VAT rates: Are you charging your customers correctly?

VAT rates: Are you charging your customers correctly?

Only a few days to go before the new ecommerce VAT rules should come into effect in the EU. Starting 1 July 2021, the general rule for ecommerce taxation is changing and all online businesses should make sure they are ready to apply the new VAT regulations on their distance sales of goods. Forget about what you have been doing so far and focus on what the new rules say.

One of the most impactful changes is the general rule for taxation in ecommerce. Until 1 July 2021, distance sales of goods should be taxed where the goods are dispatched from (until a country-specific threshold is breached). As such, an online seller would apply the VAT rates applicable where the goods are shipped from until required to register, charge and collect the local VAT where their buyers are located.

The new general rule for ecommerce taxation 

From 1 July 2021, the new general rule for e-commerce taxation is that VAT should be charged and collected where the consumers are located.

The country-specific distance selling thresholds are being scrapped across the EU and being replaced by a single EU-wide exemption threshold set at EUR 10,000.

This new threshold only applies in a limited number of cases though. For example, if you are established outside of the EU, or if you dispatch goods from several Member States, this will not apply to your business and you will be required to apply the VAT based on your customer’s location from your first sale.

As soon as you breach the new threshold (when it applies to your business) you will be liable for VAT in the EU country where your customers are resident.

Getting ready to charge the correct VAT rates  

Under the new ecommerce VAT rules, sellers will be expected to determine the location and applicable VAT rates of the products based on where the buyer resides.

This means that under the new rules, you will be expected to apply the VAT rate relevant to the nature of the goods you sell and the location of your customers.

Determining the correct VAT rates on each sale can add another layer of complexity when these rules were originally designed to simplify VAT compliance for online businesses. Businesses will need to make sure their ERP system can reflect the different rates for each order they receive from EU-based consumers if they don’t want to lose out on their margin or competitiveness.

If you are unsure about where to start, feel free to contact us and we can support you review your VAT rates.