More than 110 countries now require foreign digital service providers to register for VAT or GST, and the number has been climbing every year since the EU started enforcing its cross border rules on electronically supplied services in 2015. The standard VAT rate in France is 20%. In Germany, it’s 19%. Ireland is 23%. The UK charges 20% but operates its own system since Brexit. Canada doesn’t have VAT at all. It has a federal GST of 5% that combines with provincial sales tax in some regions to create a harmonized rate as high as 15%, and the threshold for registration is 30000 Canadian dollars. Australia charges a flat 10% GST and requires foreign sellers to register once sales to Australian consumers pass 75000 Australian dollars. A small business in Birmingham shipping handmade candles to France, a web developer in Vancouver billing clients in Berlin, and an Australian graphic designer selling templates to buyers in London are all dealing with different versions of the same problem, and it’s the receipt documentation where most of them fall apart.
An accountant in Leeds who works with about 60 small ecommerce clients told me that the most common mistake she sees is UK sellers who don’t realize they need to register for VAT in the EU at all. Before Brexit, they could sell to EU consumers under distance selling thresholds and only register once they hit a certain volume in a specific country. Those thresholds are gone for UK businesses. Every sale to an EU consumer now potentially creates a VAT obligation, and the seller has to either register in each country individually or use the EU’s One Stop Shop scheme through a single EU member state. Her clients are often months or even a year into selling before they find out, and by that point, they owe back VAT they never collected and don’t have compliant invoices for any of those transactions. “The invoices are wrong because they didn’t include a VAT number or the right notation,” she said. “And you can’t fix that retroactively with the customer. The sale happened, the money moved, and the documentation doesn’t exist.” She estimated that about a third of her cross border clients came to her after getting a notice from a tax authority, not before.
The reverse charge mechanism is supposed to simplify things for business-to-business transactions, and for larger companies, it probably does. The seller doesn’t charge VAT. The buyer self assesses it and accounts for it on their own return. A Canadian marketing consultant who bills three or four EU clients a month told me he’d been invoicing them for about two years before his accountant pointed out that his invoices were missing the notation that triggers the reverse charge. He wasn’t charging VAT, and he wasn’t supposed to be, but his invoices didn’t include the line that says something to the effect of “reverse charge applicable” or reference the relevant EU directive, and at least one of his French clients had been flagged by the French tax authority because the documentation on the purchase didn’t support the VAT treatment they’d applied. “I had no idea the wording on my invoice mattered to their tax filing,” he said. His accountant fixed the template going forward, but the prior invoices are still sitting in his clients’ records without the correct notation. Nobody has told him whether that’s going to be a problem down the line.
A consultant who works with small businesses on invoice compliance at myreceiptmaker.com said the formatting issue is probably the single most common cross border documentation failure for businesses selling internationally. Different countries require different information on a VAT compliant invoice. The EU has a set of mandatory fields including the seller’s and buyer’s VAT numbers, a sequential invoice number, the date of supply, a description of the goods or services, the net amount, the applicable VAT rate, and the VAT amount. The UK has its own version of those requirements. Canada requires specific GST/HST information on invoices over 150 dollars. A business selling from one country into another often uses the same invoice template for every client, regardless of where they’re based, and that template is almost always designed for domestic sales.
An Etsy seller in Melbourne who ships jewelry to the UK and EU told me she had no idea she was supposed to be collecting UK VAT on orders under 135 pounds until a customer in London mentioned that they’d been charged import VAT at delivery and wanted to know why she hadn’t included it at checkout. She looked into it and found out that sellers outside the UK shipping goods valued at 135 pounds or less to UK consumers are supposed to register for UK VAT, charge it at the point of sale, and remit it to HMRC. She’d been selling into the UK for about eighteen months without doing any of that. Her total UK sales over that period were maybe 8000 Australian dollars, so the VAT liability wasn’t enormous, but registering after the fact meant dealing with HMRC as a foreign business, filing late returns, and paying interest on the underpayment. She said the whole thing took about three months to sort out with the help of a UK based accountant she found online, and her fees for that were around 1100 Australian dollars. She still doesn’t fully understand whether she also owes anything in the EU, where similar rules apply for goods under 150 euros through the Import One Stop Shop scheme, and she told me she hasn’t looked into it yet because she’s been putting it off.
The receipt retention periods for cross border VAT documentation are generally tied to whichever country’s rules are stricter, and most small businesses don’t realize that. The UK requires five years. France requires ten. Germany requires eight for invoices. If a UK seller is keeping records for five years because that’s what HMRC says, and the French tax authority comes looking for documentation of a sale that happened seven years ago, the seller may not have the records anymore. The EU’s OSS scheme simplified the reporting, but it didn’t standardize retention across member states. A VAT advisor in Dublin who works with businesses outside the EU registering through Ireland’s OSS portal told me his Canadian and Australian clients are consistently surprised by how long they need to hold onto invoices for sales into countries they’ve never visited and may never visit. He said the biggest ongoing problem is small businesses that set up OSS registration, start filing quarterly, and then don’t save the underlying transaction records in a format that would survive an inquiry from a member state tax authority three or four years later.
