B2B vs. B2C VAT: Key Differences & What You Must Know

Introduction

Businesses should know the extensive spectrum of requirements concerning VAT compliance for B2B and B2C transactions. The level of B2B vs B2C VAT differences is critical in various situations when determining whether the business in question is mandated to be VAT registered or not. In some jurisdictions, the registration threshold is based merely on the calculation of the B2C transaction deriving from the cross-border distance sales or supply of electronic services (VAT Notice 741A). 

While the national registration requirements differ in other jurisdictions, the registration threshold also considers B2B transactions (Reclaiming VAT). Unawareness of the distinct calculation formula for VAT registration threshold for non-resident businesses is one of the most common B2B and B2C VAT mistakes, which could potentially lead to a series of non-compliant behavior. 

One critical point that business owners need to be aware of when determining whether their business surpasses the domestic or foreign registration threshold is a complete understanding of the place of supply rules (VAT Notice 741A). Determining the place of supply rules for B2B and B2C is different and highly dependent on the type of supply, location of the supplier, location of the buyer, threshold in place, and additional country-dependent requirements. 

Most probably the following step that the business owner needs to get familiar with when it comes to the B2B vs B2C VAT obligations will be understanding VAT reporting rules. Businesses must know their VAT duties in all jurisdictions where they make their supplies. 

Their business model and related scope of transactions(only B2C or B2B or both) are of foundational importance for determining what rules and regulations apply to related business operations within the country where the business has its principal place of business or abroad where it provides services or makes distant supplies. 

The following sections will explore the importance of properly understanding the different VAT rules and regulations surrounding B2B and B2C transactions. 

How VAT works for B2B transactions 

B2B VAT compliance 

As mentioned earlier, it is imperative to know the place of supply rules for both B2B VAT compliance and the applicability of the B2C VAT rules. Determining the place of supply(PoS) will shed light on which jurisdiction’s VAT rules the business owner should pay attention to. 

It should be noted that VAT treatment for B2B sales is “less” tricky than that for B2C sales. In many scenarios of B2B overseas supply, the reverse charge mechanism can be used. 

General guidelines for B2B PoS rules depending on the place of supply:
Domestic B2B VAT transactions – For domestic sales, depending on the type of supply, the VAT-registered supplier charges VAT on the sale at a defined rate and calculates the output tax in its tax return. If the conditions are met, the purchaser can claim input tax credits for business purchases. 

Intra-EU B2B VAT transactions – the supply of goods between two businesses registered in two different Member States—are usually followed by the use of the reverse charge mechanism. From the supplier’s perspective, this is a zero-rated transaction(intra-EU supply), while the VAT buyer will account for this purchase as an intra-EU acquisition. 

The VAT purchaser will use the reverse-charge mechanism to account for this transaction properly. The respective businesses must follow special reporting rules for Intra-Community Supplies and Acquisitions. 

International B2B VAT transactions – When it comes to B2B transactions where the place of supply belongs to a non-EU jurisdiction, different rules will apply from country to country. On many occasions, when goods are supplied to businesses whose place of business is outside the EU, the supplier will treat this supply as an export. 

This will be accounted for from the supplier side as a zero-rated supply. The buyer’s accounting rules depend exclusively on domestic tax and customs regulations.

Input VAT Recovery 

B2B transactions 

One of the notable differences in the B2B vs B2C VAT reporting is the possibility of VAT reclaim by the VAT-registered business. When the VAT-registered suppliers make taxable supplies of goods or services, they can reclaim VAT when the conditions are met. 

The business cannot reclaim VAT on purchases made outside the business activities or for goods or services used to make tax-exempt supplies. To be in a position to reclaim VAT, businesses should: 

• Has at its disposal accounting supporting documents(such as VAT invoice, Customs receipts, or other valid accounting records); 
• Claim input tax credit via VAT declaration and within the prescribed time frame;
• Keep accurate records.

B2B transactions 

Reverse Charge 

What is meant by reverse charge and the self-accounting principle? 

In many B2B transactions, the supplier charges and accounts for VAT. However, there are also domestic and international transactions in which the purchaser accounts for the output VAT. The accounting principle that permits this type of accounting and reporting of VAT is called a reverse charge mechanism. 

Under the reverse charge mechanism, in most cases, the supplier zero-rates the transaction, and the VAT purchaser accounts for the output and input VAT in the same return. In most cases, the EU business making the intra-community acquisition should report and account for VAT under reverse charge, while the supplier will report the intra-community supply in this VAT return as zero-rated.

In general, the reverse charge mechanism is often used in the following types of B2B transactions:

• Intra-Community Acquisition of Goods;
• Overseas provision of services(destination-based principle);
• Ancillary services of repair, valuation, or contract work carried out on movable goods in another Member State. 

The business owners should be aware that the most critical distinction in the B2B vs B2C VAT reverse charge, is that this mechanism cannot be extended to B2C transactions. A reverse-charge mechanism is exclusively applicable to B2B transactions when conditions are met. This tax principle makes the reporting responsibilities of businesses less burdensome, permits healthy cash-flow, and postponed VAT accounting. 

There are particular rules concerning the B2B VAT registration requirements for businesses making Intra-Community acquisitions, that businesses should be aware of if they plan to acquire a product they will use in their business activities. 

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B2C VAT Framework 

While the VAT rules concerning the B2B cross-border transactions usually trigger the usage of the reverse-charge mechanism that permits more transparency, and less difficulties when determining the place of supply rules, invoicing and reporting obligations, the case is quite different for B2C transactions. 

Depending on the type of supply, there are general rules and many exceptions regarding B2C transactions. The VAT reporting and accounting requirements almost always belong to the supplier of goods and services.

This is why, in most cases, the VAT registration threshold for non-resident providers of services or distance sales of goods is based upon the B2C turnover. A valid financial calculation system is of great importance for businesses to be aware of when they will surpass the registration threshold and to be able to act promptly on it.

B2C transactions

The supplier’s place of business determines the general place of supply rule for B2C service supplies. However, there are many different scenarios. One of the most important ones in recent years has been the principle used to define the place of supply of digital services or digital products. 

Alongside the EU, most jurisdictions worldwide have implemented the OECD destination-based principle to determine the place of supply of electronic services and digital products. In a nutshell, this principle means that the rules for the place of supply are defined according to the customer’s residence. 

An EU-based B2C VAT threshold of EUR 10,000 permits EU-based businesses to account for all their B2C transactions related to providing digital services and distant supplies of goods according to the VAT rules of their home country. 

B2C VAT thresholds vary from country to country. The B2C VAT thresholds also differ between various domestic and foreign business sectors. For cross-border providers of digital services or distance sellers of goods, the following thresholds should be taken into account: 

• EU-based B2C VAT threshold – Non-resident providers of digital services to EU customers should account for VAT from the first transaction. To make reporting and accounting easier for non-resident providers of digital services, the EU Commission established the simplified registration and reporting OSS schemes.
• The use of a specific non-EU OSS scheme permits non-resident providers of digital services to account for all their B2C supplies of ESS services within one VAT declaration.
• X country-based B2C VAT threshold – As explained earlier, the primary type of transactions that cause non-resident businesses to register in a foreign country is the provision of B2C transactions. Countries have implemented different types of B2C VAT thresholds. There are thresholds for domestic firms and non-resident businesses, as well as different types of thresholds depending on the type of business activity. 

Invoicing rules for B2B vs. B2C 

VAT-registered businesses should know the importance of the proper VAT invoicing rules, which depend on the countries where they make their transactions. The invoicing rules and requirements are mainly defined in the VAT Acts and implementing Decrees of the concerned country (VAT Records, invoices and credit notes). 

The situation in the EU is more transparent and straightforward, considering that the main VAT invoicing rules are defined in the EU VAT directive (EU VAT Invoice Requirements for Businesses). These rules define when the invoice must be issued, in what format, and what it must contain, and the extent of freedom is left to the Member State to add some nationally specific requirements to the invoicing requirements. 

Generally, B2B vs B2C VAT invoicing rules follow the logic that VAT invoice is almost always mandatory for B2B transactions, and in some instances for B2C. For B2C transactions(retail), the sales receipt is usually issued to the customer. 

• The EU VAT Directive states that for B2C transactions, a business should issue an invoice to the customer when;
• There is a distance sale of goods and the place of supply is in a different Member State, and the OSS scheme isn’t used; and;
• For the supply of new means of transport to another EU State;
• Specific transactions according to the national law.

However, it should be noted that when the invoice is mandatory for B2C transactions, it is often enough for the supplier to be compliant to issue only a simplified invoice. 

In general, the VAT invoice should have the following information.

Document & general transaction information:

• Date of issue;
• Date of supply;
• Sequential number.

Supplier information:

• Name, address, and VAT number.

Customer information:

• Name, address, and VAT number.

Financial transaction information:

• Quantity;
• Description of the goods or services supplied;
• Currency;
• Consideration for the goods or services;
• Applicable VAT rate/rates;
• VAT amount;
• VAT amount expressed in EUR if the invoice currency is other than EUR.

Additional information that may be required:

• Reference to VAT exemption;
• Reference to the reverse charge mechanism;
• Reference to self-billing;
• Exchange rate conversion method.

In general, the simplified Invoice should contain the following:

• Date of issue;
• Suppliers VAT info;
• Type of goods or services supplied; 
• VAT amount payable;
• In case of a credit/debit note, the reference code to the original invoice.

Common VAT compliance errors in B2B and B2C transactions

B2B VAT Compliance Challenges 

One of the fundamental rights of VAT law is the right of the VAT-registered person to claim input tax deduction (Reclaiming VAT). On the other hand, VAT, as a self-assessment tax, represents an abundance of responsibility for the VAT person, from prompt registration to correct accounting, charging, reporting, and storing and archiving tax records. 

To add additional complexity, the particularities of these general requirements vary between jurisdictions. With all of this complexity at hand, it is not surprising that many VAT taxable persons make errors from time to time. 

Please read further to learn the most common errors VAT businesses make in B2B transactions. 

• Failure to register for VAT when required – A business could surpass the national threshold even when making most of its supplies on a B2B basis, but because it is unaware that this type of transaction is also counted in the domestic turnover, it could surpass the national threshold without knowing it. EU businesses could be obliged to register for intra-community acquisitions of goods shipped from other member states. 
• Incorrect accounting for VAT on the reverse charge basis – businesses making VAT purchases from the taxable persons based in other countries in general are responsible for accounting the VAT on the reverse charge basis, and reporting this in the VAT declaration concerning both – output tax and input tax if the condition are met for claiming VAT for this transaction. 
• Failure to make proper changes in VAT declaration for unpaid purchases – when taxable persons reclaim input tax credit in the VAT return on the concerned purchase, but the invoice has not been paid in full or at all. In that case, the VAT should be readjusted proportionally. 

B2C VAT Compliance Challenges 

Some of the most common B2C VAT transactions mistakes that businesses are prone to make: 

• VAT rates – charging an incorrect VAT rate on the supply. Considering the variety of VAT rates based on the type of supply made and the rate changes from time to time, cross-border businesses could make an unaware mistake of a VAT rate change for a specific supply. The incorrect rate will lead to incorrect invoicing and reporting. A significant amount of VAT revenue is collected through fines and penalties from incorrect VAT calculations. 
• Distance sales – Since the explosion of e-commerce, distance sales of goods have introduced specific requirements for non-resident suppliers of goods. Invoicing and reporting rules apply starting from a particular VAT B2C registration threshold. 
• Place of supply rules for electronically supplied services/goods – Considering the rise of the digital economy in the last few years, more than 70 countries have introduced special VAT rules for foreign providers of digital services. When the specific VAT registration threshold is reached, these foreign entities are obliged to register, charge, collect, and remit local VAT. Unawareness of this responsibility often results in fines, penalties, interest, and possible website blockages.

How to stay compliant 

Please contact us if you have any questions concerning the registration process and your VAT/GST/Sales compliance responsibilities for your business operations. Our tax team would be happy to assist you.