To stay tax compliant is always one of the most important things for online businesses. To ensure compliance, getting a VAT number is usually one of the first steps and there are several reasons that require having this number, one reason is reaching the annual distance VAT threshold, an annual turnover over limit for distance selling in e-commerce.
Last Updated on 15 July 2021
When to register for VAT?
There are several reasons that lead to the need of a VAT registration. If you are storing in and selling from a European country or setting up a business in a country, you need to register for VAT and take care of filings and returns.
However, there is a third reason that, up until July 2021, legally obliged you to apply for a VAT Identification Number in a foreign country: reaching the annual threshold limit for distance selling.
If you are selling abroad via distance selling in Europe, the VAT number of the country of residence of your business was used as long as you didn’t reach the annual threshold limit of a country of import.
This regulation was changed in July 2021. Country-specific VAT thresholds were abolished and instead an EU-wide threshold for distance selling of € 10,000 has been introduced. Below this threshold, deliveries and services are taxed still at the local VAT rate and VAT is paid in the home country. As soon as distance sales exceed the EU-wide threshold, VAT is due in each country to which goods are sold to. In this case, you also need to register for VAT in these countries.
Can you claim VAT back if you are not VAT registered?
If you are not registered for VAT, you will not be able to recover input tax. You must be registered for VAT in order to submit VAT returns. In these, you provide information about your income and expenses, and the tax amounts included in each are offset to see if you have to pay tax to the state or receive tax back. If you are not registered for VAT, you do not have to submit VAT returns and therefore do not have the chance to get a tax refund.
New regulation from July 2021
As mentioned above, a new EU-wide threshold of 10,000€ replaced the previous country-specific VAT thresholds. All revenues through distance selling below this new limit are still subject to VAT in the country of origin or the home country of the business. All sales above, are subject to tax in they countries the goods and services are distance sold to.
It’s also important to remember, that the new VAT threshold of € 10,000 applies across the EU. As soon as this threshold is reached across the board, for example through sales to Poland, France and Spain, VAT registration is due in all of these countries at the same time. It is no longer necessary to reach individual thresholds.
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However, since this would involve a lot of work, there is an alternative: the One-Stop-Shop procedure (OSS for short). With this procedure, you do not have to register individually in each country, but have a central contact in your country of origin. However, the 10,000€ threshold is not applicable. Each distance sale is taxed at country-specific VAT rates. All VAT is then paid in the country of registration, the home country. This tax office then distributes the VAT to the countries the sales were conducted in. This procedure is voluntary, but is generally recommended due to the significantly reduced effort.
Which VAT thresholds are there in Europe?
When selling goods from EU country A to EU country B, your taxation and VAT duties generally remain in the country your are selling from. However, in the past, when the annual turnover to country B exceeded a certain limit, you needed to register for VAT in country B. These selling limits also differed from country to country.
Since July 2021, the new threshold of 10,000€ is reached in combination or overall. For example, distance sales from Germany to Spain of 5,000€, to Italy of 3,000€, and to France of 2,000€ in sum exceed the EU-wide mark and therefore require the distance seller to register for VAT and ensure VAT compliance in all three countries. The first 10,000€ are still taxed with the german VAT rate and paid to Germany. However, each additional sale needs to be taxed with the country-specific VAT rate and paid to corresponding local authorities.
|Country||previous annual threshold||new EU-wide threshold since July 2021|
|Austria||€ 35,000||EU-wide totalling € 10,000|
|Belgium||€ 35,000||EU-wide totalling € 10,000|
|Bulgaria||BGN 70,000||EU-wide totalling BGN ~19,570|
|Croatia||HRK 270,000||EU-wide totalling HRK ~74,900|
|Cyprus||€ 35,000||EU-wide totalling € 10,000|
|Czech Republic||CZK 1,140,000||EU-wide totalling CZK ~276,300|
|Denmark||DKK 280,000||EU-wide totalling DKK ~74,400|
|Estonia||€ 35,000||EU-wide totalling € 10,000|
|Finland||€ 35,000||EU-wide totalling € 10,000|
|France||€ 35,000||EU-wide totalling € 10,000|
|Germany||€ 100,000||EU-wide totalling € 10,000|
|Greece||€ 35,000||EU-wide totalling € 10,000|
|Hungary||HUF 8,800,000||EU-wide totalling HUF ~3,512,000|
|Ireland||€ 35,000||EU-wide totalling € 10,000|
|Italy||€ 35,000||EU-wide totalling € 10,000|
|Latvia||€ 35,000||EU-wide totalling € 10,000|
|Lithuania||€ 35,000||EU-wide totalling € 10,000|
|Luxembourg||€ 100,000||EU-wide totalling € 10,000|
|Malta||€ 35,000||EU-wide totalling € 10,000|
|Netherlands||€ 100,000||EU-wide totalling € 10,000|
|Poland||PLN 160,000||EU-wide totalling PLN ~45,800|
|Portugal||€ 35,000||EU-wide totalling € 10,000|
|Romania||RON 118,000||EU-wide totalling RON ~49,300|
|Slovakia||€ 35,000||EU-wide totalling € 10,000|
|Slovenia||€ 35,000||EU-wide totalling € 10,000|
|Spain||€ 35,000||EU-wide totalling € 10,000|
|Sweden||SEK 320,000||EU-wide totalling SEK ~102,000|
|United Kingdom||£ 70,000||not applicable anymore|
Example for a VAT threshold
A seller based in France sells to various countries in Europe and the products he has sold to Germany within the first year had a total value of € 50,000. That means that, up until the changes in July 2021, the threshold limit wasn’t reached and no actions were required as the annual threshold limit for distance sales to Germany was € 100 000. As soon as this limit was reached (or preferably shortly before), you needed to register for VAT.
With the EU-wide VAT threshold of € 10,000 a sales volume of € 50,000 is already way above the threshold. The first € 10,000 are still taxed with the french VAT rate and VAT needs to be paid in France. However, the 10,001st and each additional € must be taxed with the german VAT rate and VAT is due in Germany. The registration for VAT and filing of VAT returns in Germany is therefore already necessary in the first year. Since the french seller also sells to other countries, the threshold could also already be reached with sales to Germany below a worth of € 10,000.
The decisive factor for reaching the threshold was the net sales generated in the respective country within the past twelve months. Now, the net sales generated through distance sales within Europe overall are the decisive factor. Until the threshold is reached, you still pay tax on your sales in your own country.
Expecting a VAT-taxable turnover exceeding the threshold limit within a 30-day period also leads to the obligation of a VAT registration!
What is VAT?
The value-added tax is assessed on the value that is added to goods and services bought and sold in the EU. It applies to all commercial activities involving the production and distribution of goods and the provision of services.
There are several reason that makes a business or seller have to register for VAT, like reaching the VAT registration threshold or storing in a country.
Each and every European country has its own VAT rates and for different product categories, there are also different rates that can apply.
Note: The UK is no longer part of the European tax and customs union.
Are all sales liable to VAT?
Briefly speaking: no. But most traders and entrepreneurs sell only VAT-relevant products. For the VAT threshold, all product sales are relevant that have to be considered for VAT – as well as those that have a VAT of 0%. Thus, for reaching the VAT threshold, the following sales have to be considered:
- All goods that you have rented or lent to customers
- All business goods used for personal purposes
- Any goods that you have partially bartered, bartered away or given away
- Any services you received from businesses in other countries that you had to “charge” for because of reverse charge
- Construction work worth more than £100,000 that your business has carried out for itself
There are some sellers that are not registered for VAT because the turnover is too low, however, FBA sellers for example have to be registered anyways as storing in and selling from a country are also reason that make having a VAT Identification Number obligatory.
What is a VAT registration threshold?
The VAT registration threshold is a limit value, which used to be different in all European countries and which crossing required sellers to register for VAT in the country they are selling. Now, an overall european threshold took their place. So distance selling, e.g. via online mail orders, or rather the turnover of the distance sales, is something that still needs to be monitored. To sum it up, it’s a limit whose exceeding leads to tax obligations and duties, and the turnover is what counts.
How do I avoid VAT threshold?
There are certain ways to circumvent the VAT threshold and not reach the limit – and still make more sales. However, this only really makes sense in very few cases. A VAT registration is connected with some one-time effort by the registration and continuous small effort by the VAT advance returns, but it brings you advantages. Not only that you can now claim your input tax on incoming invoices, but also that it gives your business a certain respectability. After all, we are generally more skeptical of small or new companies than larger, established ones – and in commerce, trust is of course an important foundation.
To avoid the VAT threshold, it is possible to split your business into several.
- If you have different product categories in your assortment, you can create separate companies for each product category and distribute the sales that way.
- But: The tax office may consider this as tax evasion – especially if the companies are obviously connected, e.g. by a similar name, same bank account, very similar products, etc. – so be careful.
The turnover is decisive: Is turnover the same as profit?
The thresholds are clearly defined, and the turnover is the number that can reach the limit. But in some cases, there is a way to at least reduce the actual turnover a little bit. The VAT born on stock that was purchased for resale is the amount by which you may reduce the value of the turnover.
This can make sense if the amount of incurred VAT reduces your turnover to a level which is below the annual threshold limit.
VAT deregistration threshold
Once your business is VAT registered, you still have the option to deregister from the VAT registration. There is another threshold for this, the so-called VAT deregistration threshold. If you want to deregister from VAT, your turnover must not have reached this threshold in the last twelve months.
VAT thresholds for different accounting schemes
In the United Kingdom, there are different accounting schemes that allow you to manage your company’s VAT differently. However, there are no mandatory thresholds, only limits up to which you can optionally use them. This means that if your company’s annual turnover exceeds the threshold, you can no longer use your prefered accounting scheme.
Please note, that the EU-wide threshold does not apply to the UK, as the country is no longer part of the european tax and customs union. All VAT issues are taken care of by the british tax office, the HMRC, and distance sellers deal with british VAT as they do with the VAT duties in non-european foreign countries.
Standard VAT Accounting Scheme
The Standard VAT Accounting Scheme is, as the name suggests, the accounting scheme that companies usually use. Here, VAT and input tax are due at the moment of invoicing. Advance VAT returns take place here four times a year. If your sales tax collected was higher than your input tax paid, you pay tax to the tax office, if your input tax was higher, you get money back.
Flat Rate VAT Scheme threshold
With the Flat Rate VAT Scheme you pay a fixed, constant amount (flat rate), which depends on your turnover. This way you can save a lot of time that would otherwise be spent on your advance VAT returns. At the same time, however, you cannot claim input tax on purchases, as these are considered to be settled with flat rate payments. Only companies that expect less than £150,000 net turnover per year can make use of this accounting scheme. Furthermore, they must not have already used this scheme within the last twelve months.
VAT Cash Accounting Scheme threshold
In contrast to the standard VAT accounting scheme, it is not the time of invoicing that is relevant for the due date of the VAT, but the time of payment. The VAT payment or input tax revenue is only due for you when the payment is received or issued. To use the VAT Cash Accounting Scheme, you must be registered for VAT and your annual turnover must not exceed £1.35 million.
Annual Accounting Scheme VAT threshold
The last option is the Annual Accounting Scheme, where companies only have to declare their VAT once a year. However, advance payments for VAT must be made during the year. The Accounting Scheme may only be used if your annual turnover is less than £1.35 million.
Summary: VAT threshold limits in Europe
Keeping an eye on threshold limits when your sales numbers to a specific country are rather high is definitely recommended to make sure to avoid penalties and unnecessary paperwork.
When you act in time, the one-time processes can be ticked off rather quickly, but VAT registrations always mean future duties like regular filings and returns.
The hellotax vat automation software, the digital registration process and our team of local tax accountants ensure a proper handling of the all processes involved and to get back to the VAT threshold limit, you can monitor all current sales, goods movements and how far you are away from reaching the threshold limit in the countries you are selling to – easy and directly in our software.
As of July 2021, a Europe-wide VAT threshold for distance selling of EUR 10,000 applies. If you sell more than 10.000,- EUR net in one year to other European countries, you have to register for VAT in the countries you sell to.
As soon as you exceed the VAT threshold, you must be registered for VAT in the respective country and pay your taxes or VAT there in the future. You should plan ahead and register for VAT early so that you are already registered at the time of crossing the threshold.
The decisive factor for the VAT thresholds is the net sales generated in a given year with sales to the respective foreign country.