Accordance: 'Mega Monday' - The VAT zero rating for businesses causes confusion

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In the busiest week of the year for the ecommerce industry, Accordance, the VAT consultancy, says that many companies are aware of the zero rating for some items in the UK and are automatically assuming that they are also not subject to VAT in other EU Member States - but this is not the case.

“Each Member State has its own interpretation of the rules set out by the EU Commission and the UK is, in fact, the only Member State that allows products to be zero rated,” says Andy Spencer, Head of Consulting at Accordance. “Some countries exempt products from VAT, but businesses must be aware of all the differences to ensure VAT compliance within their business.”

The UK has a unique derogation (special permission from the EU Commission) to zero rate the VAT treatment of certain products, which dates back to the 1970s, whereas all other EU Member States are obligated to apply reduced rates no lower than 5%.

All Member States denote that some types of products and services are exempt from VAT (this is again under guidance from the EU Commission) but the UK is the only Member State which can apply a VAT rate of 0%. Not many companies are aware of the exclusive position that the UK is in and often assume that if zero rating exists and is available for use in one country, then it must be across all other Member States.

Children’s clothing is one of the most common items that businesses mistake the VAT rate on. In the UK, children’s clothing is one of the many types of goods that are zero rated; however in the majority of countries across the EU, children’s clothes are standard rated.

“It is crucial that you understand whether you need to apply the standard, reduced or zero rate of VAT to your sales in each country where your customers are based, as well as the VAT rules of the county your business is based in,” says Andy. “Each Member State has its own set of conditions that need to be met to get the VAT rate right.”

He continues: “Charging the wrong VAT rate to your customers creates problems, not only for your business but also for that of your customers and could result in disputed and unpaid invoices, which lead to cash flow problems, fines and penalties from the tax authorities and the inability to recover VAT.”

Other areas in which UK businesses often mistakenly apply zero rating to goods when dealing with other EU Member States are:

  •     Books
  •     Food
  •     Land services
  •     Sales of charity donations

Books are actually an area slightly more problematic than children’s , because of the greater variation of VAT rates across the EU. In the UK, print books are generally zero rated while electronic books are standard rated. Across the EU there are differences between countries that use the reduced rate on books and those that standard rate them. The EU has had to step in in the case of electronic books, because some Member States, such as France and Luxembourg, have tried to make the VAT rate in line with their paper counterparts, against EU regulations.

EU legislation permits Member States to apply reduced rates to books but the downloading of digital books is regarded as an electronic service. The Commission has launched a consultation on converging the VAT rates for books and digital books. The intention is to put forward proposals by the end of 2013 and in the meantime the reduced rate does not apply to digital books.

France and Luxembourg, nevertheless, decided to apply reduced rates to digital books as of 1 January 2012, thereby infringing EU law (The rates are 7% for France and 3% for Luxembourg).

“This situation is creating serious distortions of competition that are damaging to economic operators in the other 25 Member States, since digital books can easily be purchased in a State other than the one where the consumer resides and, under the current rules, the VAT rate applies is that of the provider’s, not the customer’s, Member State,” Andy explains. “The Commission considers that these reductions might not be in line with European law and has decided to send letters of formal notice to both Member States.”

Notes to editors:

  •     Accordance is a unified VAT Compliance and Consulting practice, with a focus on cross-border transactions.
  •     The company provides practical, commercially beneficial VAT assistance to blue-chip companies across the EU and beyond.
  •     Accordance assists a full spectrum of international businesses better manage cross-border VAT costs.
  •     The company reaches across Europe, but manages all work from an accessible and responsive hub in the UK.
  •     Accordance often works with accountants, acting as an ‘outsourced VAT department’ for their clients.
  •     The Accordance team includes senior ex-Big 4 VAT personnel, expert European VAT Compliance management, VAT legal specialists, Customs and Duty Experts and VAT savings experts.

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Angela Ward
The Marketing Eye
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