Understanding VAT (value-added taxes) is crucial for used smartphone retailers and wholesalers doing business in the European market. All European countries implement VAT on purchases relating to any goods or services, and VAT is assessed in many different ways depending on the circumstances. If you operate purely in Europe, understanding VAT is essential to the profitability of your business. If you operate in the United States and resell to Europe, it is important to understand VAT since it is of high importance to your customers.
While attempts have been made to create a seamless system for assessing VAT throughout European nations, VAT rates vary moderately across the region. First we’ll look at the general rules and requirements of European VAT. Then we’ll examine how different VAT schemes apply specifically to the sale of used smartphones in Europe using the United Kingdom as a concrete example in each case.
The Destination Principle
European VAT is applied based on the destination principle. This means that the tax is owed to the country where the buyer is located. European Union (EU) member states are under obligation to levy a standard VAT rate of at least 15%, but the minimum tax rate of 5% is allowed for special circumstances. The average VAT among European countries is just over 21%, with the current standard VAT being 20% in the United Kingdom.
European businesses must have a revenue of taxable goods and services that reaches a certain level before they must become VAT-registered and pay VAT. In the UK, the threshold is £85,000 (~$109,500) in VAT taxable turnover. In the EU, thresholds range from zero in Bulgaria (meaning all businesses must pay VAT regardless of sales volume) to 100,000 Swiss francs in Switzerland (~$102,000). Smartphone resellers need to be aware of these thresholds. If your taxable revenue falls below the local threshold, there’s no need to become VAT-registered or assess VAT on your products.
The VAT Cycle
VAT is a consumption tax that follows a specific cycle for collection and payment. Here’s a look at a classic VAT cycle:
- A VAT-registered business collects the applicable VAT when selling any eligible goods and services.
- The buyer is charged extra to account for the VAT.
- The VAT-registered business pays the VAT to the tax authority of the destination country.
The responsibility of collecting and submitting VAT payments rests on the shoulders of the seller. However, the actual payment comes from the buyer in the form of higher retail cost.
The general overview of how VAT taxes are collected and submitted is pretty straightforward. Let’s look at how different VAT schemes apply to smartphone resellers and how you can use them to reduce your VAT.
Standard VAT, Marginal VAT, Intra-Community Supply, Exports, and Domestic Reverse Charges
There is some variation regarding how VAT is assessed when it comes to secondhand mobile devices. Here are the main approaches to VAT with regard to secondhand smartphones:
- Standard VAT: VAT is charged on the full amount of the sale at the standard rate mentioned above. This is typically the most expensive VAT treatment.
- Marginal VAT: VAT is charged only on the seller’s profit margin, and is assessed at a lower rate; clearly, this is a more desirable option than assessing standard VAT, but is subject to certain restrictions, as discussed below.
- Intra-Community Supply: Zero VAT is charged on goods shipped between member states of the European Union. However, proof of export must be provided.
- Exports: Zero VAT is charged on goods exported outside the United Kingdom. However, proof of export must be provided.
- Domestic Reverse Charge: VAT is accounted for by the customer via a domestic reverse charge. The net effect is zero cost to the seller, but, as in the above cases, certain restrictions apply.
Let’s see how each of the above treatments can help mobile device resellers reduce their tax burden.
The Margin Scheme: Marginal VAT
The Margin Scheme is extremely important for smartphone resellers because it applies to secondhand goods and can significantly reduce a reseller’s tax obligation. Marginal VAT is calculated based on the difference between the price paid for the device and the price it is sold for: your margin on the sale. Even better, marginal VAT is assessed at a lower tax rate than standard VAT: 16.67% instead of 20%.
Let’s break down how marginal VAT works in practice:
- You purchase a used device for £100
- You resell the device for £130
- Your margin is £30
- Your marginal VAT tax is 16.67% of £30 (~£5)
The Margin Scheme is clearly great for mobile device resellers. However, there are some important restrictions to keep in mind. The standard VAT of 20% of the sale price will apply if a product does not meet the following criteria for the Margin Scheme:
- In addition to being secondhand, goods must be suitable for further use either as they are or following repairs.
- You are not allowed to factor in the cost of repairs or refurbishing prior to sale.
- Marginal VAT does not apply if you paid the standard VAT for the device. That means you can only take advantage of the Margin Scheme by buying from non-VAT registered suppliers or suppliers that also take advantage of the Margin Scheme.
Goods sold by businesses in one EU member state to businesses in another fall under the category of intra-community supply of goods (ICS). The buyer is required to account for VAT in ICS transactions, which can be zero if certain conditions are met:
- The buyer and seller must both be VAT-registered and provide VAT registration numbers on the sales invoice
- You must provide proof of transport to another member state
That said, companies that are used to moving goods from the United Kingdom to the European Union will need to make some changes because of Brexit. The political and economic changes coming with Brexit mean that intra-community supplies of goods between the United Kingdom and European Union countries will now be classified as exports with VAT applied based on the destination country.
Sellers get a zero-rate VAT on goods exported outside the UK and EU. As with ICS, however, certain conditions must be met for sellers to be eligible for the zero-rate VAT on exports:
- You must ship the goods within 3 months of sale
- You must provide proof of export outside the UK or EU
The Domestic Reverse Charge
The final element related to VAT is the domestic reverse charge (sometimes referred to as a “tax shift”) that is applicable in most sales involving mobile phones between a buyer and seller in the same country.
The condensed explanation for the domestic reverse charge is that the customer in the exchange acts as both the supplier and the buyer because the responsibility for reporting a VAT transaction shifts from the seller to the buyer of a good or service. When acting as the responsible party, you will formally charge yourself the applicable VAT before turning around and recovering the VAT as “input tax” in a VAT return. This ultimately means that there is no net cost aside from the cost of time and labor associated with fulfilling related accounting and procedural obligations.
Each country has its own rules for applying domestic reverse charge. We’ll use the UK in this example, but you should consult an accountant about the specific rules for each country. In order to apply the domestic reverse charge in the UK:
- Both the buyer and seller must be UK-based
- The transaction value must be greater than £5,000
Most mobile phones are included on the list of goods and services that the UK allows a domestic reverse charge for. However, there is a slippery slope when it comes to exceptions. Let’s start by looking at the types of mobile phones that are eligible for the domestic reverse charge:
- Standard handsets that receive spoken messages over a cellular network.
- Mobile phones supplied with accessories as part of a single package.
- Pre-paid or pay-as-you-go mobile phones.
- Smart watches with mobile-phone functions that are not paired to an external mobile device.
Most secondhand phones are going to meet the criteria for the domestic reverse charge, but there are certain features that make some devices exempt. You cannot apply the domestic reverse charge to the following:
- Mobile phones supplied with contracts for airtime.
- Mobile phone accessories supplied separately from a mobile phone.
- Wi-Fi phones that are not intended for usage with mobile networks.
- Phones with base units connected to landlines.
- Tablet devices that do not fall within the definition of a mobile device based on size or function.
- Smart watches with or without mobile functionality that are intended to be paired with a mobile phone, 3G data cards, and Wi-Fi cards.
Be mindful of when the domestic reverse charge does and doesn’t apply to cover VAT if you deal in a range of mobile devices that straddle both the qualifying and non-qualifying categories.
A Last Word on VAT
VAT creates responsibilities and considerations for companies setting up operations in Europe. This can be a new experience for companies that are used to dealing with domestic tax rules within the United States, where wholesalers that present a Resale Certificate are exempt from sales taxes. Make sure to consult legal and tax experts with VAT experience before setting up operations in countries where VAT applies.