How to Determine Your EU VAT Obligations

Andy Spencer
October 12, 2021

In our previous blog, we focused on VAT registration and the steps a business needs to go through to determine where it needs to be registered. Once the registration is in place, there are a wide range of obligations that need to be met on an ongoing basis.

The first step is fully understanding these VAT obligations. This involves mapping the supply chain for the country of registration, which might have been done to some extent to determine the liability to registration but, in any case, the full supply chain must be mapped. This includes purchases of goods and services and not just the sales that the business makes which have created the liability to be registered.

VAT returns and other declarations

The VAT return is the mechanism for periodic reporting of a business’s liabilities to the tax authority. The format and frequency of VAT reporting varies around the EU.

The way VAT is reported is currently in flux. Recent changes in Poland have seen the replacement of the VAT return with a more detailed declaration including VAT transactional data and this is a trend that will continue around the EU.

Understanding the intricacies of the VAT return is key to ensuring ongoing compliance. This also applies to other declarations required in the Member State of registration – local variations abound so it’s important to fully understand requirements to determine ongoing VAT obligations.

Invoicing

One of the practical issues that needs consideration is the invoicing obligations in the country of registration.

Within the EU, the VAT Directive provides the legislative background but Member States have some choice as to how certain provisions are implemented into local laws. This can result in different interpretations arising and it’s essential that invoices are compliant.

This is to remove exposure for the supplier but also to ensure the customer can recover VAT that has been charged to them. Getting the invoice wrong can have an adverse impact on customer relations and could ultimately result in lost customers as well as lost revenue.

Applying exemptions

Not all invoices will bear VAT as exemptions apply in certain situations.

Applying exemptions is beneficial to a supplier. The purchaser may not be able to recover VAT charged on a supply that could be exempted so it’s important to understand and apply any possible exemption to avoid adversely impacting customer relationships.

In many cases, where an exemption applies, the supplier will need evidence to prove it has been applied appropriately. Failure to provide evidence can lead to the exemption being denied, exposing the supplier to penalties and interest charges. The customer would need to be contacted to pay the VAT which can prove challenging, especially if the exemption has been denied because of a failure by the supplier. If the customer doesn’t pay, the supplier will have to fund the VAT due.

Recovery of VAT

Successfully recovering VAT on purchases is essential for businesses to maximise profitability. Member States have different interpretations on the requirements for input tax recovery including the invoicing requirements as detailed above. Navigating the local regulations is key to successful recovery.

Intrastat

Intrastat reports the intra-EU movement of goods and is sometimes incorrectly seen as the poor relation compared to VAT returns given there is no payment to or from the authorities.

Intrastat declarations are critical in providing trade information and due consideration must be given to submitting accurate declarations – as with VAT returns, the process in each Member State varies so local expert knowledge is key. Failure to do so can ultimately result in penalties in some Member States and unwanted scrutiny from the authorities in the form of audits.

Continuous transaction controls

Finally, the issue of continuous transaction controls (CTCs) cannot be ignored. Not all Member States have CTCs in place but it is a requirement that is only going to increase.

The mandates in place vary between country with some requirements only applying to resident businesses, such as e-invoicing in Italy, whilst others are subject to a threshold, Immediate Supply of Information (SSI) in Spain. Businesses need to ensure that they fully understand the CTC obligations in each country where they are registered and have a provider who is able to support the ongoing obligations.

Once a business has determined its obligations in the Member States in which it’s registered, it will need to meet those obligations on an ongoing basis. We will be looking at meeting the VAT reporting obligations in our next blog.

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Author

Andy Spencer

Andy is a highly experienced indirect tax professional who has worked in VAT for over twenty five years. Andy joined Sovos in 2009 and has responsibility for the consulting and compliance teams. Within the consulting team, he is involved in delivering major international VAT projects for blue-chip clients, bringing expertise in both structural compliance and commercial efficiency. Andy specialises in providing clients with bespoke VAT reviews that help them develop into new territories with the appropriate controls in place to manage VAT effectively. Andy has developed expertise in international VAT throughout his career and has advised on a broad range of issues in many countries. Within the compliance team, Andy is responsible for the integrity and professionalism of Sovos’ compliance offering working with the team to ensure clients meet their compliance obligations around the EU and beyond. Andy began his career with HM Customs & Excise and before joining Sovos was VAT Director at Baker Tilly’s Southern UK operation, a Senior VAT Manager at KPMG for six years, and a Senior VAT Manager at Ernst & Young for seven.
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