As a SaaS business, you aren’t constrained to selling your products domestically. In fact, it’s not uncommon for SaaS businesses to have customers all over the world. The expansion opportunities SaaS businesses have access to are unmatched; however, selling globally does draw in other considerations, like value-added tax (VAT).

The penalties for non-compliance with VAT can be severe, which is why it’s important to take a proactive approach to registration and report tracking. Even if you outsource the filing of VAT to your accountant or bookkeeper, you are still required to complete backend work to gather information surrounding sales.

In this article, we’ll cover everything your SaaS business needs to know about VAT report preparation. After you’ve finished reading this article, you’ll know the ins and outs of what your team needs to do to maintain compliance with VAT regulators and how to stay on your accountant’s good side.

What is Value-Added Tax?

Before we dive into how to prepare VAT reports for your accountant, we must first understand the basics of VAT. Value-added tax is a consumption tax charged on goods and services in each step of the supply chain where value has been added. Common items this tax applies to include labor, interest payments, materials, and profits.

Each country can adjust the VAT rate imposed based on its fundraising needs. For example, the United Kingdom has a VAT rate of 20%, while Ireland has a rate of 23%. US-based businesses might be able to qualify for a unified VAT rate to simplify the process. Working with a qualified accountant is the best way to see if this situation applies to your SaaS business.

It’s also important to differentiate between the Goods and Services Tax, known as GST. GST is also assessed at each stage of the supply chain; however, this tax is imposed regardless of if value has been added to the product.

B2B vs B2C Sales

VAT is generally paid by the consumer who purchases the product. VAT can seem like double taxation since it’s imposed on both consumers and business owners, but this isn’t the case, as the tax is incremental. For one, VAT is calculated based on the location of the customer and if the transaction is B2B or B2C.

B2C sales are generally subject to VAT, while B2B transactions might be subject to a reverse charge, where the business you are selling to pays their own government the VAT. With B2B transactions, it’s important to request a VAT identification number from each business or customer to verify that a reverse charge will occur.

Reverse charges are normally reserved for physical items, not digital items. Any businesses that don’t have a VAT identification number will be treated as a B2C sale for threshold purposes. Businesses with a VAT identification number are charged a 0% tax rate if it’s a reverse charge.

Moreover, the registration thresholds can differ based on your primary customer base. For example, the European Union requires VAT registration after your first B2C sale. As your target market changes, it’s important to revisit your VAT compliance.

Who is Subject to VAT?

Since SaaS businesses primarily sell digital goods, it can be difficult to know exactly how VAT is calculated. The rules of each country outside of the European Union can vary. Nevertheless, most countries have determined that digital products do qualify for VAT. The European Union has established four criteria used to determine if a product is a digital good:

1. The product is not tangible.
2. The product offering is based on IT.
3. The product is offered through the internet or other electronic network.
4. The product involves minimal human intervention.

Online games, images, downloadable software, site hosting services, and SaaS are all considered digital goods and subject to VAT regulations. If your product doesn’t meet the above criteria, it may be considered a physical item. This doesn’t mean that every transaction and country you sell your products to will be subject to VAT. Many countries have VAT thresholds, which are sales amounts that must be exceeded before you are required to collect and remit VAT. These thresholds vary by country, making it important to work closely with an expert to monitor sales activity.

How Does the VAT Report Preparation Process Differ for SaaS Businesses?

The VAT report preparation process does look different for SaaS businesses, as there is often no physical presence in each country and tracking value-added can be subjective. VAT is very similar to sales tax in the US. As a result, many more countries are adopting provisions to tax products in the digital realm, not always requiring significant value to be added to the product.

The primary test that SaaS business owners and managers will need to complete to determine VAT is the location of customers. Where are your products being sold to? This information should be readily available from the point-of-sale information. If you have customers located in the European Union or other countries that impose VAT, you may need to register and file forms.

The VAT Registration Process

Before you can start collecting VAT, you need to go through the proper registration processes. This includes obtaining a VAT number and registering your company with each country. However, countries in the European Union are considered “one” entity for VAT. You can choose which of these countries you register in, and your VAT number will be applicable to all other countries. When you register for the EU’s One-Stop-Shop, you can file and pay all of your VAT obligations in one country, even if the sales are sourced elsewhere in the EU. This makes the entire process simpler.

For countries that aren’t a part of the European Union, you may have to go through a separate registration process. Moreover, some countries may automatically assign your business a number, while others will only give you a number after you’ve completed the registration process. When your business is assigned a number, be sure that it’s a VAT number and not a local number. You may need to complete an extra registration step to receive a VAT number.

Going through the registration process in each jurisdiction can be tedious and open the door to a high level of errors, especially for SaaS businesses. This is why many companies work with a qualified accountant or bookkeeper to facilitate the registration process. VAT does draw in legal complexities, as you cannot legally collect VAT from customers without a formal application in place with the jurisdiction.

To maintain compliance, your SaaS business needs to properly track sales to each country to know when thresholds are triggered, which we’ll discuss in more detail in the next section. For now, let’s assume that you are nearing the threshold. What information does your accountant need for the registration process? Although the process will look slightly different for each country, expect to furnish the following information:

• Company registration number.
• Business bank account numbers for security deposit.
• Certificate of incorporation or organization.
• Proof of taxable transactions.
• Power of attorney to act as a fiscal representative.
• VAT certificate in your home country.
• Proof of signature.

If you need to apply for VAT, start compiling these documents for your accountant. The approval process can take a few weeks, so it’s best to be prepared to maintain compliance with withholding and remittances.

4 Steps to Prepare VAT Reports for Bookkeepers and Accountants

Passing the burden of VAT filing off to an accountant or bookkeeper doesn’t mean you don’t have any responsibilities. In fact, you play a crucial role in the accuracy of your VAT filings with your internal records. You will need to furnish a variety of reports to your accounting professional before they can submit your quarterly VAT. Here are four steps to implement to ensure a smooth VAT filing process for both you and your accountant:

Step #1: Compile a List of Current VAT Filing Requirements

First, you want to compile a list of your current VAT filings. If your SaaS business has already been collecting VAT from customers, make a list of the jurisdiction you are reporting in. If you’re just tackling the VAT process for the first time, you won’t have an existing list of filing obligations. This is where your sales by location will come into play.

Within your accounting system, pull a sales by location report. This report should contain the following columns: gross sales sourced to each country for the defined time period. If the different countries are not populating, you may need to consider adding a different revenue collection software program that shows the address of each customer. When looking into prospective software programs, be sure that the software can easily integrate with your main accounting system. Here are some tips when pulling your sales report:

• Be sure the report breaks down sales by both country and locality.
• Ensure the proper cut-off date for transactions.
• Differentiate sales by product. (Some products might be nontaxable).

Confirming that the sales report you send your accountant has these three components can help avoid confusion and streamline your VAT reporting. Your accountant or bookkeeper might request a certain file type, like excel or pdf. Double check on the preferred format.

Step #2: Break Down Sales by Country with Supporting Invoices

The next step in your report preparation process is to break down sales by country. Using your report from the previous step, make a list of the total taxable sales to each country. Remember, the reverse charge rules. If a business customer makes a declaration of VAT on the purchased item, you are not required to collect VAT. This commonly applies if a customer is purchasing your software to improve their own product or service.

If you think a reverse charge might be applicable, you must have the VAT number of the customer on file. If not, you will be required to charge VAT. Taking your sales report, make a list of the vendors or businesses that have a VAT number. This helps your accountant double check that the revenue should not be included in your VAT filing.

With the sales report and the VAT number of businesses, your accountant can identify which countries may need to be added to the VAT filing list based on transaction and revenue thresholds. Being as accurate as possible when pulling reports maximizes your compliance.

At a minimum, your sales by country report should include the following columns: each sales transaction, the country it was purchased from, the date of the sale, and the total amount. Since this report can contain a lot of information, double check the format your accountant or bookkeeper prefers. Data is usually easier to manipulate in an excel or CSV file type.

Step #3: Outline VAT Collected from Customers

The next step in your report preparation process is to break down sales by country. Using your report from the previous step, make a list of the total taxable sales to each country. Remember, the reverse charge rules. If a business customer makes a declaration of VAT on the purchased item, you are not required to collect VAT. This commonly applies if a customer is purchasing your software to improve their own product or service.

If you think a reverse charge might be applicable, you must have the VAT number of the customer on file. If not, you will be required to charge VAT. Taking your sales report, make a list of the vendors or businesses that have a VAT number. This helps your accountant double check that the revenue should not be included in your VAT filing.

With the sales report and the VAT number of businesses, your accountant can identify which countries may need to be added to the VAT filing list based on transaction and revenue thresholds. Being as accurate as possible when pulling reports maximizes your compliance.

At a minimum, your sales by country report should include the following columns: each sales transaction, the country it was purchased from, the date of the sale, and the total amount. Since this report can contain a lot of information, double check the format your accountant or bookkeeper prefers. Data is usually easier to manipulate in an excel or CSV file type.

Step #4: Provide Reports to Accountants Before Deadline

Finally, submit all of the information you’ve compiled in the previous three steps to your accountant or bookkeeper. Every country outside of the European Union will have different filing requirements, like Japan with an annual filing requirement or South Africa with bi-monthly reporting. Nevertheless, expect to have your accountant file VAT returns on a quarterly basis. This means they will need access to all of the relevant reports before the deadline. Here are the due dates for European Union VAT:

• First Quarter (January 1 – March 31) – April 20th
• Second Quarter (April 1 – June 30) – July 20th
• Third Quarter (July 1 – September 30) – October 20th
• Fourth Quarter (October 1 – December 31) – January 20th

Keeping track of your filing obligations is crucial. If you are nearing a threshold in a certain country, alert your accountant well before the due date so they have time to go through the registration process on your behalf.

Summary

Despite what you might have believed, SaaS businesses can be subject to VAT. When it comes to maintaining compliance with VAT, having an experienced accountant on your side is crucial. Reach out to a team member today to schedule your free consultation.