Tax implications for exporting to EU member states

If your company sells goods within the UK, offering these to customers in another EU member state may seem like a good way to grow the business.

While this may seem like a strange idea to some – given the political instability between the UK and the EU at present – the reluctance to export to the EU by the many could become a competitive advantage for the few who seize the opportunity.

Regardless of whether you have one customer or many in the EU, it’s important for companies to understand the tax implications of exporting to customers in EU member states and the requirements for setting their company up to allow this.

Tax implications of exporting goods to the EU

EU VAT is a value added tax on goods and services traded within the European Union (EU).

The export of goods outside the EU is Zero Rated. The trader must provide evidence of the export such as copies of invoices and consignment notes.

An “export” describes sales to a country outside the EU.

Goods acquired by a VAT registered company in the UK from another EU member state are liable for VAT in this country. Therefore, output VAT will need to be factored in on the relevant VAT return.

Where goods are sold to a customer in another EU member state, the supply is zero rated for tax purposes if the following conditions are satisfied:

• Supply is made to a registered trader
• The supplier quotes their customer’s VAT number on the invoice
• The supplier holds evidence that the goods were delivered to another member
• You dispatch the goods and get “evidence of removal’ within 3 months

Your “evidence of removal” should include records of customer orders, sales invoices, packing lists and consignment notes showing the goods have been received in another EU country. It must also show:

• your business details
• your customer’s details
• a detailed description of the goods and their value
• the method of transport and route it will take
• the address the goods are being delivered to

If these conditions are not satisfied, the trader must charge VAT in the same way as for a supply to a customer within the same member state as the trader.

Evidence must be kept for six years. HMRC can ask to see the evidence and if they think it is unsatisfactory you may have to pay VAT on the goods or services sold. If you can’t get this evidence in time you must account for it on your VAT return.

When do companies have to register for EU VAT?

The requirements to register for a VAT number should be the same in each country, as part of efforts to harmonise the European VAT system. This will support the drive towards an EU single market for goods and services.

Here are some examples of instances where a foreign trader is required to register for a local VAT number:

• If a foreign company is buying and selling goods in another country.
• A company is importing goods into an EU country, which can include moving goods across national borders within the EU.
• Holding goods in warehouses or on consignment stock in other EU countries for customers.
• Holding a live conference, exhibition or training if there is paid entrance.
• Selling goods to consumers over the internet (distance selling).
• Supply and install of equipment in a limited number of situations.

The requirements above apply equally to companies from within the EU non-EU companies and Non-resident companies.

How do companies acquire an EU VAT Number?

Once the obligation to register for VAT in the UK has been established, the process of registering for an EU VAT number can begin. As a basic requirement for exporting, companies must be VAT (EU companies) or tax (non-EU companies) registered. They will then be required to complete and submit a local VAT registration form, along with supporting documentation. The application form will more often than not be in the local language. EU countries have become increasingly reluctant to provide document translations as this can create misunderstandings.

Typically, a company will be required to provide the following supporting documentation:

• Proof of VAT or tax registration in its country of domiciliation.
• An original copy of the certificate of incorporation of the company.
• A copy of the company’s Articles of Association.
• An extract from the national company registrar as proof of existence,
• Increasingly, proof of the planned trade (e.g. contracts or invoices).
• If the company is appointing a local tax agent or Fiscal Representative, then a Letter of Authority or Power of Attorney.

Each country will have various other documents that should be supplied. For example, Spain requires a statement confirming that the company does not have a permanent establishment in Spain.

Following the submission of the application, it will take 2-8 weeks to receive a VAT number, depending on the country.

Registering your company for VAT

Whether you’re just starting out or are only now looking to sell goods to customers, you will need to register for VAT. There are a number of benefits to be gained from registering your company for VAT, although it’s important to understand the implications of the different VAT schemes for your company.

One of the benefits of setting up a limited company is that you will become eligible to claim tax relief for business-related expenses. This means you can take home more income than you would in a conventional employment arrangement and invest profits back into growing your company, whether you’re looking to do this locally or across borders.

Cobia Accounting provide specialist tax and financial planning, along with company formation and fixed monthly rate accounting services. We help contractors and small businesses manage their finances more effectively so they can grow more profitable while remaining HMRC compliant. To learn more, contact us today.