Temporarily over VAT threshold

Your e-commerce business is going well and you’re expanding abroad? That’s great! However, to ensure that the joy of your growth lasts for a long time, you need to get to grips with the tax situation. There are delivery thresholds that you need to consider in order to pay your taxes in the right country. Also when you exceed the VAT threshold temporarily you have to check several regulations. We tell you what happens if you overlook a delivery threshold and exceed it.

What are VAT thresholds and what do I have to consider?

If you sell products within a country, you pay tax on the sales in that country – so far, so simple. But when you start selling products from one country to another, things get interesting: There are certain sales thresholds up to which you continue to pay tax on your sales in your country. But if you exceed these limits, you have to pay tax on your sales in the buyer’s country. 

These thresholds are called VAT thresholds and used to vary depending on the country. The basis for the assessment is your annual net turnover with product sales to a specific foreign country. 

This regulation was changed in July 2021. Country-specific VAT thresholds were abolished and instead an EU-wide threshold for distance selling of € 10,000 has been introduced. Below this threshold, deliveries and services are still taxed at the local VAT rate and VAT is paid in the home country. As soon as distance sales exceed the EU-wide threshold, VAT is due in each country in which the goods are sold. In this case, you also need to register for VAT in these countries.

Example: In France, the delivery threshold used to be €35,000. As long as you achieved net sales to France of €34,999 within one year, you continued to pay tax on your sales in the country where your company is based. However, if you reached the €35,000 threshold, you had to register for VAT purposes in France and pay tax on your sales locally. 

With the EU-wide VAT threshold of € 10,000 a sales volume of € 34,999 is already above the threshold. The first € 10,000 are taxed with your loacal VAT rate and VAT needs to be paid in your business’s home country. However, the 10,001st and each additional € must be taxed with the country-specific, e.g. french VAT rate and VAT is due in France. Then the registration for VAT and filing of VAT returns in France and maybe several other countries are also necessary.

VAT threshold exceeded: What to do now? 

Especially when your business is being built up or is growing particularly quickly, it can happen that you lose track of the situation and exceeded a delivery threshold without knowing it. But you don’t have to panic immediately, because there are solutions for this case – as long as you notice your mistake in time. Otherwise, you could face penalties. 

In the UK you have 30 days after exceeding the supply threshold to inform HMRC, the UK tax office, and register for VAT. In that case, you have nothing to worry about and you have acted in time. 

Please note, that the EU-wide threshold instated in July 2021 does not apply to the UK, as the country is no longer part of the european tax and customs union. All VAT issues are taken care of by the british tax office, the HMRC, and distance sellers deal with british VAT as they do with the VAT duties in non-european foreign countries.

If we don’t use the right tools, such as hellotax, it can happen that we don’t even notice that we have exceeded the delivery threshold. Not in 30 days, but only later, when the tax office approaches us, for example, or we do the annual financial statement – and maybe we didn’t know about the existence of delivery thresholds at all until now. Of course, all this can happen.

In that case, you should register for VAT as soon as possible and report the case to HMRC and admit everything. In that scenario, you will have to pay the overdue VAT and may receive a penalty. However, if you don’t report it on your own and HMRC finds out on their own, not only will you have to pay the VAT in arrears, but you will receive a severe penalty. In this respect, it is advisable to report the omission immediately to avoid a severe penalty. If it is the first time, the tax office is usually lenient. 

If HMRC finds out themselves, they will automatically register you for VAT, simply estimate your VAT and issue penalties based on that estimate – which may be much higher than the actual figures. So you’d be well advised to come forward on your own initiative, show insight and help clear things up quickly. 

More than 30 days over VAT threshold: What are the penalties?  

But what penalties can I expect if I exceed the delivery threshold by more than 30 days? That depends on how many months late the error is discovered and how it is discovered: If you report it yourself, the penalties are comparatively mild. If the tax office itself finds out about the omission, but you can credibly convey that it was not intentional, the penalties will be more severe, but still within limits. If the tax office believes that you deliberately wanted to cheat and evade taxes, you can expect more severe penalties. 

• If you report the failure independently and voluntarily within the first twelve months, you will have to pay 0 to max. 30% of the sales tax additionally as a penalty. 
• If you do not report the failure until after the first twelve months, you will be subject to a penalty of 10% to 30% of the sales tax.
• If HMRC itself discovers the error and assumes that you deliberately intended to deceive the IRS, you will face a penalty of 50% to 100% of the sales tax. 

If you have credible reasons for not having registered and reported the sales accordingly, the penalties may be lighter, as described. However, ignorance is not one of these reasons. If you are active as an entrepreneur, it is assumed that you have dealt with the legal situation and act accordingly. 

What to do if I go over the VAT threshold temporarily?

Sometimes there are cases where you exceed the delivery threshold, but know that this is a one-time event and you will stay under the threshold again the next year. Maybe you only have a product that sells particularly well in a certain country for a short period of time, or you’re pulling out of that country with your business for other reasons.

Do you still have to register for sales tax in that country? This cannot be answered clearly with yes or no and depends on the individual case. In any case, you can write a message to HMRC within 30 days after exceeding the supply threshold and ask for a registration exception. In that case, you should be able to provide credible documents that suggest that it will indeed remain at a one-time exceeding of the supply threshold. HMRC will decide individually and inform you about the decision. 

Keeping an eye on VAT thresholds with hellotax

Much of what we have just described can be avoided if you keep an eye on your delivery thresholds from the outset and are informed when you are in danger of exceeding delivery thresholds. With hellotax you receive automatic notifications when the delivery threshold is exceeded and you can see clearly at any time how high your turnover is with sales to which country.

And if you actually exceed a delivery threshold, you can easily and directly register for VAT in the respective country. This way you avoid penalties and lengthy discussions with the tax office. 

Summary

All in all, it is clear that anyone who loses track of their sales and accidentally or deliberately exceeds delivery thresholds without registering for local VAT must expect penalties, some of which can be severe, if they fail to register within 30 days. However, those who report the error themselves can usually avert greater damage. 

FAQ’s

What are VAT thresholds?

The delivery threshold determines how much turnover you are allowed to achieve annually with sales to a certain foreign country, while at the same time paying tax on the turnover in your home country. Country-specific VAT thresholds were abolished in July 2021 and instead an EU-wide threshold for distance selling of € 10,000 has been introduced. When you exceed the new VAT threshold, you must register for VAT in the respective foreign countries and declare and pay your taxes directly there in the future.

What if I exceed a VAT threshold?

After exceeding the supply threshold, you have 30 days to register for VAT. If you don’t, you usually have to pay a penalty – the amount of which depends on whether you reported the error independently or HMRC noticed it yourself, and whether it was an oversight or you deliberately tried to deceive HMRC. 

What are the penalties for exceeding the VAT threshold?

The penalties range from 0 to 30% if you report the excess independently, to 10 to 30% if you do not report it independently but you credibly convey that it was not intentional, to 50 to 100% if the IRS assumes that you intentionally did not register for sales tax and tried to avoid paying tax that way.

What if I exceed the VAT threshold temporarily?

If you are sure that you will exceed the supply threshold only once and not again in the following years, you can submit a declaration to HMRC and explain and prove why you expect to do so. In that case, HMRC can issue a registration exception and exempt you from the obligation to register for VAT.