New rules around cross-border VAT in the European Union come into effect on 1st July 2021. This modernisation targeting the ecommerce economy is described by the European Union as future proof as well as “simpler and fairer for all”. There is a lot to these changes, but here is an overview of what is happening and how to prepare.
The existing EU VAT system
The new One-Stop Shop, or OSS, is an evolution of the Value-Added Tax (VAT) mini one-stop shop (MOSS) system, which was created by the European Union to track sales in virtual products which were until then outside of the VAT net. A class of service was created – telecommunications, broadcasting and electronic (TBE) services – to account for these new products, and it worked on the principle that VAT was payable wherever the customer of the product was, regardless of where the seller was based.
To make the reporting of these sales more manageable, companies could avail of the mini one-stop shop scheme instead of registering for VAT in each member state where they traded. Reporting in just one place made it much easier for small companies to administer VAT on sales abroad.
VAT for ecommerce businesses
The scope of supplies that may be recorded in the new system is being extended to include the cross-border supply of services on a B2C basis to a member state where the supplier is not established, the intra-community distance sales of goods, and certain domestic supplies of goods.
The different country VAT thresholds are being replaced by a single EU-wide threshold of €10,000. Current thresholds vary between €35,000 and €100,000, so this is a significant simplification.
Currently, only B2C supplies of telecommunications, broadcasting and electronic (TBE) services are covered under MOSS. The new VAT rules will impact everyone in the e-commerce supply chain: online sellers; marketplaces/platforms (regardless of whether they are based inside the EU); postal operators and couriers; customs and tax administrations; and even consumers.
Marketplaces/platforms can also fall within the VAT net
It’s easy enough to understand that as a business selling directly to EU customers, you will have VAT to account for. But the new VAT rules also mean changes for businesses in the category known as “electronic interfaces” (EI). This could mean a website, portal, gateway, marketplace, platform, application program interface (API), or some combination/variation of the above. As an EI, you may have to charge, record, and report on VAT even though you are not the actual seller of the goods/services. Typically, this would be in instances where the goods are dispatched from a non-EU country and the consignment is valued under €150 or where the supplier is not established in the EU.
Importing from countries and territories outside the EU
In addition to the OSS, a new Import One-Stop Shop (IOSS) is being introduced to simplify the declaration and payment of VAT on the distance sale of low-value goods imported from third territories or third countries. The VAT exemption for importing small consignments of a value up to €22 is being removed, which means all goods imported into the EU will now be subject to VAT and reported through IOSS. European governments were losing out on an estimated €7 billion in public revenue annually because of this threshold.
Smoother sailing for postal and courier services
Since trade within the EU won’t be subject to any procedures by postal operators or couriers, their administrative burden will also be lower. Online sellers and online marketplaces/platforms using the IOSS will need to provide them with the information required for the customs clearance in the EU, including the IOSS VAT identification number, but the postal and courier services won’t have any responsibility to validate this information. They will only need to collect VAT on relevant non-IOSS imports, which will be paid to the competent authorities on a monthly basis. This simplification offers postal and courier services a cash flow advantage which the EU views as compensation for the increased administrative work due to packages that do require customs clearance.
Benefits of the new VAT OSS system
The streamlined system means that VAT will be much easier to manage once you have completed your registration(s) and set up your invoicing, bookkeeping, and reporting processes. The European Commission estimates an administrative saving of up to 95%, which will spare you both time and money.
This new system will be simpler and more transparent for consumers too. Because VAT is paid where the consumption of goods takes place, consumers know they are going to pay the same amount regardless of where they make their purchase, allowing companies to compete on a level playing field. In addition, goods will no longer get held up at customs because of unpaid VAT.
Who should register and where?
Under the OSS, you – the taxable entity: company, partnership, sole trader, etc. – will be able to register electronically in a member state. As an Irish business, you can register here in Ireland and use the same individual ‘IE’ identification number with which you are identified for domestic VAT obligations. This registration will enable you to declare cross-border B2C supplies of services and intra-community distance sales of goods in the EU. There is also a scheme available for taxable entities that aren’t based in the EU, whereby they can choose a “member state of identification” and will be given a VAT number that starts with ‘EU’. This is known as the Non-Union scheme.
How do you register for the VAT OSS?
Pre-registration has been open since the beginning of April 2021, so you can register straight away by finding the VAT OSS link in the “Other Services” panel of your Revenue Online Service (ROS) account dashboard.
OSS covers cross-border sales, so it is not for reporting domestic sales, B2B sales, or purchases. You will continue to file your regular VAT returns as before. If you were previously registered in other EU states and decide to register on OSS, you will then be able to deregister your VAT ID in those countries as only one member state registration is required.
What if the business is already registered for MOSS?
If you are already registered for MOSS for supplies of TBE services, your registration will continue under the OSS. You may need to update your registration data if you are going to make other supplies now covered by the OSS.
However, even if you are registered on MOSS for B2C supplies of TBE services, you will not be automatically registered in the IOSS just because you are also involved in supplies which are within its scope. Should you wish to avail of the IOSS, you will be required to register.
What changes should be made in bookkeeping and accounting?
Firstly, you need to make an informed decision about how you are going to charge and account for VAT. I have given an overview here, but the devil is in the detail so I recommend you get expert advice on this. This extensive guide published by the European Commission is a good place to start. You can then decide which schemes you need to register for and update your working practices accordingly.
It’s important to build correct VAT recording and reporting into your bookkeeping processes. This means creating new country-specific VAT codes in Xero (or other accounting package) to account for the VAT in each and every EU country you sell to. You need to do this so that the VAT report shows the correct amounts.
Don’t ignore this change. If you don’t register for OSS and start reporting on EU VAT, you could be faced with a situation down the road where Revenue is asking for, say, 20% of your revenues to date because you should have been applying VAT. If Revenue deems what you sold as having VAT in the price, you will owe that money and they will expect you to pay.
My advice is to make sure you are doing things correctly from day one. Even if you get a small element wrong, the fact that you made every attempt to comply with the regulations will go a long way. As we’ve discussed in a previous blog, getting on Revenue’s radar for one thing could mean a simple aspect query turns into a full-blown audit, with all the consequences that brings.