A spanner in the works: Addressing the VAT challenges for manufacturers embracing ecommerce

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The ecommerce revolution is well underway for B2B businesses in 2023.  Adopted and popularised mainly by B2C brands, ecommerce platforms enable businesses to buy, list and sell their products and services online.

Sites such as Amazon and AliExpress have long been celebrated for their ability to help B2C brands reach more customers, on a global scale, and boost their sales revenue and cost-efficiencies in the process. Consumers are well and truly on board too, thanks to their ease-of-use and competitive pricing.

Now, B2B sales teams are beginning to smell the roses. Part of a wider trend of B2B brands following in their B2C counterparts’ footsteps, it is estimated that 17% of B2B sales in 2023 will be made digitally – rising from just 13% in 2019.

Take automakers as an example. A rise in online shopping habits sparked by the pandemic, and the rise of the automotive “aftermarket”, has created an exciting opportunity in the B2B automotive arena, with ecommerce platforms allowing manufacturers to sell auto parts and tools to mechanics around the world, fast-tracking third-party retailers and boosting direct revenues as a result.

The VAT challenge

While the ability to sell to more B2B customers globally is a big win for manufacturers, sales teams who are new to ecommerce may have a bumpy road ahead when it comes to tax – one of the main challenges here being Value Added Tax (VAT).

Sadly, for manufacturers, the sale of any product that was manufactured in one country, imported, and then sold to a buyer in another, creates complexities when it comes to VAT. The same applies to the service side of things, and this is evident again when we look at the automotive industry. You could have a car manufactured in China, purchased in Germany, yet running software services that were developed in Poland. VAT becomes particularly challenging when there are two, three or even four countries involved.

Why? Because different countries have different rates and requirements for VAT. The Netherlands, for example, has several VAT measures in place for B2B traders, such as a “free circulation” policy, which allows goods to be sold freely within the EU market once VAT has been paid at the time of importing. In contrast, since leaving the EU Single Market and Customs Union following Brexit, U.K. businesses no longer get to avail of the simple, straightforward free movement of goods within the EU, which creates additional hurdles.

The “VAT gap”

In order to make the most of ecommerce and sell goods internationally, manufacturers must stay on top of these different rules and rates to ensure that they are VAT compliant within each country they are trading with.

Those that don’t risk a slippery slope of sanctions, fines, and reputational damage, and this remains a big issue for many businesses today. According to the European Commission, the “VAT gap” in 2020 remained high, with EU member-states losing €93 billion in uncollected VAT from non-compliant businesses.

The same principle applies when it comes to issuing compliant invoices. The buy and sell of goods spanning multiple countries creates a need for multiple invoices, so when trading internationally, manufacturers must issue invoices that fit the language and currency requirements of the buyer’s country.

The solution

In the same way that technology creates the opportunity and the challenge, it also offers the solution. The availability of cloud-based VAT automation technology today is great news for B2B sales teams, as it can be used to address many of the VAT compliance risks facing them today.

It can also provide detailed VAT reports and gather automatic updates on the latest VAT rates around the world, saving hours of manual calculation and admin work.

For businesses in certain countries, this technology has become a necessity. In the U.K. for example, the ‘Making Tax Digital’ policy requires all VAT-registered businesses to use approved digital software to support them with getting their tax returns correct – from submitting VAT returns and viewing VAT payment history. On a global scale, it’s likely that all countries will follow in this direction eventually, as the future of sales and tax becomes increasingly digitalised.

Final words

If businesses want to truly embrace the new era of B2B ecommerce, they must be aware of the potential pitfalls that come with this sales channel – with tax being one of the common culprits.

B2B ecommerce may present ample opportunities for manufacturers to reach a global customer-base and boost their sales revenue. But with the EU’s “VAT gap” showing no signs of closing any time soon, and more and more businesses being hit with fines and penalties for non-compliance, attention to detail is now essential when it comes to your indirect tax.

 

Disclaimer: Copyright © 2023 Vertex, Inc. All rights reserved. The information contained herein is intended for information purposes only, may change at any time in the future, and should not be relied upon in making purchasing, legal, or tax decisions.