to how to submit VAT MOSS returns as a Non-EU Business.

We know that this can sound complicated for small businesses but there’s no getting around it. VAT is by no means a simple system, especially with all the variables involved between different member states.

This is why we have created a solution at Quaderno to automatically handle correct VAT processing. Your customer’s location is automatically taken into account so that correct VAT is applied on your sales receipts without any administrative headaches.

Let us know if you have any questions about VAT or digital taxes in general at support@quaderno.io.

Happy to help.

Carlos Hernández
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Carlos Hernández

Founder at Quaderno
Carlos is a film buff, loves tea and is a hopeless traveller. His main hope has always been to create simple products that make our lives a lives a little bit easier. He also defines the functional design of Quaderno as it organizes his daily development. Any one of these days you will find him having a walk around your town.
Carlos Hernández
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