The Million Dollar Case Study: Europe – Session #6: Amazon VAT in Europe

I am making good progress towards my goal of launching a product in Europe… I have chosen my product, drilled right into my product research and design specification, ordered some samples which should arrive in the next couple of weeks, and I'm maintaining constant communications with my suppliers, discussing things like certificates, manufacturing timelines, design tweaks and so on.

Phew. If that's not enough, it's time to start thinking about tax and legal set up. This is a difficult subject to cover on a case study like this because it's a complex, and the best course of action for each individual business owner can vary wildly.

But don't worry, in this session we invited Amazon VAT and PAN EU Expert Christoph Prokes from FBA hero to give us a simplified run down of exactly what you need to know as an Amazon seller.

VAT in Europe – TLDR; Top level advice

Before we dig into the specific learnings from Christoph's presentation, let's have a healthy dose of “reality check” on the difficulties we might face, before figuring out how to overcome them. 💃

First of all, if you are not familiar with VAT or business operations in Europe then this may seem daunting to begin with. It is a complex topic and there are lots of different considerations that can vary from person to person.

The good news is, it's much simpler to start by selling in one country, like the UK, first of all – and we're going to cover exactly how to do that today.

This is where I am going to start with my sleeping bags, and then  later on I can tackle the idea of selling across Europe and how to manage VAT in several countries. As per Greg's advice, I am prioritizing the tasks that matter first, and taking each part of my journey one step at a time.

The main three takeaways I got from this session are as follows:

1. Setting up your business properly for VAT is the best way to go, as it ensures you are trading within the law and it sets you up for long-term success
2. Don't let complex tax or admin put you off from building your business. Sure, it can be complicated but it's the same for all businesses. Being an international business comes with extra responsibilities, but you need to get over these hurdles to reap the benefits of building your own future.
3. Don't do this alone! You probably could figure out how to master handling your VAT across Europe if you are into that kind of thing, but this is going to take hours of your time. Most business owners consider accountancy costs money well spent, so whether you opt to use Amazon's services or hire an accountant or service, it's going to save a lot of time and headaches. If you are just starting out, it's tempting to save money and cut corners, but try to remember that time is our greatest asset!

Here's the video:

Here's the slides: 

What We Will Cover

Here's what Christoph covered in this session:

• What is VAT and how does it work
• When to apply for a VAT number
• Amazon Storage Options
• How Registration and Filings work
• Import VAT
• FAQs

The required disclaimer: Any information shared in this case study is not legal advice. We are providing an honest and transparent insight into our own progress and findings. As such, you should always consult professionals when figuring out your own tax and legal business set up.

What is VAT (Value Added Tax)?

Let's get down to it.

Put simply it is a type of consumption tax that is placed on products and goods in Europe. When consumers buy products in Europe, the price that they pay is inclusive of VAT.

The rate of VAT varies across different European countries too. In the UK it is 20% so I have accounted for that amount in my profit calculations which you can find in Session #3 of this case study. To find out the VAT rates within the UK, check out this page. Trusty Wikipedia has a list of full VAT rates in different European countries here.

How does this differ from Sales Taxes in the US? 

The main point of difference here between Europe and what you might be used to if you are an Amazon seller in the states, is that VAT is always included in the final price of the products sold. Whereas in the US, the tax is usually added afterwards.

So if you are looking to sell in Europe, you need to consider that the final selling price you want to set for your product will be inclusive of VAT, and you will need to save that VAT income for paying back to the appropriate authorities when your tax bill is due.

How To Calculate VAT?

First of all, Christoph wanted to share a really simplified way to calculate your VAT as shown here:

He advises that you break down your calculations to something as simple as possible for VAT purposes so that you don't get confused down the line. Here, Christoph has figured out the overall costs (production, shipping, amazon fees) and total margin. This allows him to figure out the net sales price, and then add on the VAT, which for the UK is 20%.

Important note: As an Amazon seller, you will enter your total sales price inclusive of VAT as the price of your product in Amazon. So you need to figure out what VAT rates are applicable for your product and get your total sales price accordingly. Amazon will not automatically add on the VAT, or collect VAT on your behalf. The price you enter into Seller Central will be inclusive of VAT. 

Will VAT eat into my profits?

If you have not done your product research and profit calculations correctly, then potentially. But hopefully if you have been following along so far, you will have factored this in to your planning already.

Make sure you revisit Session #3 to see how I calculated my profit including VAT for the UK!

Remember, VAT is added to the net price

It is very important to remember that VAT is calculated on the net price of the product, not the final selling price. If you have a final total sales price in mind, and want to know how much VAT would be collected, you need to calculate it backwards.

For example, if I sell a sleeping bag for £24 in the UK where VAT is 20%, I would divide 24 by 1.2 to get £20, and the difference of £4 would be the VAT.

You can also use this handy tool to quickly calculate your VAT backwards, by entering your final selling price into the “input amount” field.

When To Register for VAT

You need a VAT number when:

A) Store in a country
You will need a VAT number from the first day of storage. So in my case, from the first day my inventory lands in the UK.

B) Pass the Distance Selling Threshold Limit
Using the above example, if I decide to sell my product in Germany, all I would need to do is translate my listing and make it available in Germany, and then customer's can order my product and it will be shipped from the warehouse in the UK. In this instance, I would be able to continue to sell using my UK VAT registration within the Threshold Limit of 100,000 Euros. After that, I would be required to register for VAT in Germany. Each country has different thresholds.

With this in mind, this means that any seller looking to start selling in Europe will need to register for VAT before sending inventory to that country.

How To Get A VAT Number As An Amazon Seller

There are two ways to get a VAT number as a seller:

1. Found a company
2. Use a Fiscal Agent/Representative

Christoph's advice for any international seller (outside of Europe) is that founding a company in Europe has a lot of disadvantages, including a lot of admin, paperwork, bookkeeping and taxes. It also requires a local bank account which is very difficult to get.

So the main recommendation is to use a Fiscal Agent. For example, if you have a US company, you would get a representative in Europe to get a VAT number as a US business.

Amazon Storage Options in Europe

This was a really useful part of the session which highlights a few different ways to structure your business in Europe. Christoph shared with us three models, EFN, CEE and PAN EU:

Let's break this down:

EFN

• The simplest model, storing in one country
• Only one VAT number required – but you could still sell to other marketplaces as a distance sale
• Higher shipping fees and longer delivery times

CEE

• This is an option if you want to sell in Germany
• Amazon built warehouses in Poland and Czech Republic and have started to force people to send inventory to Germany, Poland and Czech Republic by charging 50 cents more on every shipment if you do not do this – a lot of sellers in Germany are now storing in all 3 countries
• Requires VAT number in all countries
• Medium shipping fees and delivery time

PAN EU

• Amazon warehouses in 7 European countries – Amazon will store your inventory in what ever country they think is right for free (similar to how Amazon works in the US with internal movements across states)
• Always pay lowest shipping fees with faster delivery times
• BSR boost – you are preferred because you have the lowest fees and products are closest to the customer

Which one should I choose? 

Christoph's advice was to start with one marketplace to begin with, particularly if you are a new seller or you just want to get a toe in the water over in Europe. However, if you are a larger seller already and think you may benefit from PAN EU and easily meet the distance selling thresholds if you only store inventory in the UK, then it may be a consideration to go for PAN EU right away.

If you wanted to sell in the UK and Germany, for example, then this becomes more problematic. Because you would then likely need to do both the EFN and CEE models, register for VAT in all of these countries, and send inventory to all of these countries.

Taking Christoph's advice, it would be ideal to start selling in the UK, then listing in Germany and selling from the UK warehouse. Then once sales start to pick up, it would be a good time to consider PAN EU.

VAT Registration and Filing

Christoph confirms that registering for VAT isn't too difficult a process (even without founding a company in that country). Phew!

Here's what you can expect to find:

VAT Registration

• You will need business documents, passport copy, forms… lots of admin and paperwork to be aware of, but it's not complex
• It will take around 2 months for the government to send your VAT number, but don't worry about getting started because,
• You can start storing and selling products using a validity date! 

You can set a VAT validity date from any date you decide (so if you wanted to start selling tomorrow, that's fine). What you would do is start selling and filing your VAT as normal, whilst you wait for your actual VAT number.

VAT Returns (+ other reports)

• Differs from country to country, UK: Quarterly, DE: Monthly
• You will submit your VAT return and get a confirmation of what you owe, then you will pay the government by Bank Transfer
• Usually you will have about two weeks to pay, and there are strict due dates with heavy penalties

Here's what a UK (left) and German (right) VAT return looks like:

Usually you would fill this in online, and there are lots of different numbers to be added. It's not enough to just say “my revenue is X and 20% of that is X”. You need to file a comprehensive breakdown for a VAT return. So how can you do this? Let's explore our options.

VAT: When To Outsource

There's three options here: do it yourself, use Amazon's service, or hire an external partner. Here's Christoph's advice on this…

File VAT yourself

• Most cost effective but very time consuming
• Steep learning curve if you aren't familiar with how to file your VAT
• Takes you away from other important business tasks
• Risk of getting it wrong and seeing problems down the road

Use Amazon's Service

• Fairly cost effective, not too expensive
• Amazon partner with accountants for this service and will file your VAT for you
• You will have to give Amazon all of your information, such as who you imported from and so on – many sellers wary of giving this information to Amazon
• Amazon provide this as a service to encourage people to get registered, it may not be the best service, so you may not get the best bang for your buck

Use An External Partner

• Either hiring local accountants yourself or using a service provider that specializes in Amazon VAT
• Not hiring cheap VA's from freelance marketplaces because this is too risky
• Most expensive option but ensures you file correctly
• Saves you a lot of time and hassle

Where Do I Find Reports in Amazon for my VAT filing? 

I asked Christoph to help with this step, as it's something that most people starting out cannot see until they get inside of Seller Central and start selling. I wanted to know where and how Amazon gives reports with my sales and VAT data that I can later hand over to my accountant for filing.

Here's where you can find the reports under “Reports > Fulfillment By Amazon” and these are made available monthly and will be stored historically. These reports show all of your sales within each time period. The key here is that you will be able to see what each customer paid for a product (taking into account any promos or discounts, or pricing changes if you are testing your price).

Remember, it's up to you to set a total selling price including VAT. That means its also up to you (and your accountant) to figure out how much VAT is owed for your particular product, and then calculate how much you have collected across all of your sales. 

This data is exactly what your accountant will need, to figure out how much VAT you have collected, and how much you need to pay back. Thanks for sharing Christoph! 👍

Import VAT

The final point Christoph wanted to make was about import VAT. A lot of people have asked if you need to take stock of this when doing your profit calculations, and Christoph's advice is no.

This is because import VAT is reclaimable.

For example, if you import £1000 of goods to the UK, you will be required to pay 20% import VAT of £200 when your goods arrive in the UK. But this is reclaimable when you file your tax return. Essentially, you will never pay VAT twice on the same product. Think of Import VAT as a “deposit” which you then reclaim once you start making sales.

Please note that Duties are separate to Import VAT and are not reclaimable, so this is something you will want to account for in your profit calculations.

EORI Number

One final piece of the puzzle that is very important is that you will need something called an EORI number in order to import goods into Europe. This is a European wide number that is super easy to apply for, with no restrictions and effectively links your imported goods to you as a business and your VAT number.

If you do not do this, your goods will be held at customs, and you will not be able to reclaim any Import VAT.

Some suppliers in China will offer to use their EORI number, which Christoph does not recommend (unless you really are in a tight spot). This is because it means the supplier will be able to reclaim your VAT. 

It's super easy to get an EORI, so make sure you do this! If your goods are within Europe then you do not need to consider this step, but as most FBA sellers are importing from overseas, it's a very important consideration.

Here's the link to apply on the gov.uk website.

FAQs

We had plenty of time at the end to cover some of Christoph's most frequently asked questions at FBA hero, as well as a few questions Greg and myself had.

Do I need a local Bank account?

No, you don't need a local bank account to sell on Amazon in Europe. Actually, its very difficult to get a European bank account in most cases unless you are actually from there. You can pay your VAT return directly using a bank transfer from any bank account.

Christoph recommends using a bank account in the same currency to avoid fees and poor conversions. But you can use services like World First, Payoneer, Transferwise and so on.

What if I did not sell any products (+ paid import VAT)?

If you make 0 sales, then the government would actually owe you the £200 back, which you can either reclaim, or leave there as credit for when you start making sales and owing VAT.

What if a customer asks for an invoice?

Christoph made an observation that many European customers, especially in Germany, request an invoice for a purchase.

Amazon does not send an invoice, they only send a payment confirmation that does not show VAT.

If you get customers asking for an invoice it's as simple as sending an invoice for their order including the VAT (net cost, VAT and gross cost). If you start to get a lot of these requests you can use an invoicing automation service to help you supply these to customers.

Is my product eligible for a reduced VAT rate?

You will need to research if your product is eligible for a reduce rate of VAT or even 0% VAT in the countries you are selling in. It's up to you as a seller to factor in the VAT to your final selling price and entering your final selling price into Amazon Seller Central. It is also your responsibility to account for and file how much VAT you have collected and how much you owe back to the government.

VAT rates vary in different countries, so you need to do your research. For example, in the UK certain products like children's clothes and books are 0% VAT. You need to know this so you price your products accordingly.

If you are unsure you can ask your accountant.

What is the risk of not being VAT registered?

Christoph explained that there is a lot of VAT evasion going on, and the authorities and Amazon are definitely working to fight against this. It can be difficult in terms of competition, if one of your competitors is not paying VAT and undercutting on price.

However, it's not worth the risk associated with not registering for VAT. Ultimately, we want to build a legitimate business that has room to grow and expand. Therefore, the best advice is to follow the rules to the book.

Figure Out Your Business Setup  🌎 🇪🇺 🇬🇧

Christoph's advice if you are a US seller, or living outside of Europe, is that it is probably best to found a company in your home country. This way, you can register for VAT and sell in Europe as well as your own country (if there is an Amazon marketplace).

Even if you are located in say, Spain, but wanted to sell in the UK or Germany, you may still be better off creating a Spanish business and then registering for VAT in the UK or Germany. First of all, it's much easier to form a company in your own country, in your own language. Second, if you found a company in the UK, that means you also have to do all of the relevant paperwork, business taxes and so on, in that country.

Ultimately, this is a business decision you need to make for yourself and your business, and everyone's situation will be different. If you do need advice on how to proceed, it's always best to speak with a professional.

Conclusion & Next Steps

I think we can all say a big thank you to Christoph for providing such an easy to understand account of how VAT works for Amazon sellers. I certainly learnt a lot and I feel like I know everything I need to get started with a VAT registered business.

For me, I am delving into selling on Amazon for the first time and taking each step as it comes, which right now involves learning the basics of VAT enough so that I can get set up correctly.

If you would like to use FBA hero for your Amazon VAT requirements, you can use the coupon code “UKJungle” to get a €50 recurring discount for any single country packages – Visit FBA hero for more information. 

Homework

So next task for me, and for you if you are following along, is to register for VAT, get an EORI number and if you haven't already, get a Seller Central account set up for Europe. For most people, this will require registering for VAT in the country you are looking to sell, ahead of ordering your first inventory.

Here's this weeks homework link with all of the useful links from this post listed!

Next Steps

In the next session, we look at Amazon product branding, including how to find a good brand name, how to get a barcode and considerations for the Amazon Brand Registry and trademarks! Catch up on the full recap here.

If you are following along with the case study retrospectively, no matter when you started, the key is to make sure you dedicate the time each week to watch and/or read the recap, and complete the homework tasks set. You can find a full list of the session recaps here:

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