How VAT Works: A Guide to EU Taxes

If you’ve ever considered expanding your Amazon business to sell in Europe, you may have come across those three big, scary letters: VAT.

VAT, or Value-Added Tax, is a source of annoyance and/or terror for many would-be global Amazon sellers. Many sellers simply don’t know how it works, and they soon give up because they feel it wouldn’t be worth the time or effort to understand and implement VAT correctly.

We’re here to put an end to this struggle. Confusion about VAT shouldn’t be a barrier to global selling — there are too many great opportunities overseas to miss just because of some tax policies. Arm yourself with the knowledge needed to face the world as a global seller — read on!

What is VAT?

Let’s start with the basics. As I said above, VAT stands for Value-Added Tax. In its simplest definition, VAT is a more robust form of sales tax.

You’re likely familiar with sales tax if you’ve sold anything in America. Sales tax, as many sellers know, creates its own set of problems; at a fundamental level, though, it’s a percentage-based tax on sold goods that’s collected all at once from the end consumer and paid to the government. Notably, every transaction that doesn’t go to an end consumer is sales tax exempt — the only person who pays sales tax is the consumer.

On the other hand, VAT is collected at every stage of the supply chain, or every time “value is added” — hence the name. It’s collected piece by piece over each transaction until it’s ultimately paid in full by the end consumer. After that, each participant in the supply chain gets a VAT refund based on the difference between VAT paid and VAT collected.

In a lot of ways, VAT and sales tax are very similar. For the same tax percentage, the amount of money that the government receives and the amount of tax the end consumer pays is the exact same. For example, a $50 item (not including tax) with either a 20% sales tax or 20% VAT will cost the consumer $60 in both cases, and the government will receive $10 in taxes either way.

So what’s the real difference?

With sales tax, every member of the supply chain is exempt from collecting or paying taxes except for the retailer, who collects the full tax from the customer and later pays it to the government.

With VAT, every member of the supply chain pays a little VAT to the previous member, and collects a little VAT from the next. At the end, they’re refunded the difference.

This might still be confusing, so let’s look at an example.

Example – The Greatest Album Ever Made

Our subject for this example is going to be the greatest music album ever to grace the Earth — the completely imaginary LP I just made up called Too Many Squirrels by Anthony White and the Inconvenient Doorstops.

The Greatest Album Ever Made
(I don't know why I made this.)

First, let’s look at the supply chain in an imaginary US state with a sales tax of 20%.

  1. The label company produces Too Many Squirrels and sells it to a distributor for $10. This transaction is sales tax exempt.
  2. The distributor sells the CD to an Amazon seller for $20. Again, this is sales tax exempt.
  3. Finally, the Amazon seller sells the CD for $30 + 20% sales tax, or $36. The seller pays this $6 in sales tax to the IRS.

Now, let’s say Too Many Squirrels was actually Trop d’Écureuils by Antoine Blanc et les Butoirs Incommodes. Antoine is selling his CD is France, which has a 20% VAT rate. Let’s see how the supply chain breaks down here.

  1. The label company produces Trop d’Écureuils and sells it to a distributor for €10 plus 20% VAT (€2), for a total price of €12.
  2. The distributor sells the CD to an Amazon seller for €20 plus 20% VAT (€4), for a total price of €24.
  3. Finally, the Amazon seller sells the CD for €30 plus 20% VAT, for a total price of €36.

As you can see, each step of the supply chain was responsible for paying and collected some amount of VAT. Because of this, the collection is more complicated — but remember, the government should still receive €6 at the end of this. Let’s take a look at who owes the French Ministry of Finance what.

  • The label company is the simplest example — they collected €2 of VAT from the distributor, so they pay the government those €2.
  • Next, the distributor collected €4 from the Amazon seller — but they also already paid €2 of VAT to the label company. Therefore, they pay the difference: €2.
  • FInally, the Amazon seller collected €6 from the customer — but again, they already paid €4 to the distributor. Again, they pay the difference: €2.

As you can see, each member of the supply chain must collect and pay VAT, but they are only responsible for the difference between what they collected (output tax) and what they paid (input tax). Because of this, every business has a net gain/loss of 0 (in taxes), and the total sum of the VAT, €6, was paid by the customer and ultimately collected by the government.

Hopefully, this helped you understand how VAT works at a basic level. Now, let’s go into some of the details of VAT that you’ll need to know before you start your adventures in global selling.

Note: In this article, we’ll be assuming that you are a United States merchant selling/planning to sell in Europe using FBA, and that your inventory is being shipped to a fulfillment center in the UK. VAT rates, thresholds, registration, and other requirements vary depending on the country your goods are stored in.

The Basics of VAT Registration

If you’re a US seller shipping inventory to the UK, knowing when to register to VAT is very simple: you must register for VAT as soon as your goods arrive in the UK. Storing inventory in a European country creates a taxable supply which triggers an immediate need to register for VAT — since you are not a resident of the country, there is no sales threshold before having to register.

To register for VAT, complete this form through the HMRC site.

Once your business is VAT-registered in the UK, you are required to collect UK VAT on every sale you make to EU customers, regardless of their location. This is true until you exceed certain sales thresholds — more on this under the Distance Selling Rules section.

The VAT rate for the UK is currently 20%, but you should always keep an eye on this rate just in case it changes. To see all current EU VAT rates, click here.

You are required to submit a VAT Return to HM Revenue & Customs (HMRC) every 3 months. This return should include your total sales and purchases and the amount of VAT you owe. However, if you made any wholesale purchases from other VAT-registered companies, you had to pay VAT on those purchases — and you’re allowed to reclaim it. On the return, you should also include the amount of VAT you can reclaim (all input tax you paid on purchases) and what your VAT refund from HMRC is.

To summarize, the VAT Return should include:

  • Total sales and purchases
  • Amount of VAT owed
  • Amount of VAT you can reclaim
  • Your VAT refund from HMRC

Note that once you’re VAT registered, you are required to submit a VAT Return every 3 months no matter what — even if you have no VAT to pay or reclaim.

Importing Your Goods – EORI and Import Tax

There are a few other things you should know about when you actually begin to import your goods into the UK. Let’s go over them.

EORI Number

The Economic Operator Registration and Identification (EORI) Scheme is, to put it simply, a method for tracking imports and exports in and out of the EU.

Since selling in Europe from a US-based business counts as the import of goods into the EU, you will need an EORI number in order to ship your inventory to the UK.

Your EORI number is your unique identifier as an importer, and it’s used to identify you and all your shipments across all EU countries. Although EORI doesn’t technically have anything to do with taxes, both an EORI number and a VAT number are required if you want to start selling in Europe — EORI for customs, VAT for paying taxes.

An EORI number can, however, be tied to your VAT number — if you’re already VAT-registered and you register for an EORI number in the UK, your number will simply be the letters “GB” followed by your 9-digit VAT number and suffixed with “000”.

If you’re already VAT-registered, you can apply for an EORI number here.
If you’re not VAT-registered, you can still apply for an EORI number here (but we don't recommend it — see below).

If you’re not VAT-registered already, applying for an EORI number requires carrier and tracking information, which you can’t get unless you’ve already sent a shipment to the UK. Since you need to be VAT-registered anyway to sell in Europe through FBA, we recommend you register for VAT first, then for your EORI number second.

Import Tax

Even if you weren’t planning on making wholesale purchases from VAT-registered businesses, you’ll still get a taste of VAT input tax as soon as you ship your goods to the UK. This is because you’re required to pay import tax on your goods as soon as they arrive in the UK, at the standard 20% VAT rate.

However, you shouldn’t worry about this tax destroying your margins — because this is an input tax, you’re eligible for a refund on this payment. As long as you have the correct documentation — a C79 Form (a.k.a. Import VAT Certificate) — you can include the amount of input tax paid on your quarterly VAT Return and get a full refund.

Extra Considerations

There are innumerable other factors and/or obstacles that might trip you up as you settle in with global selling. Although this list is by no means exhaustive, here are a few things to be aware of.

Distance Selling Rules

One of the biggest benefits of using Amazon FBA to sell in Europe is access to Amazon’s European Fulfillment Network, or EFN. Because of this network, you can have all your inventory located in one warehouse in the UK and sell to the four other EU marketplaces — Germany, France, Spain, and Italy — as long as you have Amazon listings for each of those geographies.

By default, since your inventory is being stored in the UK, you’re required to charge UK VAT on all sales made, regardless of the customer’s location. However, if your sales in any non-UK country really begin to take off, you’ll need to take additional actions — as dictated by the Distance Selling Rules.

These rules state that you can sell to customers in other EU member states for domestic VAT rates only until you cross certain sales thresholds. These thresholds vary depending on the country:

  • In most EU member states, the threshold is €35,000 (or equivalent), as this is the default rate set by the EU.
  • In France, Germany, Luxembourg, and the Netherlands, the threshold is €100,000 (or equivalent).
  • In the UK, the threshold is £70,000 (or equivalent), but as a foreign seller with inventory stored in the UK, there are no thresholds — as stated above, you’re required to register for VAT as soon as your inventory arrives in the country.
    If you’re using a fulfillment center in another EU country, of course, this threshold is something to consider.

As soon as you cross a threshold in any of these countries, you must register for VAT in that country, begin collecting VAT at the local rate for sales to that country, and pay VAT to the local revenue office.

VAT Invoices

Because VAT is collected in stages and businesses who paid input tax are eligible for a refund, any sales you make to a VAT-registered customer must be tracked to be refunded later.

This means that if you make any sales to a VAT-registered customer, be it a business or an individual planning to resell your product, that customer may request a VAT invoice.

Providing these invoices is not complicated, but it can be time-consuming, especially as you receive more and more requests. Check out our post on automating your VAT invoices if the time cost of sending invoices manually is creating a problem for you. If you want to know the best way to send VAT invoices to your customers, check out this post.

Conclusion

Obviously, international tax policy is a hugely complex subject with tons of obscure details and quirks that can trip you up. Even the subject of VAT, by itself, deserves a much more in-depth explanation than any blog post could provide.

However, sellers shouldn’t refuse to expand internationally just because they don’t understand the tax system — it’s an opportunity too great to let a bit of bureaucracy get in the way. Therefore, my goal was to give a basic overview of how VAT works and what you’ll need to know to get started in the global marketplace.

Ultimately, if you want to know every minute detail of international taxes, you’ll need to hire a tax advisor. However, that shouldn’t be necessary for your initial expedition into overseas selling.

If you need additional help — and you likely will at some point, seeing as this topic is so huge — there are plenty of outside resources available. The best place to start for UK VAT questions is HMRC’s website.

If you have any other questions or comments for us, however, please let us know below!

Tags: Amazon, VAT, MwSt, TVA, IVA, Mehrwertsteuer, Taxe sur la Valeur Ajoutée, Impuesto al Valor Agregado, Imposta sul Valore Aggiunto

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