It is important to register for VAT at the correct time – particularly if companies are involved in cross-border transactions.
“The penalties for not registering can be harsh – but if a company does nothing or ignores their responsibilities, this can result in even more problems,” says Andy Spencer, Head of Consulting at Accordance. “If there is a delay in registering, it will be necessary to liaise with local tax authorities to resolve retrospective VAT issues and this can sometimes create issues with the tax authorities that can be complicated to deal with.”
Andy Spencer offers 7 steps to quickly resolve the situation.
1. Understand your obligations
There can be a number of reasons why a business has to be registered for VAT in another Member State and it is necessary to understand the VAT rules that apply to the transactions that your business is carrying out. This will ensure that your business registers for VAT at the correct time.
A common reason for a VAT registration in another Member State is distance selling, where a business in one Member State makes sales to private customers across the EU. In this case, VAT registration in the Member State of the customer is required when the Distance Sales threshold for that Member State is reached. Businesses must ensure they are aware of where their customers are, and keep track of sales on a country-by-country basis to establish when a VAT registration becomes necessary.
2. Keep calm!
If you realise that you should have registered for VAT a while ago, don’t panic – but do take prompt action. While it can seem daunting to have to have to deal with tax authorities in other countries, it does not pay to defer dealing with the issue. The exposure to penalties and interest will continue to increase if there are delays in regularising the position and the approach of the tax authorities can change if there are delays in notification. There can also be time limits for recovering VAT in other countries, so acting quickly is the best approach.
3. Make full disclosure to the tax authorities
If you deliberately avoid registering for VAT at the correct time, the tax authorities will view your business in a much harsher light than if you admit to your error as soon as you discover it. Although you may be liable to interest and penalties on the VAT not accounted for in the other Member State, these will generally be at a lower level if a full disclosure is made. In addition, penalties can potentially be negotiated if disclosure is made to the tax authorities on a voluntary basis.
4. Voluntary registration
There may be situations where it would be advantageous to backdate a VAT registration on a voluntary basis. For example, if VAT has been incurred in the past in a Member State and the only way to recover it is to be registered for VAT. It will be necessary to take into account that rules relating to retrospective VAT registrations vary across the EU; while some Member States allow retrospective registration, procedures vary and it’s important to understand how each tax authority operates.
5. Accounting for overseas VAT
If you have to retrospectively register for VAT in another Member State, the main issue is likely to be how to invoice your customer for the overseas VAT that you need to pay to the tax authorities.
If you are a distance seller, you are not going to be able to raise a further invoice to your customer as they have paid the retail price for the goods. It is likely that domestic VAT will have been charged on the sale which should be recoverable from the domestic tax authorities as the VAT was not due. Therefore, the issue will be that the business has to fund the difference between the VAT rate in their own Member State and the VAT rate in the Member State of their customer – where the VAT rate is higher in the other Member State there will be an additional cost which will have to be absorbed by the business.
If it is possible to pass the VAT charge onto the customer, it will be necessary to raise an invoice to the customer for both past sales and sales in the future. When the VAT number has been allocated, this will not be an issue but care needs to be taken for the period before the VAT number is allocated.
6. Get your invoicing correct
Rules on invoicing without a VAT number can vary considerably around the EU. For example, in the UK, you must not show VAT separately on your invoices until you receive your VAT registration number. However, it is possible to invoice for a VAT inclusive amount to ensure that the business has the ability to collect the VAT from the customer – it would be necessary to raise a VAT invoice once the VAT number is issued. This is not the case in all Member States, so it is necessary to take account of local rules.
7. Get help!
Accordance is experienced in resolving issues presented by retrospective VAT adjustments, and has successfully negotiated reduced interest, fines and penalties for clients making retrospective VAT payments, while ensuring that companies are compliant in respect of VAT obligations going forward. Where necessary, Accordance can provide advice on any retrospective issues that have arisen in the course of registering for VAT, and provide support to ensure on-going compliance with changing VAT legislation.