Voluntary disclosure describes telling a Tax Authority that you should have registered for VAT earlier than you did. Making a voluntary disclosure can help you reduce potential penalties if you’ve been non-compliant.
Because international VAT rules are complicated, it’s not uncommon for ecommerce businesses to not realise they’ve been non-compliant. Voluntary disclosure gives you a chance to address the mistake before it becomes a real problem.
When you make a voluntary disclosure, you’re telling a tax authority that you’ve been non-compliant. Usually, this is telling them that you didn’t register when you should have. However, voluntary disclosures can also be about fixing errors in previous VAT returns or correcting instances of underpaid tax.
Voluntary disclosures are viewed positively by Tax Authorities. They would rather you admit the mistake when you become aware of it, than chase you when they do. Afterall, communication is the key to all relationships - even those with Tax Authorities.
When it comes to late registrations, the voluntary disclosure process is called “backdating”. Essentially, backdating a VAT registration gets you a registration with the start date in the past.
Backdating hinges around the “effective date” of your registration. The effective date is the date you should have started collecting and remitting VAT. In the UK, that’s the first day of the second month after you cross the registration threshold.
For example, you made your first taxable sale to the UK on March 19th. You have to register by the end of April. Your effective date of registration is the 1st of May.
As part of backdating your registration, you’ll need to prepare and file returns from your effective date of registration to the present day. To do this you’ll need your historical sales data and invoices showing input VAT from that time period.
You’ll also need to pay the VAT you owe from the effective date, usually with penalties and interest. This is where voluntary disclosure can make the most difference. It can reduce the penalties you could face. Plus, if the amount of VAT you owe is large, it can give you a chance to arrange payment terms.
The primary reason to make a voluntary disclosure is that it can reduce the penalties you might be facing. Most Tax Authorities in Europe have a scaled approach to penalties. The severity of it will reflect both the extent of your non-compliance, and your behaviour. For example, deliberate tax avoidance will be penalised more harshly than accidentally missing the registration deadline. In some cases, the penalty might even be removed altogether.
Besides potentially reducing penalties, there are other reasons to consider voluntary disclosure:
To put it simply: it’s the law. Your VAT obligations are based on your taxable activity and when they took place. Not knowing that you had to register doesn’t change the fact that you should have.
Tax Authorities are really good at finding out when your effective date of registration should have been. They can access things like import documents and marketplace data, and use them to work out when you should have registered.
If you know you’ve made a mistake and choose not to inform the Tax Authority, the consequences become much harsher. It can be considered intentional tax evasion, which in the UK is a criminal offence punishable by up to 10 years in prison.
Non-compliance will affect you even if you’re not based in the country where you have the VAT obligation. Import privileges can be suspended and marketplaces can close your accounts. Governments often have co-operation agreements with other countries that can enable tax authorities to pursue you across international borders.
One of the benefits of backdating your VAT returns is that you can recover VAT on past expenses. If the period you have to backdate for is quite long, it can also help you reduce the amount of VAT you owe.
A backdated VAT reclaim allows you to recover input VAT you paid on a business expense. You must have made the purchase between your effective registration date and the present day. Making a claim depends on evidence, however. If you don’t have a valid invoice for the purchase, you’re going to have a hard time getting the VAT back.
Each country has its own VAT rules, so where you made the purchase will make a difference. If you’re not sure if you can make a claim in a specific country, you can always talk to someone at SimplyVAT for advice.
Here’s a list of common costs you might be able to reclaim:
In our experience import VAT tends to be the most common (and expensive) thing ecommerce sellers want to reclaim.
