On 1. January 2015 the European Union changed its VAT legislation. This change has a major impact on startups, especially SaaS providers. Read on for the whole story on what happened and how that will affect you and your business.
Thursday: Call our tax consultant to clarify VAT legislation. I had put it on my checklist. And it did not have high priority. In the end, it’s simply VAT, Value Added Tax, a sales tax added to the money that we invoice, right?
Boy, was I wrong.
My call basically went like this:
Tax consultant (TC): “Do you intend sell to businesses and to individuals?”
Me: “Yes, sir.”
TC: “Do you intend to sell within Germany, the European Union and world wide?”
Me: “Well, yes, of course. It’s an internet business.”
TC: “Ok, it’s gonna get complicated then.”
The phone call with our tax consultant was the beginning of a steep learning curve related to VAT and all the tricky legislation that comes with it. Our company is registered in Germany (our team is actually located both in Germany and Portugal). So, we expected to include the German VAT in our invoices. True, says the tax consultant, but only for some customers. Other customers need a different VAT rate. And others even don’t get charged VAT at all. To make matters even more complicated, the European Union changed its VAT legislation on 1. January 2015.
It really is! Now, we expect there are quite a few startups and small companies around who will face the same challenges. Therefore, we’ll explain in detail in this post what the status of VAT legislation was for a company in the EU until 1. January 2015 and what changes from 2015 onwards.
Two important notes before we get started: What we explain here applies to software-as-a-service (SaaS) companies. If you are in the area of e-commerce for example, the rules will be different. And secondly, this post does not constitute legal or tax advice. It is simply an account of our experience and our understanding of the VAT rules.
The case until 01. January 2015
You can sell to either a business (B2B) or an individual (B2C). And you can do so to customers in your own country, in the European Union or world wide.
When you sell to private customers (B2C) the case is actually fairly simply: You charge them the VAT of your company’s country of residence. For our startup, Followistic, that means a German VAT rate of 19%. And it does not matter whether you are selling to somebody from your country, the EU or world wide. One size fits all
Example: For our $99/month package we bill our customers $99 (surprise!) of which 19% is VAT, meaning we as a company charge $83,19 for our service pre VAT.
Now, selling to individuals is one thing. Yet many startups squarely aim for businesses as clients. And while for individuals there is the “one size fits all” VAT rule, there is no such things if you sell to a business. Sad but true.
Let us break it down for you. In case you are selling to a business from:
a) Your country of residence: That remains simple: invoice includes VAT (again, in our case that’s 19%)
b) EU country: Unlike with selling to individuals or businesses from your country, there is no need to charge the VAT of your home country. Instead what you actually need to do is charge the VAT rate of your customer’s home country. After having charged the right VAT you would need to register your business with the financial authorities of your customer’s home country and declare the sale while paying the VAT there.
Now we are a SaaS company who’d like to sell to customers everywhere and that includes each and every one of the 28 EU member states. However, charging everybody the right VAT rate and then registering our business in each member state would be pure madness.
Luckily, there is the so called “reverse charge method“: You basically do not bill your EU business customers any VAT at all. Instead you add a note saying something along the lines of “no VAT due to reverse charge”. By that, you hand over all responsibility regarding VAT matters to your customer who then has to declare the invoice and comply with local VAT policy.
c) Worldwide (marked “Difficult” in the table): Just as with selling to customers from EU countries there is no need to charge your home country VAT if you sell to businesses worldwide. You do need to comply with local VAT rules though and unfortunately, there is no reverse charge method for all countries.
That means you basically have to check for each and every country what their VAT rules are:
- No VAT: Some countries do not charge VAT and therefore you can send invoices without VAT to customers from those countries.
- VAT with Reverse charge: There are countries as Switzerland (reminder: Switzerland does not belong to the EU), where the reverse charge method is applicable. So to a customer from Switzerland you would write an invoice without VAT but reference the reverse charge.
- VAT: Probably the most tricky one. If a customer’s home country charges VAT, but does not take part in reverse charge you actually have to bill your customer the local VAT rate, register your business in the country and pay the collected VAT to the local financial authorities. And there is no magical solution for that. If you don’t wanna get into a grey area you will have to follow the steps outlined above: Charge local VAT, register locally, pay VAT to local financial authorities.
The case from 1. January 2015
The smart guys in Brussels wanted to make all things VAT easier, especially for cross border transactions. That’s why from 2015 onwards there is new legislation which affects the way VAT is handled when selling to individuals, both in the EU and worldwide.
It’s important to note that VAT procedures for charging businesses do not change. At best, stick to what we outlined above. To make sure you’ll actually notice what has changed in the second table, let us point it out clearly:
Now, if you are selling to a EU or worldwide (private) customer you were charging them your company’s home country VAT up to now and paying that VAT to your local authorities. Starting 2015, something important changes:
a) EU customers: Instead of charging your local VAT you’ll have to charge the customer his or her local VAT. And in theory, you would have to register with the home country of your customer and pay the VAT you collected to the local authorities. This might sound similar to selling to EU companies. And it is! Now, in order not to have to register locally everywhere there is the reverse charge method for EU companies. For individuals, there is the so called “Mini One Stop Shop Method” or VAT MOSS:
You’ll charge your customer his or her local VAT rate, declare this to your local financial authorities and pay your local financial authorities the amount collected. Those guys will then take care that the VAT actually ends up at the financial authorities of your customer’s home country.
To sum it up, what changes is that you don’t charge your local VAT anymore but the customer’s local VAT.
b) If you are selling to somebody from your country: Nothing changes.
c) Worldwide customers: Well, just as with selling to companies worldwide this one will become rather tricky from 2015 onwards. The fact is that from then on, your sale is not subject to VAT in your home country as it was before. Instead, it’s subject to VAT in your customer’s country.
So, you’ll have to figure out if that country charges VAT and if so how much. And in theory you’ll have to register locally and pay the VAT if applicable.
We hope that our little journey in the lovely world of VAT legislation was valuable to you. If you’ve got any questions, do as you always do and don’t hesitate to let us know in the comments.