Invoicing to European Union Customers and VAT

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Disclaimer

Neither the author, nor Flakey.info, nor Psand.net accept any responsability for the information contained herein. Please note this document refers to this topic from the perspective of a UK company selling services to companies in other EU member states. It is based upon the author's own experience when billing to clients in Spain and upon information and advice obtained from the UK and Spanish tax authorities and the advice of accountants operating in these two countries. THIS DOCUMENT IS NOT INTENTED TO REPLACE ANY MEMBER STATE OR EUROPEAN UNION PUBLICATIONS ON THIS TOPIC. ALWAYS CHECK WITH YOUR ACCOUNTANT AND RELEVANT TAX AUTHORITIES BEFORE PREPARING YOUR INVOICES.

Intracommunity VAT

Invoicing to other EU customers is actually fairly simple, but there are a couple of things to understand and that you must put on the invoices. Firstly an overview of how VAT works intracomunitarily - i.e. between European Union member states:

With VAT it works that when one company in one member state provides goods or services (and in our case it's nearly always services) to another company in a different member state, the seller does not add VAT to the invoice (regardless of whether the seller is VAT registered) but instead zero rates it and puts £0.00 for VAT. It is then the job of the buyer to pay the correct local (i.e. their country's) VAT rate for the purchase directly to the authority which handles VAT in their country and this is done through their VAT declaration. For example:

Imagine you sell something to someone in Spain for €1,000. On the invoice, the figures would be as follows:

Sub total:€1,000.00
VAT (at 0%):€0.00
Total:€1,000.00

The client then declares this to their local VAT authority and in Spain for example would then pay the local rate of VAT (16%) to them. So they would then pay the VAT €160. At the end of the quarter or year, this figure is balanced against a credit for the same amount (and their other inputs and outputs) and they would receive it back, essentially meaning that they never paid it. The way this is done is probably different in each member state, but this does not affect the seller. Buying is another matter, but we'll leave that for now.

In Spain, intracommunity VAT operations, require the use of números de operador intracomunitarios - translating to Intracommunity Operator Numbers. I spoke to HM Revenue & Customs (see footnote 1 on HMRC) in the UK and they claimed to have never heard of them ;). However, an invoice should show at least one of the client's or your numbers, and for safety's sake, it is a good idea to put both your company's and the client's numbers. Read on for details on how to do this.

Preparing the invoice

Download a PDF of an example invoice in Spanish.
Download a PDF of an example invoice in English.

You need to do the following:

Bank details for reciept of payments

Theoretically, to make life easier, it is a good idea to have a current accounts in both pounds and euros. Give the euro account details if the billing and payment is in euros and the sterling ones if it is in pounds. That way all the figures correspond and accounting is made easier. There are, however, drawbacks of so-called currency accounts, such as not having on-line or telephone banking facilities with them.

To receive the payment you need give your customer your IBAN (International Bank Account Number). In the past we have had trouble convincing our banks that they do indeed have IBAN numbers, but they do, so be persistent and you will get what you need.

The IBAN number is formed by prefixing a international code to your bank sort code and account number. The format is CC-NN-BBBB-XXXXXX-YYYYYYYY, where CC is a country code (in this case GB), NN (I think) is some number identifying the bank, BBBB also identifies the bank, XXXXXX is your sort code and YYYYYYYY is your bank account number. Confused? Here's an example:

We phone our bank, Big Banking Corporation, and they give us the IBAN prefix of GB-31-BIGC, meaning:

Other notes

You are obliged to declare to HM Revenue & Customs any monies you receive for payment against EU invoices. This goes on your VAT Return in box 8 - purchases made from other states go in box 9. If you complete this box, HM Revenue & Customs will then send us an EU Sales List, which you will need to complete and send back to them. This I presume is so that at some point they can match their figures with those of the other EU memeber state and come to the conclusion that the system is just too darn complicated and that it really needs simplifying.

Purchases

Lastly, purchases. My understanding is that we should be eligeable to pay no VAT in member states, giving our VAT number, but only if the final destination of the goods is the UK. In this case, we would then let HMRC know and possibly have to pay them the 17.5% UK VAT, but at the same time be able to claim this back with our VAT return.

However, the final destination bit means that if I buy myself a new iMac G5 while living in Spain, where it will be used, I apparently cannot claim a zero VAT rating as the final point of sale is Spain and Spanish VAT applies, even though my company is a UK company. I then have no way of getting this money back unless I become self-employed in Spain, in which instance I have to pay social security and even then, it won't be my company that pays for it, but myself, or rather me as fiscal entity in Spain. To get the money out of my company, I'd have to invoice them for it, which means I'd have to charge Spanish VAT anyway. As you can probably see from this simple example, the EU has some way to go yet before the intracommunity VAT system becomes truly integrated.

List of EU member states

The 15 states are the United Kingdom, Ireland, Finland, Denmark, Sweden, Belgium, the Netherlands, France, Luxembourg, Spain, Portugal, Germany, Greece, Austria and Italy of which all but the UK and Denmark use the Euro.

Ten new states joined on the 1st January 2007, followed by a further two on 1st January 2007. The new 12 states, making 27 in total, are Poland, Lithuania, Letonia, Cyprus, Malta, the Czech Republic, Slovenia, Slovakia, Hungary, Estonia, Romania and Bulgaria. To my knowledge at the time of writing, none of these are officially in the Eurozone, but would probably prefer to deal in euros rather than pounds. Don't bother dealing in US dollars either as that leads to all parties having to pay comissions.

Additional recent VAT note on representation of VAT on euro-invoices

In point 13 of VAT Notes No 4 2004, HMRC advises that when issuing an invoice in a foreign currency which (sic) includes UK VAT, the VAT amount must always be expressed as a sterling equivalent. This is apparently a legal requirement with penalties to be levied on any trader who fails to comply. HMRC refer us to paragraph 7.7 of Notice 700 with respect to establishing exchange rates. In addition, they advise that anyone receivinga purchase invoice where UK VAT is charged, but that does not record the sterling equivalent, contacts their supplier as a matter of urgency to request a valid VAT invoice. They warn that input tax claims may be denied if not supported by the proper evidence.

Footnotes

  1. Note the new department called HM Revenue & Customs (HMRC) has the combined responsabilities of the fomer Inland Revenue (IR) and HM Customs and Excise (HMCE), the new department being formed on the 18 April 2005 following the O'Donnell review which, published in March 2004, recommended the merger of the two former departments.. Effectively Inland Revenue merged into HMCE, the latter being the far older of the two departments.

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Author: Mike Harris

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This article copyright (c) 2005 Psand Limited. Permission is granted to copy, distributed and/or modify this document under the terms of the GNU Free Documentation License, Version 1.1 or any later version published by the Free Software Foundation; with no Invariant Sections, with no Front-Cover Texts, and with no Back-Cover Texts. A copy of the license is included in the section entitled "GNU Free Documentation License".