Businesses trading within the European Union will probably be aware of cross border VAT (value added tax). This form of sales tax affects many businesses trading within the various countries of the European Union, as well as global businesses trading specific items and services with customers based in the EU.

New rules ratified in December 2017 are due to come into force in 2021, and represent a significant shake-up of cross border VAT law. Other aspects of international trading meanwhile have already changed, largely to the benefit of European businesses. Read on for more information about the new cross border VAT laws, and your liabilities as a global business.

How cross-border VAT used to operate

Under previous EU rules, businesses with a presence in an EU country could trade freely with other EU businesses. As long as you both had a VAT number, the other business would bear responsibility for paying VAT on the transaction at their local rate. They could then claim this VAT back in their next return, with the period depending on their jurisdiction.

Selling goods and services to customers was another matter. If your business exceeded one of two thresholds – either €35,000 or €100,000 in sales, depending on the country – you would be liable to register for VAT in that country. A large business would end up having to register and file VAT returns in dozens of countries and multiple languages.

This obviously presented a large administrative burden, with a particular impact on medium sized and predominantly online businesses. EU calculations show that the average VAT payment per country is €8000 a year – a hefty figure when you apply it to multiple countries. This is not to mention the administrative cost of bookkeeping and translation for each locale.

The role of digital services and MOSS VAT

The rules were slightly different for ‘digital’ businesses who do not trade in physical goods. Previously, digital companies could take advantage of local tax laws to undercut businesses based in other countries. This gave companies in low tax jurisdictions an unfair advantage, and was seen to have massively favoured large companies, who could easily relocate to low tax jurisdictions.

As of 2015, any business selling digital goods and services – including music, films, TV shows, games and gambling, among many others – is liable for VAT at the rate local to the customer, rather than the business. This applies to all global businesses selling to EU customers, regardless of their location. To simplify this process, the EU created a system called MOSS VAT.

MOSS VAT is a ‘one stop shop’ tax service, previously only available for the sale of digital goods and services. By registering with a MOSS VAT service in any one EU member nation, businesses could report and pay multiple VAT obligations through MOSS each quarter. The MOSS would calculate and then distribute the VAT payments to each country on your behalf.

Changes to cross border VAT (2018-21)

As a result of tax avoidance and the work of the EU Competition Commission, cross border VAT had been targeted for reappraisal for several years. A suite of changes was finally passed in December 2017 with the consent of all member nations.

This new package of rules and laws is intended to improve EU business competition, reduce costs and simplify the reporting and payment of cross border VAT. The headline change is the extension of MOSS from digital services to all online sales involving European customers. Countries have been given until 2021 to upgrade their MOSS solutions for this new law.

Cross-border trade thresholds have also been adjusted. Starting in January 2019, all businesses will now pay VAT at the local rate for up to €10,000 of trade per country. Companies with less than €100,000 in total cross-border sales will also only have to provide one piece of evidence for their customers’ locations, rather than the current two pieces.

Cross border VAT rules for non-EU sellers

The MOSS VAT service for digital services and good remains in place, but new laws will clamp down on VAT avoidance. Online marketplaces are now legally required to guarantee that their sellers have valid VAT numbers, so that they cannot undercut European sellers with VAT obligations.

The current VAT exemption on consignments of non-EU goods under €22 has also been revoked, in order to prevent the abuse of local distribution centres. However, trusted MOSS registered sellers will no longer have consignments under €150 stopped by customs, making shipping a faster and cheaper process for many sellers.

In addition, postal services will now assume some of the burden of VAT reporting. Instead of declaring for each shipment, operators can now choose to report VAT periodically. The end result of all of these changes should be a more competitive, quicker and fairer market, and cost savings which will be passed on to the European consumer.

What you need to do

While the cross border thresholds will come into force in 2019, your business will not be obligated to change its reporting and payment methods until 2021. For now, it may be prudent to seek specialist advice in order to adapt your payment and shipment methodology, and prepare yourself for the imposition of the new laws.

For non-EU businesses who find themselves having to report VAT for the first time, there are several options. The UK is a traditional favourite destination for MOSS reporting because of its simple interface and English language. However, Brexit has thrown this status into question, with no word yet on whether the UK will retain the use of MOSS. Ireland is the one remaining EU country that natively speaks English, although Malta and Cyprus offer similar platforms.

For everyone else, the new changes represent an administrative hurdle, but an ultimately positive step forwards. The sweeping reforms should force the largest companies to be more accountable about sales tax, while also making the market a fairer and cheaper place for the startups and SMEs of the world.

If you have any further questions about MOSS VAT, the changes to cross-border VAT, international trade or expanding a business abroad, get in touch – we’ll be happy to help.