Who are B2C clients for VAT purposes?

This article is again about one of the most frequently asked questions we are facing in our discussions with ebusinesses: What are “B2B” and what “B2C” clients?

The logical and expected explanation would be: B2B are all legal persons and B2C all natural persons / private individuals.

Unfortunately VAT follows its own logic – which is in most cases illogical when considered in everyday content. The above explanation therefore cannot be applied for VAT purposes.

B2C clients through VAT glasses

A very simplified answer is: B2B clients for VAT purposes are all clients that are registered for VAT purposes as well as all foreign clients that would have been registered for VAT if the domestic rules would apply to them. B2C clients are all other clients.

B2C clients can include, among others:

  • Private individuals
  • Small businesses, self employed persons and entrepreneurs
  • Holding companies
  • Financial institutions
  • Associations, federations, and clubs
  • Charities and foundations
  • Unions
  • Non-governmental organisations
  • Governmental organisations and public bodies
  • Political parties and political candidates

All above can be B2C clients if they are not registered for VAT. However, if they are registered for VAT they are regarded as VAT taxable persons and all sales to them are treated as B2B.

If your clients can provide you with their VAT number, they should be treated as B2B clients. If not, you should assume that they are B2C clients and tax them accordingly. You might be required to correct your invoices latter, but at least you will be in a safe tax position.

What about clients from the jurisdictions with not VAT system? In these cases there is usually a document or tax number available locally which is in most countries accepted as an equivalent to the VAT registration – for example Form 6166 – Certification of U.S. Tax Residency for the US companies.

Why is it important to know your clients?

This is most important in case of cross border sales of most services – and especially in case of eservices (we have provided some basic explanations on eservices in this article).

If your clients are B2B and located in another country then your sales company you should generally not be required to charge them VAT or other indirect taxes – your customers should take care of the indirect taxation according to their local tax rules.

If they are EU based B2C clients then you should charge local VAT in the country where your EU sales company is located (until 31.12.2014) or register for VAT and charge local VAT in the country of your customer (if sales are done by a non-EU company or after 1.1.2015 even if they are done by an EU company). See also this article for a more detailed explanation on new EU 2015 2C rules on eservices.

If the client is located outside of the EU it does not really matter if it is a B2C or B2B client – at least not from the EU VAT point of view. EU company selling eservices to a non-EU client should not charge EU VAT in any case – but it might be required to register locally in the country where the client is located and charge local tax for the sales to the client.

The above rules are general VAT rules applicable in the EU– in other territories the rules are probably at least a bit different and you will need to check them out separately.

Conclusions

Know your customers and be able to prove their taxable status and location. It is important to know if you have to treat them as taxable or non-taxable persons for VAT purposes and be familial with all other implications of their tax status.

  • Are you checking the VAT/tax status of your customers in all territories?
  • Do you have an overview of countries for which you need to make these checks?
  • How are you archiving the evidence that you have made the required checks and their results?
  • How often do you review and update your customer records?
  • Will you be able to prove that you have done the checks and their outcomes to a tax auditor in five years?