The Chargebee EU VAT Guide for
Subscription Businesses

What is the EU VAT?

The European Union Value Added Tax (EU VAT) is a general tax levied on most goods and services that are traded for consumption within the EU.

“Value-added” in VAT refers to the amount by which the value of a product is increased at each stage of production and distribution.

It is applied when a VAT registered business sells goods or services to another business or to a consumer based in the EU.

Also, VAT is an indirect consumption tax, because it is paid ultimately by the consumer and turns out to be neutral for VAT registered businesses.

When businesses pay the revenue authorities, they deduct VAT that they've paid on purchases used in the production of goods from the VAT that they've charged on their sales.

VAT Registration

As per the EU VAT rules, if any individual, partnership or company supplies taxable goods and services, they can become VAT registered.

Here are a few examples of products and services that fall into taxable supplies -

  • Sale of new and used goods.

  • Hiring out or renting goods.
  • Offering a service, for instance, interior decoration, graphic design, lettering e.t.c
  • Admission fees for exhibitions and events.
  • As of now, the VAT registration is done in the seller’s respective EU country and there’s no need to register elsewhere even if sales are made to consumers in other EU member states.

It is mandatory for businesses to register for VAT in the member state they are incorporated. If the business sells to customers in selected member states, then it can register for VAT in those states. If the business sells digital goods to customers across multiple states, then it can choose to opt in for VAT MOSS (Mini One Stop Shop)

Though businesses with revenues less than the VAT turnover threshold for their country will not be required to charge VAT on their sales and it’s not mandatory for them to register.

VAT Threshold

Earlier, there was a set turnover threshold in each EU country. If a business did revenues that were below the threshold, they were not required to register for VAT.

But at present, there is no threshold for registration if a business sells into other EU countries.

For instance, if a UK based business sells a product worth 1 EUR in Spain, they’ll have to register for VAT in that country, even if their net turnover is below UK’s exemption threshold of 81,000 GBP.

If a business sells e-services only in the UK or to non-EU countries, VAT registration will not be required until the revenues reach the threshold.

In a recent update, the UK's revenue authority has amended the MOSS for small businesses in the UK. As per the HMRC brief 46, businesses will be needed to locally register for VAT, in order to use MOSS and still enjoy the benefit of the threshold for sales made within the UK.

VAT MOSS

With 28 countries and a total of 27 different VAT rates, businesses will find it difficult to register for VAT in different member states.

Instead, they can register for EU’s optional program to simplify the VAT process called the Mini One Stop Shop (MOSS) which will enable businesses to register in one country and pay their dues with a single payment.

The revenue authorities of the member state will distribute the VAT to other member nations.

Here’s how the VAT MOSS registrations will work -

  • EU based businesses will have to register in the country where their business is incorporated.
  • EU based businesses that operate in more than one location within the EU will have to choose one EU member state for registration.
  • Non-EU businesses can register with any of the 28 member states.

VAT MOSS Return

Businesses registered for VAT MOSS will be required to make quarterly returns and provide the gross value of sales made in each EU country, with the following schedule -

  • Returns for the first quarter (1st January-31st March) - By 20th April
  • Returns for the second quarter (1st April - 30th June) - By 20th July
  • Returns for the third quarter (1st July - 30th September) - By 20th October
  • Returns for the fourth quarter (1st October - 31st December) - By 20th January
  • If no supplies have been made to consumers in EU countries in a given quarter, a ‘nil-return’ will be required.

VAT Rules for B2C and B2B Sales

There are basic principles to understand the application of VAT in different scenarios.

Scenario 1:

Let’s see how the EU VAT rules would apply to a subscription business established in the UK.

B2B sales
There are three possible scenarios -

  • If a customer is based in the UK, VAT is charged at the UK’s rate.
  • If a customer is based in another EU country, no VAT is due if a valid VAT registration number is provided by the customer.
    • In this case, a reverse charge mechanism is applied and the customer would be required to pay VAT to their government at the VAT rate of their own country.
    • The seller must record the payment with all the details including customer’s VAT registration number and submit it with their EC sales list (a list of supplies made to VAT registered businesses in other EU countries).
  • If a customer is based outside the EU, VAT is not charged.

B2C sales

  • Telecommunication, Broadcasting, and Electronic (TBE) Services*:
    • If a customer is based in an EU member state, VAT is charged at the customer's country rate.
    • If a customer is based outside the EU, VAT is not applied on sales.
  • Others (Non-TBE):
    • If a customer is based in the UK or any other EU member state, VAT is charged at UK’s rate.
    • If a customer is based outside the EU, VAT is not applied on sales.

Scenario 2:

Let’s see how the EU VAT rules would apply to a business established in a non-EU country and the customer is based in the UK.

B2B sales:

  • VAT is not applied on sales.

B2C sales:

  • TBE Services: VAT is charged at the UK's rate (the customer's country).
  • Others: VAT is not applied to sales.

*TBE services include - Downloadable software licenses and software updates, Online training courses, Online magazines and newspaper subscriptions, Ebooks, Software as a service, Advertising space on websites, Downloads and online streaming of music, films & games, Fee-based online membership, Website domain sales and web hosting services.

Following goods and services, where the internet is just used to facilitate the sale, are not a part of TBE and hence are not affected by the new rules -

Sale of physical goods where the ordering and processing are electronic, Physical books, newspapers or journals, Advice offered through email by lawyers and consultants operating in the financial services industry. Online booking services for events, hotel or restaurants, Ads in newspapers, posters or television, Courses, tutorials delivered by a teacher (ex - using a service like Skype), Businesses that sell digital goods and services through internet portals, gateways or, marketplaces must figure out whether they’re making the supply to the consumer or it’s being fulfilled by the platform.

The owners of the platform are responsible for charging VAT if they are the ones who authorize the transactions and delivery of services.

For instance, if an app-developer is selling apps through Apple’s app store, Apple is responsible for collecting VAT. As Apple acts as a licensee for the app-developer and sells apps to consumers with a set commission.

Different EU VAT Rates

Within an EU country, there are different VAT rates, depending on the type of product or service being sold. In all member states -

  • Most supplies of goods and services bear a standard rate of at least 15%
  • Member states may also charge one or two reduced rates, not less than 5%, on selected goods
  • Super reduced rates, less than 5%, are also applied on specified items, including zero rates
  • It’s important to note that a reduced rate of 0% (zero-rated) used by some countries is a taxable rate of VAT even though it’s zero. Thus, revenue generated from zero-rated goods is still included in the taxable revenue.

There are some supplies pertaining to public interests like education, financial and medical services, that are exempt from VAT.

There are supplies that are outside the scope of VAT, examples include - supplies made by someone who isn't a taxable person, supplies not made in the EU and grants or donations where the giver receives no benefit.

Difference between “Zero-rate” and “Exempt” supplies -

It might seem that they’re the same as no amount of VAT gets charged in both cases. But there is an important distinction - if something is sold and zero-rate VAT is applied, businesses can still claim the VAT paid on their purchases. In the case of “exempt” supplies, however, businesses cannot register for VAT and are not entitled to a VAT reclaim on their business expenditure.

For instance,

  1. Spain’s VAT Rates -

    Reduced VAT rates - 10% (Applied on selected supplies, including - Medical, Pharmaceuticals, Transport of passengers)

    Reduced VAT rates - 4% (Applied on selected supplies, including - Basic food items, Newspapers)

  2. UK’s VAT Rates -

    Standard VAT Rate - 20%

    Reduced VAT rates - 5% (Applied on selected supplies, including - Domestic fuel, Some stop smoking products, Children’s car seats, Property renovations)

    Reduced VAT rates - 0% (Applied on selected supplies, including - Basic food items, Children’s clothing, Most public transport)

VAT Invoice & Requirements

All EU VAT registered businesses are required to produce VAT invoices for their sales, in paper or electronic form.

Though each EU member state has different requirements when it comes to information in these invoices, the following are common among them

  • The date of issue of the invoice.
  • An invoice number that’s unique and sequential
  • Seller’s VAT identification number
  • Consumer’s VAT identification number (in case the consumer is liable to pay tax on the supply)
  • VAT rate applied
  • Total amount payable
  • Full name and address of the seller and the consumer
  • Date of supply of the goods or services if it’s different from the invoice date
  • Consumer’s full name and address
  • Description of goods supplied and services rendered

Simplified Invoices

If the invoice value does not exceed EUR 100, a simplified invoice can be issued by taxable entities, it must include the following

  • Date of issue
  • VAT amount owed
  • Nature of goods supplied or services rendered
  • Information on the identity of the seller

EU VAT Returns

Similar to invoices, all EU member states have different formats for VAT returns. The VAT return records following information for a given accounting period:

  • Total sales and purchases
  • VAT owed
  • Amount of VAT to be reclaimed
  • VAT refund due
  • Businesses must submit a VAT return even if there’s no VAT to pay or reclaim.

The frequency of making VAT returns varies between EU member states and typically follows a Monthly, Quarterly or Annual reporting schedule.

In rare cases, returns are also made on an activity basis for companies that are involved in irregular trading.

What businesses need to remember

For each transaction, businesses will be required to collect two of the following pieces of information as proof of the location of their customers -

  • Customer’s billing address.
  • The IP address of the device used by the customer.
  • Location of the bank from which payment was made
  • The country code of the SIM card used by the customer.
  • The location of the customer’s fixed landline.
  • Credit Card’s BIN

Two crucial things to keep in mind -

Both pieces of information collected as location evidence must be non-conflicting

All this information must be stored by businesses for at least 10 years.

How Chargebee can save the EU VAT headache for you

EU VAT is complex and ever-evolving. And it requires a lot of research and learning to get it right. Chargebee makes sure that your subscription business complies with the latest EU VAT regulations with minimal hassle.

  • Smart Tax Calculation for Any Scenario

    Chargebee handles EU VAT based on the type of your subscription business.

    If you are a business selling digital services to one member state, then Chargebee applies the tax rate accordingly. Digital services, on the other hand, sell to multiple member states in the EU. In that case, businesses can register with VAT MOSS (Mini One Stop Shop). Chargebee simplifies the VAT collection process by collecting the tax rates defined by VAT MOSS.

    If you aren’t a VAT MOSS registered business, then you get the flexibility to select countries you want to sell to and Chargebee will apply a tax rate based on the billing address.

    Whereas, for businesses selling physical goods, the VAT rates depend on where the business is incorporated in. Chargebee applies this tax rate based on your organization’s address. If you cross a certain threshold then you will have to register in the member states where you sell to and charge based on the destination. Chargebee will apply an origin-based tax or a destination-based tax by keeping track of your sales per annum.

  • Location Validation (For Digital Services)

    The VAT has to be charged based on the customer’s location. The primary source for the customer’s location is the ‘Country’ field present in the billing address. Whenever a customer signs up with you, Chargebee verifies it against the country the IP address is point to or the country determined by the Card BIN of the customer. An error message is shown if the location is not validated. The customer will not be able to complete the order unless the number is validated.

  • VAT Number Validation

    For a transaction to be considered B2B, a valid VAT number has to be provided by the customer. When a VAT number is added or updated to an account, Chargebee sends this number to the European Commission’s VAT Information Exchange System (VIES) and validates the number.

    Chargebee will validate the customer’s VAT Number during subscription renewals if the number has not been validated in the last three months.

    If VIES server is down, Chargebee will store the VAT number and reinitiate the validation process every 24 hours. If it is found valid, the VAT charge won’t be applied. Otherwise, VAT will be applied to the upcoming invoices.

  • VAT Consultation Number

    You may have to prove to the Tax Administration of a member state that you have verified the VAT number while collecting it from the customer. In that case, a special VIES validation is required. Whenever a VAT number is validated, VIES generates a consultation number. Chargbee pulls this number from the VIES system and stores it. The customer can export the list when needed.

  • EU VAT Compliant Invoice

    With Chargebee, you can send invoices that are compliant to the EU regulations. By setting up the template once, you are ready to go. An EU VAT Invoice sent to a customer contains the following information:

    • Merchant's trading name and address.
    • Merchant's VAT number.
    • Invoice date.
    • Buyer's name or trading name, and address.
    • The invoice contains the applicable VAT rate for each line item and a subtotal amount before applying VAT and a final invoice amount after VAT is added.
    • A VAT exemption note in case the end consumer is a business.