If you’re a business anywhere in the world and you have customers in the European Union, listen up!
It’s time to get serious about VAT. For those who don’t know, that’s Value-Added Tax, the tax you should be applying to almost every sale you make in the EU. And the tax you should be submitting back to the EU each quarter.
For decades, many businesses selling goods and services into the EU have thought that as long as they pay taxes in their home country, they’re as good as gold. But that’s not the case anymore.
As a supplier of digital products to EU customers, you’re responsible for charging, collecting, reporting, and submitting this Europe-specific tax to individual governments. Yes, this means across all 28 EU member states and their various VAT rates.
But never fear! We’ve made VAT simple for you. We’ve gathered all of the essential information, answered all the questions we imagine are kicking around in your head, and laid out everything about VAT for non-EU businesses in one place.
Let’s get started.
What is VAT?
We can answer the most obvious question first. VAT stands for “Value-Added Tax.” It’s a consumption tax that applies to all goods and services, whether physical or digital. That means every time a customer purchases a good or service in the EU, they pay VAT on the spot.
The seller (your business) collects the VAT from the customer and pays some or all of it to the government. In this way, you can see yourself as a kind of tax middleman. It’s not your money paying for the VAT, you’re just collecting and submitting the customer’s money to the government.
That’s why it’s important to know when to charge VAT to your EU customers. Because if you don’t charge the customer for VAT, then actually it will be your money paying for it. The government will still expect the taxes from you, whether you knew to add VAT or not.
How much VAT should you add? That depends on where your customer is located. Rates vary across the different EU member states, ranging from 17-27%. In our overall VAT guide, you can find an up-to-date list of EU digital tax rates. (And we’ll explain this more in a moment!)
Why are non-EU businesses responsible for EU VAT?
Because European governments want to ensure they receive taxes on all goods and services consumed by their citizens, even goods and services coming from other parts of the world. Physical products are taxed at customs. Digital products obviously don’t cross any borders to pass through customs, so digital products have VAT added.
If foreign businesses weren’t required to charge VAT, imagine the disadvantage that would place on EU-based businesses. Their products would cost more. Their local customers would look outside the country to find something cheaper, and EU businesses would suffer. Then, when the EU businesses suffer and make fewer sales, their governments collect less tax.
So, requiring non-EU businesses to charge VAT evens the playing field for native vendors, and it increases the EU governments’ tax revenues. It’s all economics, baby.
Step 1: How does a non-EU business register for EU VAT?
You can register for VAT in the EU member state of your choice. That gives you 28 countries to choose from! If you need an English-speaking base, the obvious option is Ireland.
Once you’ve chosen where you want to base your EU tax operations, you register for a VAT Mini One-Stop Shop (MOSS) with that local tax authority. You can do this online. Find the “non-Union scheme” option, as this process is designed for non-EU businesses.
Hold up… Mini One-Stop what? Yeah, it’s a funny name, but it saves you serious time and energy! Let us explain:
A MOSS allows you to consolidate all of your EU VAT in one single tax return, even if your customers live in multiple different countries.
Let’s say you choose to register in Ireland. You apply for a VAT MOSS on the Irish Tax and Customs website.You sell to customers in Spain, Germany, Hungary, and Italy. When tax season comes around, you submit one VAT return to your MOSS in Ireland. Your Irish MOSS then calculates how much VAT should be returned to the tax authorities in Spain, Germany, Hungary, and Italy -- and distributes all of that for you. Beautiful, right?
(As for how to actually submit those VAT returns, you’ll learn more about that in Step 5.)
Step 2: What should you verify about your customers in the EU?
You need to verify two things about your EU customers: who they are and where they are. The first determines whether you charge them VAT, the second determines how much.
Determine who they are:
When you make a sale in the EU, request the buyer’s VAT number. Businesses will have one, private individuals will not. Unfortunately, some buyers may try to pretend they’re a business just to avoid the tax charge, so they’ll submit a phony VRN. For that reason, check to make sure each VRN valid. You can use this simple VIES validation tool from the European Commission.
Determine where they are:
In addition to requesting the buyer’s VAT number, you also need to request proof of their location. Their location will determine the rate of VAT you add to the sale, since each EU member state has its own rate. (Find an up-to-date list of EU digital tax rates on our guide.)
Next, to prove to the government that you’re charging enough VAT, you also need to prove where your customer is located. So, when making a sale, kindly request two of the following pieces of evidence:
- Billing address - Location of the customer’s bank - Country which issued the credit card - The IP address location of the buyer’s device - Country of the SIM card (in cases where the purchase was made on a mobile device)
Finally, document this location evidence and keep it on record for 10 years. A decade is a ridiculously long time, but that’s the law. A cloud-based accounting and tax software can make collecting this evidence and storing it really easy; the collection of data is automatic, and there’s no risk of losing records.
Step 3: When does a non-EU business have to charge EU VAT?
Not always. It depends on where your customer is and whether your customer has a valid VAT registered number, or VRN.
If they don’t have a VRN, you do charge VAT.
This means your customer is a normal end-consumer. It’s your average B2C transaction. You must charge VAT on the sale, and then follow the rest of the protocol we explained above.
If they dohave a valid VRN, you do not charge VAT.
This means your customer is a fellow business, and therefore you’re exempt from charging VAT. You don’t have to worry about it (yay!). The transaction is covered by the reverse-charge mechanism.
Reverse-charge mechanism? This also makes your life easier as a seller, if you are selling B2B. With the reverse charge mechanism, the buyer is totally responsible for filing VAT on the transaction. Since European companies can be reimbursed for any VAT they spend on products to help run the business, it’s more efficient if they simply keep the money in the first place -- rather than pay it to you and later claim it back from the government.
Step 4: What is a proper VAT invoice? What are the best practices for VAT invoicing?
A VAT invoice includes quite a bit more information than a normal invoice. Each invoice should contain:
Your business’ name and address
Your business’ VAT number
Invoice sequencing number
Buyer’s name and address
Buyer’s VAT number. If you are using the reverse charge mechanism, you must also add the text “EU VAT reverse charged”
VAT (amount and rate) applied to each item
Final amount after VAT is added
The currency used
Even though that’s a lot of specific information, you can still organize everything so that it’s easy to read. Here’s an example of how to structure a VAT invoice:
Keep each invoice on record for five years. Why? Because the EU tax authorities want these on-hand should any official institution inquire about VAT. If you ever would receive a request, you’d have to make these records electronically available within 30 days. So best practice is to keep digital files in a cloud-based storage system, or simply within your accounting/tax software if you use one.
Step 5: What’s the deal with submitting EU VAT returns?
You submit one EU VAT return to your MOSS at the end of each quarter. Every three months, four times a year, you get the idea. From the last day of each quarter, you have 20 days to file and pay. So the deadlines are as follows:
- 20 April, for first quarter ending 31 March - 20 July, for second quarter ending 30 June - 20 October, for third quarter ending 30 September - 20 January, for fourth quarter ending 31 December
You submit your return online. You’ll need your records of VAT invoices to complete the filing.
Something to keep in mind: if you made any sales in a different currency (i.e. - in the Danish Krone, but your MOSS uses the Euro), you will need to convert those amounts to the official currency of your MOSS. Use the European Central Bank’s official exchange rates.
Based on the information you enter, the MOSS website will automatically calculate how much VAT you owe. Then you’ll receive instructions on how to complete the payment.
Are non-EU businesses eligible for EU VAT refunds?
Sure, you are. If you overpay VAT through the VAT MOSS scheme, then you’ll get the money back. But it won’t be from your MOSS; the refund will come directly from the various tax authorities where your customers are located. So, you’d get a partial refund from Spain, from Germany, from Hungary, or from Italy. This also means the refund will come in their local currencies.
The great thing is that refunds are directly deposited to your bank account, whichever bank information you provided in your MOSS registration. So just make sure those details are up-to-date!
Can a non-EU business just ignore EU VAT?
Legally, no. If you choose to not comply with EU VAT law, you risk getting caught by tax authorities. With that comes paying for years of back-taxes plus penalties for not following the rules. A blow like that could potentially ruin a small business. Moreover, if it turns out you’ve intentionally broken the law, you could find yourself in court. No one wants to be convicted of fraud, right?
Last but not least, you could look at it as a matter of ethics: if you enjoy the privilege of selling to customers in their country, shouldn’t you also pay the respect of following their laws? It’s just the right thing to do.
As they say, peace of mind is priceless.
This sounds complicated. What can help non-EU businesses handle VAT?
Okay, so maybe this all wasn’t as simple as we hoped. The best way to clarify and simplify this VAT craziness is to use a cloud-based accounting tool that automates the entire process -- from charging the correct VAT to collecting payment to issuing the proper invoice. All of your records are kept safely online for you, even if your computer crashes.
Quaderno handles all of this tax compliance for you, so that you can spend your time focusing on dominating the European market -- on bettering your product, getting to know your customers, taking care of your employees, or whatever else matters more than fretting over tax technicalities.
In fact, Quaderno can do all of the following:
Calculate the right amount of tax to charge each customer, right on your checkout page.
Automatically verify the VAT numbers you receive from customers.
Collect and store the customer location evidence that you need to get from every sale.
Create and send invoices in multiple languages and currencies.
Send VAT invoices automatically.
Ensure you never overpay on your VAT returns.
Notify you when any tax policies or tax rates change, so that you’re always in the loop.
And that’s only how Quaderno can help with EU VAT. When it comes to other sales taxes around the world, or your own income tax, or simply everyday billing and accounting -- Quaderno jumps through all the hoops for you and presents your business data in a way that’s easy to understand. Sign up for a free trial and see how Quaderno can cut through all the bureaucracy for you.
* At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or accountant.