Business

Avoid penalties for late registration of internet sales

Doing business in other countries will have VAT implications
Doing business in other countries will have VAT implications Doing business in other countries will have VAT implications

QUESTION: Over the last few years, my business has changed and I now sell many of my products to customers within the EU. Most of these customers are not businesses and I had a VAT inspection recently and I am now having to register for VAT in other countries and I may be liable to interest and penalties. Why is this the case?

ANSWER: Mail order and internet sales of non-digital goods to private individuals, ie business to consumers or B2C in other Member States of the EU are known as distance sales. The basic rule is that these sales are initially subject to UK VAT and treated in the same way as domestic sales.

However, if a business’s sales exceed certain thresholds, it has to register for VAT in that EU member state and account for domestic VAT at the appropriate rate on its sales in that country. The varying VAT rates in the member states will need to be taken into account when considering the pricing policy. The relevant turnover to each member state is measured over a calendar year rather than on a rolling 12 months with a normal UK VAT registration.

Businesses in this position will have to be aware of the various VAT rates applicable in each member state they are registered in, so they can account for the correct amount of VAT on their sales. The EU has laid down two possible registration thresholds (ie either €35,000 or €100,000), and each member state can decide which of the two thresholds it will apply.

With the increase in internet based sales, many more businesses are affected by these rules and it is essential to keep a close eye on the level of sales so that you know if and when you have to register for VAT in another EU member state.

It is quite feasible that a business could have to register for VAT in each member state of the EU. The administrative burden of this can be considerable. In addition, if a business fails to monitor its distance sales and exceeds one of the national thresholds without informing the tax authorities, back tax and penalties may be due.

If a business does not monitor its turnover in each of the member states there is a good chance that it will miss its requirement to register for VAT. Even if the business misses it, their accountant may pick it up, or worse, HMRC may identify it during an inspection. If HMRC spot it, they will inform the other member states tax authorities and then they will contact the business directly requiring them to register for VAT.

So once sales to non-registered customers in, say, Ireland exceeds the Irish distance selling limit of €35,000 in any given calendar year, there is a compulsory requirement to obtain an Irish VAT registration and begin charging Irish VAT on any further sales made to Irish non-business customers. This treatment is mandatory and although it may be tempting for some businesses who breach the thresholds to continue charging UK VAT on all these sales in the hope that the tax authorities in that country do not discover this, this would not be recommended (as well as being against the law).

Having to obtain a late foreign VAT registration and correcting the VAT charged on sales going back would not be recommended.

If you make B2C internet sales to other EU member states monitor your sales to make sure you register on time. If you don’t, you will still have to pay the VAT in the other member state and may have a long fight with HMRC to get back your overpaid UK VAT.

:: Malachy McLernon (m.mclernon@pkffpm.com) is a director at PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.