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UK Tax Law Update

4 August 2011



For additional information please contact:

Nick Thornton


Will Gay

No presence in Europe but customers in Europe? Do you charge them VAT?


US based web businesses which have no real presence in the EU, but do have customers there, could be forgiven for assuming that the collection of the EU’s "Value Added Tax" or "VAT" is not their concern. Surprisingly, that would not be a safe assumption.

VAT is an EU tax on the supply of goods and services. It is charged at different rates in different EU states, varying from 15% to 25%. Businesses are liable to pay VAT, which in practice is collected from customers through pricing.

The surprising aspect of this for a US based business with no real EU presence can be that it potentially has VAT obligations and liabilities where non-business customers in the EU are serviced through the web. These obligations and liabilities will arise wherever local thresholds for minimal levels of "taxable" sales are breached in a particular EU state. In the UK, that threshold is currently £73,000.  In some other countries, the threshold is €100,000, but it can be much, much, lower.

Once this threshold has been breached, the US business would become liable to collect VAT in the relevant state and account for the VAT (whether or not actually collected) to the relevant local tax authority. Failure to comply would attract penalties and interest.

Affected businesses have a choice. They can simplify compliance by registering under a "special scheme" in a single EU state, and account for their EU VAT liabilities to the relevant tax authority. Alternatively, where there is a significant volume of EU business, they could consider establishing a real trading presence, and registering for VAT, in a chosen single EU state. The result should then be that e-supplies to non-business customers made from that establishment would be subject to VAT at the local rate in the chosen state, regardless of where EU customers are situated. Common choices for such establishments are Luxembourg (where the rate of VAT is currently 15%), and the International Business Centre at Madeira (Portugal) (where the rate is 16%). The relatively low establishment costs and low marginal corporate tax burden can be outweighed by a significant pricing advantage when supplying to a customer in, say, Denmark, Sweden or Hungary, where the local rate of VAT is 25%.

Many affected businesses are unaware of these issues, and some choose to ignore them. However, the potential consequences of failure to comply are serious, and not only for those businesses with future plans for "on-the-ground" expansion into the EU or those looking to raise funds from investors who are typically more aware of these issues.

If you would like to know more, Nick Thornton (+44 20 7862 4612) or Will Gay (+44 20 7862 4762) of Orrick’s London tax team can help.