In 2016, delivery is king. For many e-commerce companies, where product differentiation is minimal, competitive advantage can come from multiple delivery choices and low delivery fees. However, although a quick win in terms of benefits to the customer, often many companies fail to realise the VAT implications that change to delivery options can result in.
At Accordance, we have noticed a significant trend whereby more and more e-commerce companies making B2C sales are moving away from the traditional ‘Distance Selling’ business model. By holding stock in just one EU Member State and using that location as a fulfilment centre to make deliveries to private individuals located in other EU Member States, this strategy meant that initially, businesses only had to account for VAT in the country where the goods were sent from. A need to register for VAT in other Member States only became necessary when the value of sales breached the relevant distance selling thresholds.
As e-commerce businesses strive to stand out from their competitors, decrease basket abandonment and maximise market share, customer experience can be the deciding factor in purchase. If your business is flourishing in another country, it makes business sense to move away from the distance sales model and hold stock closer to your customer base, so enabling you to offer next day or free delivery. It is no surprise then that large marketplace operators like Amazon (that often house other business’ stock) are starting to offer special discounted rates as an incentive to move away from the distant selling model, especially in emerging territories.
As companies grow and expand globally, they often look to adopt new business practices and procedures, yet often fail to realise that they can no longer adhere to the same VAT rules and regulations. , Whilst the over-riding position for VAT is generally the same in each EU Member State, there are certain local rules and procedures that businesses need to be aware of. These include sometimes needing to use fiscal representatives, accounting for VAT on the correct forms and in the right language and making sure the VAT liability of supplies is correct. If any of these obligations are missed or the rules misinterpreted, it can lead to penalties for the business and potentially damage to the brand.
What does all this mean?
If your business takes the step to hold stock in another EU Member State, it will be required to register and start accounting for VAT in that country on sales fulfilled from there. Consideration will also have to be given to how imports are managed across more than one country, movements of own goods are accounted for and local purchases and supplies reconciled and tracked. All of these new activities have VAT compliance obligations attached to them that combined make managing VAT significantly more complicated compared to when only distance sales are made (i.e. only one VAT number is required at the beginning).
The EU’s tax authorities, suffering from austerity measures imposed by their Governments, are ruthlessly chasing increased tax receipts. For example, we understand that one tax authority recently took a warehouse owner to court to recover unpaid VAT. However, it was not VAT owed by the warehouse itself which was being chased but a company using the warehouse to store its stock!
This type of action highlights the movement towards what some tax experts are calling ‘responsibilisation’, meaning that everyone has an obligation to ensure that the correct amount of VAT (and tax in general) is paid, even if you are not directly involved with the supply. These new approaches from tax authorities mean that the chances of an e-commerce business being able to escape its international VAT obligations through pleading ignorance or neglect are becoming slimmer.
No-one can deny that the advance of the Internet has metaphorically allowed e-commerce companies to present a global shop window. However, with these opportunities comes compliance, not only of your own Member State’s rules and regulations, but those where your customers are located. Ensuring you receive the right advice to put the right procedures in place from the start will not only mean you will avoid fines and penalties, but also avoid damage to your brand reputation and customer trust.
Rob Janering is a Senior VAT Consultant from VAT specialists, Accordance.