Part 2: UK and Europe – the largest opportunity
An in-depth series on tax for Amazon and Shopify sellers
While the US might have the largest and most profitable consumer market in the world, the United Kingdom and Europe have a combined population that’s 2.5 times bigger. With an ecommerce industry that consists of three major markets, upcoming countries, and flourishing start-ups, it’s projected to continue growing year-on-year by 13% – to hit a turnover of €621 billion by the end of 2019.
For those who aren’t familiar with the tax system in Europe, it can be easy to find yourself overwhelmed by the 28 member states (including the UK). But break it down into sections, and you’ll soon realise each region plays its own important role.
Here to help you better understand your tax obligations as an ecommerce seller in the UK and Europe is Melanie Shabangu. She is a client-managing director at AVASK Accounting & Business Consultants, a London-based accounting firm with a long-established expertise in international VAT. They’ve been working with Amazon sellers since 2013, and have been helping ecommerce sellers navigate their VAT requirements ever since.
This guide on tax in the UK and Europe will cover:
- The Amazon landscape explained
- What is VAT – and when should I register?
- Other tax considerations
- Change is ahead – VAT and Brexit
- Staying on top of your taxes in Europe
As an international ecommerce seller, you might also have tax obligations in:
The Amazon landscape explained
To understand your tax obligations, especially as an Amazon FBA seller, there are a few things you need to know – or be reminded of.
Melanie says the UK has always been “the gateway” to other European marketplaces. Until recently, it was the largest Amazon EU marketplace of five, that service 27 countries throughout Europe. Germany has nudged slightly ahead only recently. These five marketplaces – the UK, Germany, Italy, France and Spain – will source your inventory through the Pan-European FBA, enabling you to sell across Europe by sending your products to the fulfilment centres closest to your customers.
To sell your products on Amazon in each EU marketplace, you need to meet the Amazon seller rules in each country, which means, Melanie points out, being able to speak the national language.
What is VAT – and when should I register?
VAT – or value add tax – to Europe is what sales tax is to the US – with a few key differences.
In the context of ecommerce, VAT is a general tax applied to all commercial activities involving the production and distribution of goods. It’s an indirect tax, not a business cost, paid by the customer, but collected by the seller on behalf of the applicable government. It’s charged as a percentage of price and collected fractionally, meaning VAT-registered businesses deduct the VAT they have paid from what they have collected – avoiding double taxation.
The rate at which VAT is charged is different in each country across Europe. You’ll also find the rate may change depending on the product you’re selling. Under EU law, each country can set its own VAT rate at or above 15%, although some countries may have special reduced rates for certain products.
As of January 1, 2019, these are the standard VAT rates applied in the European member states:
- Belgium 21%
- Bulgaria 20%
- Czech Republic 21%
- Denmark 25%
- Germany 19%
- Estonia 20%
- Ireland 23%
- Greece 24%
- Spain 21%
- France 20%
- Croatia 25%
- Italy 22%
- Cyprus 19%
- Latvia 21%
- Lithuania 21%
- Luxembourg 17%
- Hungary 27%
- Malta 18%
- Netherlands 21%
- Austria 20%
- Poland 23%
- Portugal 23%
- Romania 19%
- Slovenia 22%
- Slovakia 20%
- Finland 24%
- Sweden 25%
- United Kingdom 20%
Melanie further explains that for EU-resident sellers, registration for VAT is triggered by an annual threshold which is different in each state and determined by taxable turnover. For foreign ecommerce sellers, EU distance-selling VAT thresholds come into play.
These thresholds were created to simplify tax administration and encourage free trade. Ecommerce sellers may sell to private customers in other EU states under their local VAT number at their VAT rate, e.g. a Spain retailer sells shoes at the Spanish VAT rate of 21% to Swedish customers instead of at the Swedish VAT rate of 25%. Once the Spanish retailer’s sales pass the distance-selling annual threshold in Sweden of SEK 320,000, they need to register as a non-resident VAT trader. They can then continue to sell their shoes to their Swedish customers, but would need to charge the local VAT rate of 25%. The 25% VAT is payable to the Swedish tax authorities through a Swedish VAT return.
The only goods not subject to VAT are exported goods sold to customers abroad.
Other tax considerationsIncome and corporate tax
Just like VAT, income and corporate tax differ between countries in the EU. Personal income tax depends on how much as an individual you earn where you are a tax resident, with maximum potential tax rates around Europe for certain income brackets.
For example, if a country has four tax brackets with a top income tax rate of 60% at a threshold of €1.5 million, then each Euro of income over €1.5 million will be taxed at 60%. Under €1.5 million each Euro will be taxed according to the lower tax brackets. Those in the top tax bracket may also have to pay social security contributions or payroll taxes, flat-rate taxes levied on wages in addition to income tax.
According to taxfoundation.org, Estonia (21.3%), Latvia (21.4%), and the Czech Republic (31.1%) have the lowest top income tax rates of all European countries covered. The countries with the highest top income tax rates are Slovenia (61.1%), Portugal (61.0%), and Belgium (60.2%).
For foreign sellers trading in Europe, your personal income tax will generally be recorded and due in the country where you are a tax resident – unless your country of residence has a global taxation policy. Fortunately, lots of countries have a tax treaty or dual tax agreement with the EU, meaning you won’t end up paying double tax.
All European countries tax corporate income
(CIT). CIT rates differ substantially across
countries, ranging from 9% in Hungary to 34.4%
As well as VAT and income tax, as an ecommerce seller you need to be aware of customs and excise duties. These taxes help keep the system fair for EU producers, so they can compete equally with offshore suppliers on the European market. You effectively become an importer the minute you buy a product from a non-EU country, and are liable for customs and excise duty – as well as additional VAT.
Customs duty is calculated as a percentage of the customs value of the goods, which includes the price you paid, insurance and shipping costs. The rate of customs duty depends on the type of goods, which country you’re importing from, and whether the customs value exceeds £150.
Just when you thought you’d learned everything you could about VAT, as an importer you’ll also be liable for import VAT. This is calculated as a percentage of the taxable amount, based on where the product is being delivered. The taxable amount is made up of the customs value, customs duty, any other importation costs, and supplementary costs up to the place of destination. Import VAT is not due if the total value of all goods (exclusive of customs duties and transport costs) is less than a country’s minimum import threshold.
Commonly, import VAT is not included in the price paid to the seller, which means you’ll need to pay it to the delivery company or directly to customs. If it’s all inclusive, you will pay the import VAT to the seller. If the VAT is not paid correctly, under national legislation you will be jointly liable.
Brexit: Change is ahead
With the effects of Brexit looming, and marketplaces across Europe joining forces to monitor VAT registration, Melanie says the best thing any ecommerce business selling in Europe can do is get on top of their VAT registrations. She says at AVASK they’re encouraging their ecommerce clients to register on all the major platforms.
“When ecommerce started, we were advising 50 Amazon ecommerce sellers, today we’re advising more than 6000. We want sellers to make sure they have a VAT in case of Brexit, and because of tax authorities who will be checking if you have a VAT, and shutting down accounts if you don’t.”
Melanie explains that in previous years there have been concerns about people trading online, and how they posed ‘unfair’ competition.
“Tax authorities across Europe, including those in the UK, are cleaning up all the businesses that don’t want to trade legally on the platform [Amazon]. That is a good thing, it means if an ecommerce seller and a brick-and-mortar store buy the same product for £10, the only difference in price will come from mark-up.”
In addition, she says, they’re seeing countries like Germany and France introducing joint liability rules, meaning marketplaces will be jointly liable for monitoring VAT registration and returns.
“Marketplaces are turning around and saying, ‘We want sellers to have VAT numbers so we don’t have to police on the platform’, even though an ecommerce seller may not have reached the distance-selling threshold. For a new seller, it used to be fine to be registered in one country, e.g. get a UK VAT number, ship to the UK, list products on all Amazon platforms, wait until you reach the distance-selling threshold.
“What you have now are marketplaces governing their own rules.”
Staying on top of your taxes in Europe
When it comes to staying on top of your VAT obligations in Europe, Melanie stresses the importance of consulting a professional.
“When it comes to tax, tax is like law. Before you know it, you’re reading for 12 hours trying to figure out my job, instead of just handing it on.
“Anybody who wants to trade internationally in the long-term should consult a professional tax advisor. Rules are changing all the time, especially with Brexit, and you’ll find there are new things you’re not aware of.”
Melanie says foreign ecommerce sellers need to make sure they include VAT when marking up their product “so you don’t erode your profits – the moment you do that VAT won’t be a problem.” She adds that Amazon sellers need to understand how ecommerce works – or get help from someone who has experience working in Amazon.
Lastly, Melanie says a tool like A2X removes headaches, so you know it’s worth the investment. Whether AVASK is helping a foreign seller using a UK company to incorporate and expand, or a local business selling online, A2X is their accounting connector tool of choice.
“There isn’t any software out there that works as well as A2X to extrapolate data from Amazon to produce curated reporting.” She says A2X is now just part-and-parcel of their services, and they make sure they link all their Amazon – and Shopify – customers up with A2X.
Great opportunities in Europe for the compliant
As Melanie says, “We’re learning more and more about selling online,” and there are great opportunities in Europe for local and foreign ecommerce sellers – if you’re vigilant. “Do your market research where competition is concerned, and in every market it’s about patience. There’s always an opportunity, it’s just how you position yourself.”
As tax authorities across Europe get wiser about online trading, ecommerce platforms and online sellers, it’s important to remain up to date with your tax obligations and what they mean for your business. Trade legally, expand your business – and work with a professional who has experience with VAT in the European market.