VAT Compliance in Digital E-Commerce: Navigating the Tax Rules

The e-commerce landscape has evolved significantly over recent years, revolutionizing the retail sector and enabling businesses to reach global markets. However, the development of digital services and online shopping, both B2B and B2C, has created some complex tax implications, in particular related to value added tax (VAT).

VAT – consumption tax – is widely applied depending on where goods and services are consumed. However, with e-commerce, the challenge arises when businesses need to sell cross-border and goods or services are consumed in different tax jurisdictions.

Before the UK left the EU, British companies used UK VAT on distance sales to other Member States. Only if the threshold applicable in a given Member State was exceeded was registration necessary and local VAT due.

However, as of July 1, 2021, this is no longer the case. Instead of individual thresholds, a one-off amount of €10,000 applies to all sales to EU consumers. After exceeding such a significantly reduced threshold, there is an obligation to register and settle VAT in the EU. These new e-commerce rules aim to make the system more compatible with the concept of VAT as a consumption tax.

One Stop Shop (OSS)

The introduction of One Stop Shop (OSS) VAT registration aims to ease this bureaucratic burden for smaller businesses.

Generally, if a business sells goods or services from the UK to several different EU countries, then it only needs to register in one of the jurisdictions and it will generally be wise to register in one that speaks English.

So how does this work in practice?

Traders submit one document or return to one jurisdiction that lists the sales made in all other jurisdictions, and then the EU takes responsibility for remitting that money.

Please note that OSS only applies to goods with a shipment value of EUR 150 or less.

It is really intended for someone who sells small items through an online marketplace such as Amazon or Ebay. Moreover, there are different one-stop shops for goods and services, so companies may require registration for both.

Of course, OSS only applies to countries within the EU, so for example other jurisdictions outside the EU, such as Norway, will still need to be cross-jurisdictionally registered.

B2C vs. B2B

An additional complication is whether transactions are classified as B2C or B2B.

B2B suppliers have always had to follow a different VAT principle, namely that the responsibility for settling VAT generally rests with the recipient, i.e. the customer, while in the case of B2C it remains the responsibility of the supplier.

Online marketplaces

In the case of online trading platforms, special rules apply, according to which the responsibility for settling VAT is transferred to the online trading platform.

For example, businesses selling goods via Amazon to UK consumers would not need to register in the UK as VAT is the responsibility of Amazon. This means for HMRC it can focus its efforts on the online marketplace retailer, rather than trying to work with companies around the world that may have limited visibility.

Digital services

Generally, for B2C providers, the place of supply of services is the supplier’s premises, but for some services the “use and enjoyment” principle applies, which means that the place of supply of the services then shifts to where those physically used services are actually provided and enjoying.

So if you run a UK business providing digital services to consumers outside the UK, you will be responsible for multi-jurisdictional registration obligations.

Pricing challenges

Different jurisdictions apply different VAT rates, which poses a challenge for EU businesses to price their goods and services competitively.

Do they charge different prices for different jurisdictions? Or maybe you provide a price without VAT on your website and then add VAT at the point of sale?

Each of these options has its advantages and disadvantages, but it is important that providers know where these products and services are consumed, especially in the digital services space where VPNs can be used to hide users’ true location.

Knowledge is power

These policies are a potential minefield for businesses, but there are a few simple steps that can chart a safe path forward. So what questions should e-commerce companies answer as part of their compliance planning?

• Are you dealing with goods or services? Different delivery rules apply to each of them.
• What is the nature of this service? Does this fall under Digital Services Regulations?
• Take into account the value of the goods. Is this part of the full service?
• What are the implications of different VAT rates in different jurisdictions for your pricing strategy? Depending on the chosen strategy, all conditions must take them into account, leaving no room for misinterpretation
• What jurisdictions do you trade with? Various rules will apply, which are extremely important to understand and comply with in each relevant jurisdiction.
• If it is a service, does it fall under the “use and enjoyment” category? If so, how do you determine where your customers are?

In an increasingly interconnected global marketplace, addressing these issues will enable businesses to implement processes that enable them to meet compliance obligations in the various jurisdictions in which they operate.