What the Brexit trade deal means for VAT and online sales
While the Brexit trade deal with the EU, announced at the end of 2020, will impact most small business owners in some way, online sales and ecommerce traders in particular face challenges to their operations as a result of the changes. Here, we set out the different options available to them.
One of the biggest changes for people who sell online is the introduction of new VAT rules (external link). Under the new deal, UK-based online sellers of goods to consumers in EU countries will no longer be able to declare and pay VAT via their UK VAT return in countries where they are below the annual distance selling threshold.
The threshold is €35,000 a year per country for most EU nations, except in the Netherlands, Luxembourg and Germany, where it is €100,000.
That means UK ecommerce small businesses face some decisions if they want to keep selling to EU consumers. The change means import VAT and customs declarations are due for the first time, and failure to act quickly could leave them with extra taxes, delayed shipments and frustrated customers.
So, what are your options if you sell goods online into EU countries?
Pass the cost of VAT to the customer
One option is to make your EU-based customer the so-called ‘importer of the record’, by treating the supply of your goods to EU customers as being a zero-rated export.
The issue here is that the goods would then be subject to import VAT on arrival into the EU, meaning that the customer would need to pay import VAT in order to take delivery of the goods. That could have a big impact on your customers’ experience, damage the reputation of your business, and probably reduce the likelihood of any repeat business from customers who feel they have been unfairly charged ‘hidden’ costs. You may even have to accept the goods back if customers refuse to pay the tax, meaning potential extra costs and further lost income.
Pick up the cost of the 'importer tax' yourself
Instead of asking customers to pay for the tax at the point of import, as described above, you could choose to act as the importer of the goods shipped into each EU country yourself. To do this, you would have to register for VAT in the EU country of your customer. You would then pay the import VAT to clear the goods into the country, and sell the goods to your customer at the local VAT rate. You could then offset the import VAT and sales VAT in the foreign VAT return. You’ll also have to make a customs declaration and pay any tariffs. Remember that the place of supply of the goods will be the EU country where they are sent, which means you would also need to charge VAT at the rate applicable in each of the EU countries where you are selling the goods.
Unlike the option above, this approach protects your customers’ experience and effectively reinstates the uninterrupted flow of goods that existed before Brexit. However, in registering to pay VAT in each of the receiving countries, you may have customs and VAT compliance costs to worry about – although the good news is that most EU countries have good deferred import VAT schemes, which let you avoid the cash payment of EU import VAT.
Pay import VAT tariffs while your customer clears the imported goods
A third option is to combine these two approaches in a way that your EU customer clears the goods, but you pay import VAT and any tariffs. This means you would, legally speaking, make your customer the importer of record, but you would pay any customs and import VAT via the freight forwarder.
This approach protects your customers’ experience and also means you wouldn’t have to become VAT registered or do the filings in the country you are selling to. However, you will need to obtain a Power of Attorney from your seller, which will take time and add a step to the process for your customers. Also, if you don’t want to lose the VAT you’ve paid, you’ll need to charge the customer at the checkout stage, which means you may have to adapt your ecommerce systems. To help small businesses navigate these complicated issues, the government has provided a step-by-step guide to exporting (external link) and also set up a dedicated helpline for post-Brexit export issues: 0300 322 9434.
Hold your stock in the EU
Another option is to choose to hold stock in one EU country and fulfil orders from there to other EU countries. This would require you to register for VAT in that EU country, but it would also allow you to pay and recover the import VAT. As you would then be registered for VAT in the EU country, the onward supply of the goods to customers within the EU could be treated as intra-EU supplies in the same way as they currently are – subject to the normal distance-selling thresholds.
This option would create an immediate inconvenience and cost to you – as you’d have to ship stock to the EU country of your choice and hold them there. However, after that, it would all work very much the same way as before Brexit in terms of VAT – and you wouldn’t have to complete customs declarations each time you make a sale. You will still need foreign VAT registrations – certainly in the country where you hold the stock, but you could avoid the cashflow hassle of import VAT via Postponed Accounting (external link).
This move will likely become easier still in July 2021, when the EU’s ecommerce VAT reboot brings in the One-Stop-Shop (external link) – or ‘OSS’ – single EU VAT return, which will remove the Distance Selling thresholds and make it more straightforward to do intra-EU sales.
Of course, if you decide this is the option for you, you’ll also need to choose the right country for you – whether countries such as the Netherlands and Belgium, which offer very good VAT schemes, or places that are easy to access, such as France, which can be reached by road, rail or sea.
As you weigh up the possibilities, one option is to use the UK Government's Brexit Checker Tool (external link) to get a personalised list of actions for your business.
It’s clear that while the Brexit trade deal has resulted in all manner of issues for small businesses to consider, now is the time to weigh up which of the potential VAT solutions are the best for you.
At Hiscox, we want to help your small business thrive. Our blog has many articles you may find relevant and useful as your business grows. But these articles aren’t professional advice. So, to find out more on a subject we cover here, please seek professional assistance.
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