How to Avoid VAT-Related Problems
by Larry Harding
President, High Street Partners

If you are selling a product or service in Europe, you should be aware of the many ramifications of the Value-Added Tax (VAT). Yet our U.K. team reports that 95, if not 100 percent, of our U. S.-based clients lack clear understanding of the issues involved. Most resort to head burying until they get whacked with a big bill. All 27 European Union member states have a harmonized VAT system, and the non-EU countries follow similar principles. Rates are high, from 15 percent to 25 percent, and there is little margin for error.

Don't assume that VAT works just like sales tax in the U. S. (it does not) . Don't assume that VAT does not apply to non-European businesses (it does) . Don't assume that VAT is not an inescapable part of doing business in Europe (it is).

Penalties for mistakes and non-compliance abound, so getting it wrong is costly in terms of profitability and cash flow. When evaluating the cost/benefit of any cross-border business transaction, always take into account any potential VAT impact. How to avoid the most common VAT-related problems:

1. Understand the VAT basics. VAT is not a sales tax. VAT applies to all stages of the transaction chain, and its cost is intended to fall on the final consumer. Businesses are supposed to be VAT tax collectors, not taxpayers. Your objective is for your company to pay over VAT collected from customers, and get a refund of any VAT paid to vendors, or on imports. When your business pays a VAT, it usually should be recoverable, if the rules are followed. There is no "exemption" because you are not a European business. Profit is irrelevant; VAT applies if there is a supply of goods or services, profit or not.

2. Obtain a VAT registration. Never do business in Europe without one. VAT registration gives your business EU VAT privileges and ensures you do not get stuck with irrecoverable VAT on purchases and on imports. It costs little to register, and although there is a compliance cost of keeping records and filing VAT returns, it is much less than the cost of getting it wrong.

If you do any of the following, you are almost certainly liable to register for VAT:
. act as importer of record
. hold inventory or buy/sell in an EC state(s)
. sell evaluation units in situ
. supply and install goods
. Sell B2C—goods or electronically delivered services

3. Avoid importing to Europe if at all possible. Get your customer or reseller to do it and you will avoid many issues. Too often companies talk themselves into this avoidable situation, mostly to please the customer and "take care of the VAT" without realizing what it really means.

4. If you must import to Europe, always do so in your own name with your own VAT number. If you do not use your company's name and VAT number, you will be non-compliant and the VAT paid may not ever be recoverable, resulting in a hit to your bottom line. Contracts always should provide for VAT to be charged in addition to the price. Always issue a VAT compliant invoice—otherwise, your EC customer will not pay.

5. Use EU cash flow benefits and minimize compliance headaches. Register for VAT in just one EU country, clear goods through customs in that one import country, and move those goods from there on to any customer in another EU country. This will keep your VAT registrations to a minimum and ensure that you pay import VAT only on goods that are staying in the import country. Additionally, customers outside the import country are neither charged VAT nor involved in customs formalities.

6. Know the local rules. Each EU member state has local variations to VAT. A few examples: In the U.K., vendors of cell phones and computer chips have a different VAT regime than the rest of the trading community. France, meanwhile, does not permit non-resident businesses to register for VAT except in limited circumstances. And Ireland offers cash flow benefits for exporters and foreign businesses.

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