Whether you’re an online seller or small-to-medium-sized enterprise (SME), you will be aware of the impact of the recent changes to the tax system across Europe.  

It’s going to become easier next year for European online merchants to manage their tax bills through VAT simplifications. But there will be much more import VAT for online sellers to pay. And marketplaces, which have done so much to create millions of cross-border business leaders, are now on the hook for any missing VAT.

But what do these changes mean for European VAT rates and your FX? 

What’s changed?

The European Union (E.U.) is putting in place reform of the E.U. VAT system that helps European SMEs to enjoy the benefits of the Single Market and to compete in global markets.The changes cover [1]: 

  • Tackling fraud: Big marketplaces will now become liable for much of the missing VAT that has escaped the tax authorities for years.
  • One-stop shop (MOSS):It will be simpler for companies that sell cross-border to deal with their VAT obligations thanks to a ‘One-stop Shop’. Businesses can make declarations and payments using a single online portal in their language without having to rely solely on VAT calculators. These will be per the same rules and administrative templates as in their home country. Member States will then pay the VAT to each other directly (this is already the case for all sales of e-services) [2]. 
  • Reducing red tape:Simplification of invoicing rules, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders. Companies will no longer have to prepare a list of cross-border transactions for their tax authority (the so-called ‘recapitulative statement’). 
  • Distance selling threshold: The current E.U. VAT regime ‘place of supply’ rules requires sellers to charge the VAT of their customer’s country of residence – known as the destination principle. For E.U. cross-border sales this currently means sellers have to VAT register in each country where they are selling goods. Currently, to reduce the burden on small sellers, the E.U. operates a special VAT registration threshold for eCommerce, known as a distance selling threshold. This is generally only available for sales from a seller’s domestic stocks. From 1 January 2021, this registration threshold simplification will be withdrawn. Cross-border sellers will have to charge the VAT rate of the customer’s country of residence from their first sale and remit it to the foreign tax authorities [3]. 

 

2021 will bring significant changes

Our partner Avalara, a provider of technology for tax determination and filing, reports that the European Commission (EC) will be diligent in enforcing these new rules in 2021. Richard Asquith, VP of Global Indirect Tax, Alvara, commented:

“The tax authorities want to ensure that they are receiving their fair share of VAT and continuing to reduce the VAT fraud gap. [4]

Where the marketplace ‘directly facilitates the payment, terms & conditions or transport on a cross-border sale, they will have to charge the VAT of their foreign E.U. customers and report it through their OSS filing or non-resident VAT return.” 

For a more detailed breakdown of the new legislation, read Avalara’s 2021 eCommerce EU VAT reboot guide which WorldFirst has contributed to. 

FX and VAT rates today

There are two main ways to convert your foreign currency transactions into sterling for VAT purposes: 

  1. Using the UK market selling rate at the time of the supply. Speak with WorldFirst for information on rates. 
  2. Leveraging the exchange rates which are published.This is known as the period rate of exchange. This method means that you can use the same rate for an entire period, usually a calendar month, but you should check to see if any adjustments are made to the rate within the period. 

Being aware of the rates and charges associated with your FX when paying VAT helps you manage your costs overall. WorldFirst’s transparent pricing allows you to know your costs upfront giving you access to a fixed spread. 

Get more information

SME business leaders can contact our team of FX specialists for more information on managing their FX or specific questions around VAT and tax. Making payments, transferring funds or keeping track of business spend with WorldFirst couldn’t be easier. 

 

[1] https://ec.europa.eu/commission/presscorner/detail/en/IP_17_3443 
[2] https://www.gov.uk/guidance/register-and-use-the-vat-mini-one-stop-shop 
[3] file:///C:/Users/rickardo.beckles-bur/AppData/Local/Microsoft/Windows/INetCache/Content.Outlook/8XKAD4YI/2021%20guide.pdf  
[4] https://ec.europa.eu/taxation_customs/news/vat-gap_en